1/WHAT ARE DEFERRED TAX ASSETS AND LIABILITIES?
Deferred taxation giving rise to deferred tax assets or liabilities stems:
• either from differences in periods in which the income or cost is recognised for tax and accounting purposes;
• or from differences between the taxable and book values of assets and liabilities.
On the income statement, certain revenue and charges are recognised in different periods for the purpose of calculating pre-tax accounting profit and taxable profit.
In some cases, the difference may be temporary due to the method used to derive taxable profit from pre-tax accounting profit. For instance, a charge has been recognised in the accounts, but is not yet deductible for tax purposes (e.g. employee profit-sharing in some countries); or vice versa. The same may apply to certain types of revenue. Such differences are known as timing differences.
In other circumstances, the differences may be definitive or permanent, i.e. for revenue or charges that will never be taken into account in the computation of taxable profit (e.g. tax penalties or fines that are not deductible for tax purposes). Consequently, there is no deferred tax recognition.
On the balance sheet, the historical cost of an asset or liability may not be the same as its tax base, which creates a temporary difference. Depending on the situation, temporary differences may give rise to a future tax charge and thus deferred tax liabilities, while others may lead to future tax deductions and thus deferred tax assets. For instance, deferred tax liabilities may arise from:
• assets that give rise to tax deductions that are lower than their book value when sold or used. The most common example of this derives from the revaluation of assets upon the first-time consolidation of a subsidiary. Their value on the consolidated balance sheet is higher than the tax base used to calculate depreciation and amortisation or capital gains and losses;
• capitalised financial costs that are deductible immediately for tax purposes, but that are accounted for on the income statement over several years or deferred;
• revenue, the taxation of which is deferred, such as accrued financial income that becomes taxable only once it has been actually received.
Deferred tax assets may arise in various situations including charges that are expensed in the accounts but are deductible for tax purposes in later years only, such as:
• provisions that are deductible only when the stated risk or liability materialises (for retirement indemnities in certain countries);
• certain tax losses that may be offset against tax expense in the future (i.e. tax loss carryforwards, long-term capital losses).
Finally, if the company were to take certain decisions, it would have to pay additional tax. These taxes represent contingent tax liabilities, e.g. stemming from the distribution of reserves on which tax has not been paid at the standard rate.
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