Accounting for Deferred Tax Assets and Liabilities

To make a decision whether to account for the deferred tax assets (DTAs) and deferred tax liabilities (DTLs) or just to account for the current tax liability, it is necessary to define DTAs and DTLs and assess their importance. According to the AASB 112 Income Taxes, deferred tax liabilities may be defined as the amounts of income taxes payable in future periods in respect of taxable temporary differences (AASB 112).

DTAs, in their turn, are the amounts of income taxes recoverable in future periods arising from deducible temporary differences and the carryforward of unused tax losses and credits (AASB 112).

DTAs and DTLs are the results of difference between accounting rules and the tax policy in terms of revenue and expense recognition and asset depreciation. Consequently, the temporary difference appears between the carrying value of an asset or liability and its tax base, i.e. the amount attributed to it for tax purposes (AASB 112). The Income Taxes Standard requires entities to recognise DTLs and DTAs in case it is possible that future recovery or settlement of an asset or liability will change the amount of future tax payments.

DTLs and DTAs have to be recognised for all taxable temporary differences, except if they arise from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not business combination and does not affect neither accounting profit (loss) nor taxable profit (loss). According to the Standard, entities are required to account for the tax consequences of transactions in the same way they account for these transactions themselves, i.e. if transactions are recognised in profit (loss), other comprehensive income or equity, all related tax affects are recognised accordingly (AASB 112).

The recognition of DTLs and DTAs is connected to the fact that recovery of carrying amount of an asset in the form of economic benefits is inherent in the recognition of the asset itself. If the carrying amount of the asset exceeds its tax base, a taxable temporary difference arises, and the obligation to pay the resulting income taxes in future periods is a DTL. The second situation when entities are obliged to recognise DTLs and DTAs is when income or expense is included in accounting profit and taxable profit in different periods. Such temporary difference may take place, for instance, due to differences in recognition of receivables (on a time proportion basis or when cash is collected) or depreciation (AASB 112).

Accounting for DTLs and DTAs is necessary not only due to accounting standard requirements, but also because it allows better planning and managing future cash flows of an entity. On the one hand, by accounting for DTLs an entity may maximize its profits in the publicly available financial statements to the benefit of the shareholders. On the other hand, in the tax accounting recognition of DTLs allows delaying tax payments and therefore reducing tax burden in current period releasing more funds for investment. In addition, accounting for DTLs and DTAs is useful for assessing future cash inflows and outflows and thus applying more accurate financial planning.