Deferred Taxes

Table of Contents

Introduction4

Discussion6

Historical development6

Types of deviation8

Accounting of Deferred Taxes9

Liability method9

Deferral Method9

Active vs. deferred tax liability9

Purpose of the deferred tax10

Temporary differences and permanent differences12

Methods for estimating the deferred income tax14

Balance sheet method14

Time Difference Method15

Deferred tax assets and its recognition15

Conceptual nature of taxes on profits16

Conclusion17

References19

Deferred Taxes

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant information relating to the analysis of Tax Accounting. The basic purpose of accounting is to provide various users of financial accounting, economic information, relevant and useful to the decision-making process. However, this goal of accounting is impaired, with relative frequency and interference by the tax laws. Problems occur when the legal rules force companies to account for certain transactions by applying criteria or tax rules, which contradict with the accounting standards. To resolve this inconsistency between GAAP and tax rules, the Financial Accounting Standards Board (FASB) in the United States, and the International Accounting Standards Board (IASB), internationally produced standards that govern the accounting treatment of tax profits and result in the ownership structure of the companies. The adoption of accounting standards for the accounting for own taxes on profits and different temporal allocation criteria of income and expenditure to income, make differences arising between book and taxable income. GAAP provides universally applicable standards for record keeping and presentation so that world over the information of a company's accounts is available uniformly. As the accounting is primary tool for viewing the companies status of operations, the need for including all the important and relevant information in the accounting process has been advocated by the Accounting Theories. These theories have provided guidelines for specifying which information needs to be included in the accounting statements. These theories have also provided frameworks for evaluating the accounting practices (Wolk, 2008).

As the business operations are getting complicated and companies are using different measures to record their business transactions or glorify status of businesses, the need for elaborated evaluation guidelines are increasingly becoming important. The accounting theories also facilitate in the development of new procedures and practices. The primary purpose of the accounting theories is to present a consistent set of rational principles that shape the general frame of reference for the assessment and growth of strong accounting practices. The management views the financial reports for making decisions and it is important that these reports contain the actual state of accounting information. One of such factor which is easily neglected to take into accounting is deferred taxes. The requirement for deferred tax accounting come up as companies often pre-pays or postpone taxes on profits applicable to a specific period (Wolk, 2008).

Deferred taxes are hidden tax burdens or benefits that occur due to differences in approach and / or valuation of assets or liabilities. In addition, the deferred tax assets can also be caused by situations such as: (1) the occurrence of tax losses available for offset in future periods, (2) by adoption of different criteria for measuring elements of assets and liabilities ...