Accounting units that put together financial statements in full have a duty to report deferred tax on their balance sheet. This is also mandatory for accounting units that have mandatory consolidation (in this case it is irrelevant if the accounting unit releases financial statements in full or not). Full financial statements are put together by companies that have mandatory audits, and also every joint-stock company (again, if the company has a mandatory audit is irrelevant in this case). Others may report deferred tax voluntarily, for example for sake of comparability of reported information in case the company had to report deferred tax in the past.
To properly understand deferred tax, we need to understand that it has very little to do with actual taxes – it is mainly accounting construction – this tax is not something that the company would have to pay to the government, and it doesn´t give anyone right to postpone payment of taxes; the main reason for the existence of deferred tax is compliance with accrual principle in accounting (which means reporting of accounting events in correct period). Deferred tax is caused by different accounting and tax look on different items that influence the amount of tax base – these differences are divided into temporal (differences that are recognizable assuming meeting specific requirements in the future) and permanent (differences that are not going to be recognizable in the future). Only temporal differences can cause deferred tax. These differences can lead to deferred tax receivable or deferred tax liability. We will show both options on specific (made-up) examples.
Deferred tax receivable often arises in cases when expenses are recognized in accounting before they are recognized by taxes – for example, we can create an accounting allowance for receivables that precede tax allowance – this cost will lower our profit, but it will not lower our tax base in the current year – it could do so in following years, but without corresponding expense in accounting. Similarly will be proceeded in most cases when accounting expense precedes tax expense. Special deferred tax receivable is a recognizable tax loss from previous years.
Deferred tax liability is most easily explained by depreciation – let us assume that accounting depreciation of a machine is currently lower than tax depreciation (caused, for example, by different useful life in accounting and for tax purposes), but in the future, we expect the situation to change and for accounting depreciation to overgrow tax depreciation – even though now we have lower tax base against accounting profit due to higher tax depreciation, in the future, we are going to have lower tax base when compared to accounting profit due to lower tax depreciation.
The last topic for this essay is the way to book, report, and calculate deferred tax. The calculation itself is quite simple – we take temporal differences and multiply them by the tax rate which will be valid during the time of recognition of liability/receivable (of course, we are not clairvoyant – future tax rate should be equal to the current tax rate unless we know for sure that it will be different; even then, companies should apply caution principle). Deferred tax is booked on special account no. 481 (it doesn´t matter if it´s receivable or liability), and in the balance sheet you can find it between long-term receivables on side of assets, or between long-term liabilities on side of liabilities.
This is all from our side in terms of introducing deferred tax; in case you have any questions or you feel unsure about this topic, don´t hesitate to contact our experts who will happily help you.
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