Deferred Tax
Deferred tax is defined as an organization’s liability for taxes owed that is postponed to future periods. It occurs because of tax law that permits firms to write off expenses in a very fast way than they are realized and thus creating a deferred tax liability. Under tax law, for example companies can always depreciate fixed assets at faster rate for tax purposes than the real use of the asset would demand (Porterba 45). Deferred tax is the tax that is to be paid later date or a tax liability that an organization owes but does not pay at the current point although it will still pay for it in the future.
Deferred tax items may be either assets or liabilities. Where deferred tax liabilities are mainly easy and highly certain. This is because they are the provisions against future tax payments that relate to current or the past period’s profits. Deferred tax assets are normally less certain because there may not be future profits to claim against. Big losses results into high-deferred tax assets that can make a weak business seem like though it is backed by a powerful balance sheet than is the case. Deferred tax accounting occurs because companies normally postpone or prepays taxes on profits pertaining to certain period.
There is a difference in the manner in which particular items of expenses are permitted for tax purposes and how a company actually treats them. For instance, tax laws permit depreciation in the first year after an organization has certain assets. Nevertheless, an organization may write off its depreciation over many years on its financials statement. In some cases, the tax laws may not notice some of the expense that has been accounted for by the company in its account. A good example includes the provisions made at the discretion of the management like those for bad debts that are not fully recognized by tax authorities (Mehnert 78).
Deferred taxes are important in accounting because they tend to provide accurate calculation of accrual earnings. They also give accurate measure of the equity position. Furthermore, deferred taxes moderate earnings by increasing the tax liability in better years and reducing the tax liability in bad years. Lastly, deferred taxes reduce from one balance sheet to another where a tax reversal is created thereby offering cushion to the business operations.
Having a good knowledge or being aware of the effects of deferred taxes of any business is very important to the management during the decision making process and monitoring.
Standardization process enhances the ability to make accurate calculations and meaning full measures that are comparable to the same type of the business. It is also important to account for deferred taxes since they are recognized as the matching principles (Accounting Standards Board 28). These taxes are given so that investors may have an opportunity to comprehend the anticipated tax liabilities resulting from tax relief, which has been accelerated up to a given date, or untaxed income.
In the current accounting standards, it is necessary for an organization to make provisions for deferred tax based on either of the temporary differences of timing methods. For instance, in situations where a deferred tax liability or asset is recognized, the liability or asset needs to decrease overtime. Deferred taxes should therefore be accounted for using the principle in IAS 12, income taxes that seems to be the same as to SFAS 109.
Works Cited
Accounting Standards Board. Deferred tax: Accounting Standards Board. New York, NY:
ASB, 2000.
Mehnert, Michael. The Accounting of Deferred Taxes under IFRS. New York, NY: GRIN Verlag, 2010.
Porterba, James. The significance and composition of deferred tax assets and liabilities. Los Angeles, MA: National Bureau of Economic Research, 2007.
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