deferred-taxes

Deferred Tax Accounting

name: deferred-taxes description: Deferred tax accounting — temporary differences, DTA recognition. Cover temp vs permanent, DTA/DTL, tax loss carryforwards.

When to Activate

• Identifying and measuring temporary differences between tax and accounting bases
• Recognizing deferred tax assets (DTA) and deferred tax liabilities (DTL)
• Assessing recoverability of deferred tax assets
• Accounting for tax loss carryforwards and tax credit carryforwards
• Distinguishing temporary from permanent differences
• Calculating the effective tax rate and reconciling to statutory rate
• Business combinations: deferred taxes arising from purchase price allocations
• Changes in tax rates: remeasuring deferred tax balances
• Intragroup transactions: deferred tax on unrealized profits
• Presenting and disclosing deferred taxes in financial statements

Core Concepts

Temporary vs Permanent Differences

Temporary differences — differences between the carrying amount of an asset or liability in the financial statements and its tax base that will reverse in future periods:

Type	Example	Effect
Taxable temporary	Accelerated tax depreciation (tax base < book value)	DTL — tax paid later
Deductible temporary	Warranty provisions (tax base > book value)	DTA — tax saved later
Taxable temporary	Revenue recognized for tax before book (e.g., installment)	DTL
Deductible temporary	Impairment losses not yet tax-deductible	DTA

Permanent differences — differences that will never reverse. No deferred tax is recognized:

• Tax-exempt income (e.g., municipal bond interest under US GAAP)
• Non-deductible expenses (e.g., certain fines, entertainment in some jurisdictions)
• Tax credits
• Participation exemption on dividends (many EU jurisdictions)

Key distinction: Temporary differences create deferred taxes; permanent differences affect only the effective tax rate.

Deferred Tax Assets (DTA)