Standard accounting methods and tax accounting methods have different sets of rules. If you expect to receive a payment, you may have to pay taxes on it in the current period, but not when the payment is actually received. This type of timing difference creates a deferred tax situation.
When trying to understand deferred tax assets and liabilities, it’s important to keep in mind the difference between financial reporting and tax reporting. These two forms of accounting involve different rules and calculations, and these differences can result in both deferred tax assets and deferred tax liabilities.
Financial reporting involves accounting rules, such as those set forth by the Accounting Standards Board (AcSB) Financial statements report pre-tax net income, income tax expense, and net income after taxes.
Tax reporting, on the other hand, calls for tax authorities to set the rules and regulations regarding the preparation and filing of tax returns. Examples of tax authorities include the CRA and local provincial governments.
In this article, we’ll cover everything you need to know about deferred tax assets and liabilities to give you a much better understanding of what these terms mean and why they’re important.