Other credits promote the investment in more clean energy sources. For example, accelerated cost recovery measures promote investment in a specific area or asset class. In contrast, tax regimes are generally not similarly focused and often include aspects of tax policy that seek to incentivize certain behaviors. The focus is on the consolidated results of the reporting entity. Generally, the objective of general purpose financial reporting (e.g., US GAAP reporting standards) is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Often, differences between book carrying values and the related tax bases are the result of separate objectives between financial reporting standards and income tax regimes. Specifically, the recognition of pension book expense (and the corresponding liability) often occurs prior to the recognition of the related tax deduction (which generally occurs when the pension liability is funded or otherwise settled with cash or other property.)Ĭauses for differences between accounting carrying values and tax bases
In the case of disposal, a sales price equal to the book carrying value would result in a taxable gain, given the lower corresponding tax basis. In a fixed asset example where the book carrying value exceeds the corresponding tax basis, the deferred tax liability can represent the tax consequences of recovering or disposing of the asset at its book carrying value.The following chart illustrates when an accounting asset or liability (excluding income tax accounts) generates a corresponding deferred tax asset or liability:Īdditionally, a deferred tax asset can result from an income tax credit, loss carryover or other tax attribute that is available to reduce future income tax obligations.įundamentally, deferred tax balances represent the future tax impacts of recovering or otherwise consuming assets (e.g., by depreciating the asset) and settling liabilities (e.g., by cash settlement of the obligations) at the respective book values. The timing of the cost recovery of the fixed asset may differ between the tax law for a particular jurisdiction and the applicable accounting rules, which can result in a deferred tax asset or liability. A deferred tax often represents the mathematical difference between the book carrying value (i.e., an amount recorded in the accounting balance sheet for an asset or liability) and a corresponding tax basis (determined under the tax laws of that jurisdiction) in the asset or liability, multiplied by the applicable jurisdiction’s statutory income tax rate.Įxample: Generally, the income tax basis in a fixed asset is the purchase price less tax depreciation previously allowed under the applicable tax law. Simply stated, the deferred tax model allows the current and future tax consequences of book income or loss generated by the enterprise to be recognized within the same reporting period, providing a complete measure of the net earnings.
In detail Overview - why are deferred income taxes important and what do they represent?
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