Deferred Tax Assets (Deferred Tax Liabilities)
International Accounting Standard 12 defines deferred tax assets as “the amounts of income taxes recoverable in future periods in respect of:
Deferred tax liabilities are defined by this Standard as “the amounts of income taxes payable in future periods in respect of taxable temporary differences”. The temporary differences are the differences between the carrying amount of an asset and liability and its tax base. Tax base is the value of an asset or liability for the tax purposes. The tax base of a liability is usually its carrying amount less amounts that will be deductible for tax in the future. The tax base of an asset is the amount that will be deductible for tax purposes.
(a) Deductible temporary differences;
(b) The carry forward of unused tax losses; and
(c) The carry forward of unused tax credits.”
The carrying values of assets and liabilities are not always the same as tax bases. It is believed that the liabilities will be settled and the assets will be recovered eventually over time and at that point of time their tax consequences will crystallize.
Two types of temporary differences can arise i.e. taxable temporary difference and deductible temporary difference.
The taxable temporary difference results in the payment of taxes when the carrying amount of a liability is settled or the carrying amount of an asset is recovered. Taxable temporary differences give rise to deferred tax liabilities. A deferred tax liability arises
- If the carrying value of an asset is greater than its tax base OR
- If the carrying value of a liability is less than its tax base.
Deductible temporary differences result in amounts being deductible when determining the taxable profit or loss in the future period when assets or liabilities are recovered or settled. Deductible temporary differences give rise to deferred tax assets. A deferred tax assets arises
- If the carrying value of an asset is less than its tax base OR
- If the carrying value of a liability is greater than its tax base.
Disclosure of Deferred Tax Assets and Deferred Tax Liabilities
Deferred tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits, and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry-forward of unused tax credits, and unused tax losses can be utilized.
Deferred tax liabilities are recognized for all taxable temporary differences.
Both deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the temporary differences when they reverse, based on tax laws that have been enacted or substantively enacted at the end of the reporting period.
When assessing the realizability of deferred tax assets, an entity should consider whether it has sufficient taxable profit in the relevant tax jurisdiction in the carryforward period.
In addition, US GAAP requires entities to disclose a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. This disclosure should include a description of the circumstances that led to the change in the valuation allowance and the effect of the change on the overall effective tax rate.
Also, US GAAP requires entities to disclose the significant components of deferred tax assets and liabilities, including information about the nature and expected reversal of temporary differences and the expected tax rate that will be used to measure the deferred tax assets and liabilities.