Deferred Tax Liabilities

Definition

Deferred tax liabilities are amounts of income tax payable in the future periods as a result of taxable temporary differences. They represent the future tax consequences of events that have been recognized in the financial statements, but the tax effects have not yet been paid or settled.

5 Must Know Facts For Your Next Test

1. Deferred tax liabilities arise when the carrying amount of an asset is greater than its tax base, or when the carrying amount of a liability is less than its tax base.
2. Deferred tax liabilities are classified as non-current liabilities on the statement of financial position and are not expected to be settled within the next 12 months.
3. The recognition of deferred tax liabilities is based on the concept of temporary differences, which are differences between the carrying amount of an asset or liability and its tax base.
4. Deferred tax liabilities are calculated using the tax rates that are expected to apply when the liability is settled, based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period.
5. Deferred tax liabilities can have a significant impact on a company's financial statements, as they can affect the reported net income and the effective tax rate.

Review Questions

• Explain how deferred tax liabilities are related to the concept of current and non-current assets and liabilities.
  • Deferred tax liabilities are classified as non-current liabilities because they represent the future tax consequences of events that have been recognized in the financial statements, but the tax effects have not yet been paid or settled. The recognition of deferred tax liabilities is based on the concept of temporary differences, which are differences between the carrying amount of an asset or liability and its tax base. These temporary differences can result in taxable amounts in determining taxable profit or loss of future periods when the carrying amount of the asset or liability is recovered or settled.
• Describe the impact of deferred tax liabilities on a company's financial statements and effective tax rate.
  • Deferred tax liabilities can have a significant impact on a company's financial statements, as they can affect the reported net income and the effective tax rate. When a company recognizes a deferred tax liability, it is recording a future tax obligation that will need to be paid, which can reduce the company's reported net income. Additionally, the recognition of deferred tax liabilities can affect the company's effective tax rate, which is the actual rate of tax paid by the company, as the deferred tax liability must be considered when calculating the effective tax rate.
• Analyze how the recognition and measurement of deferred tax liabilities are influenced by the concept of temporary differences and expected tax rates.
  • The recognition and measurement of deferred tax liabilities are directly influenced by the concept of temporary differences and expected tax rates. Temporary differences arise when the carrying amount of an asset or liability differs from its tax base, and these differences can result in taxable amounts in future periods. Deferred tax liabilities are recognized for these taxable temporary differences, and they are measured using the tax rates that are expected to apply when the liability is settled, based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period. The expected tax rates used to measure deferred tax liabilities can have a significant impact on the company's financial statements, as changes in tax rates can result in adjustments to the deferred tax liability and the recognition of deferred tax expense or benefit.

Related terms

Temporary Differences: Differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, which will result in taxable or deductible amounts in future periods when the asset is recovered or the liability is settled.

Taxable Temporary Differences: Temporary differences that will result in taxable amounts in determining taxable profit or loss of future periods when the carrying amount of the asset or liability is recovered or settled.

Deferred Tax Assets: Amounts of income taxes recoverable in future periods as a result of deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused tax credits.