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1. DEFERRED TAX
Introduction
Deferred tax refers to the difference between the tax amount that a company reports on its
financial statements and the amount that it will actually pay in taxes to the government. This
difference arises because of timing differences between when income and expenses are
recognized for accounting purposes versus when they are recognized for tax purposes. For
example, a company may have a tax deduction that it can claim in the future for an expense that
it has already incurred. In this case, the company will record a deferred tax liability on its
financial statements to reflect the fact that it will owe less in taxes in the future when it claims
the deduction. Similarly, if a company has a tax credit that it can apply in the future, it will
record a deferred tax asset on its financial statements to reflect the fact that it will pay less in
taxes in the future when it uses the credit. The deferred tax amount is adjusted over time as the
timing differences between accounting and tax recognition change.
Purpose of deferred tax
The purpose of deferred tax is to accurately reflect the tax implications of a company's financial
transactions and events on its financial statements. It ensures that a company's reported financial
position and performance are not distorted by temporary differences in the timing of when
income and expenses are recognized for accounting and tax purposes.
By recognizing deferred tax assets and liabilities, a company can provide a more accurate picture
of its future tax obligations or benefits. This information is useful to investors, creditors, and
other stakeholders in assessing a company's financial health and making informed decisions.
Moreover, deferred tax helps to align a company's financial reporting with tax regulations, which
can prevent regulatory issues and penalties. It also enables companies to plan their tax strategies
more effectively by identifying opportunities to minimize tax liabilities and maximize tax
benefits. In summary, the purpose of deferred tax is to provide a more accurate and transparent
representation of a company's financial position and performance, facilitate effective tax
planning, and ensure compliance with tax regulations.

2. Type of deferred tax
There are two main types of deferred tax:
1. Deferred Tax Asset (DTA): A deferred tax asset arises when a company has paid more in
taxes than it owes for accounting purposes. This can occur when a company has incurred losses
or has unused tax credits that it can carry forward to reduce its future taxable income. The DTA
reduces the amount of taxes the company will owe in the future and is recorded as an asset on the
balance sheet.
2. Deferred Tax Liability (DTL): A deferred tax liability arises when a company has paid less in
taxes than it owes for accounting purposes. This can occur when a company has accelerated its
depreciation or amortization expenses for accounting purposes, but cannot claim the same
amount for tax purposes. The DTL represents the additional taxes the company will owe in the
future and is recorded as a liability on the balance sheet.
It's important to note that deferred tax assets and liabilities are not permanent in nature and can
change over time as the underlying accounting and tax circumstances change. Companies must
regularly assess and update their deferred tax positions to ensure they are accurate and reflective
of the current situation.
Several situation’s that can give rise to feferred tax asset and liability
There are several situation’s that can give rise to deferred tax assets and liabilities, including:
1. Accrued Expenses: If a company has accrued an expense for accounting purposes, but the
expense will not be deductible for tax purposes until a later period, a deferred tax liability will
arise.
2. Deferred Revenue: If a company has deferred revenue for accounting purposes, but has
already recognized the revenue for tax purposes, a deferred tax asset will arise.

3. 3. Stock-Based Compensation: If a company grants stock-based compensation to its employees
for accounting purposes, but the expense is not deductible for tax purposes until the shares are
exercised, a deferred tax asset will arise.
4. Intangible Assets: If a company has acquired an intangible asset, such as a patent or
trademark, for accounting purposes, but the asset has a shorter useful life for tax purposes, a
deferred tax liability will arise.
5. Bad Debt Allowance: If a company has established a bad debt allowance for accounting
purposes, but the deduction will not be allowed for tax purposes until a later period, a deferred
tax liability will arise.
6. Pension and Other Post-Employment Benefits: If a company provides pension or other post-
employment benefits for accounting purposes, but the deductions are not allowed for tax
purposes until the benefits are paid, a deferred tax liability will arise.
These are just a few examples of situations that can give rise to deferred tax assets and liabilities.
In general, any difference between the accounting and tax treatment of an item can potentially
give rise to a deferred tax asset or liability.
Advantages and Disadvantages of Deferred tax
Advantages of Deferred Tax:
1. Accurate Financial Reporting: By recognizing deferred tax assets and liabilities, a company
can provide a more accurate picture of its future tax obligations or benefits. This information is
useful to investors, creditors, and other stakeholders in assessing a company's financial health
and making informed decisions.

4. 2. Tax Planning: Deferred tax helps to align a company's financial reporting with tax regulations,
which can prevent regulatory issues and penalties. It also enables companies to plan their tax
strategies more effectively by identifying opportunities to minimize tax liabilities and maximize
tax benefits.
3. Better Resource Allocation: Deferred tax can help companies allocate resources more
effectively by providing a clearer picture of their future tax obligations or benefits. This
information can help companies make better decisions about investments, acquisitions, and other
strategic initiatives.
Disadvantages of Deferred Tax:
1. Complexity: Deferred tax accounting can be complex and requires significant expertise.
Companies must regularly assess and update their deferred tax positions to ensure they are
accurate and reflective of the current situation.
2. Uncertainty: Deferred tax assets and liabilities are not permanent in nature and can change
over time as the underlying accounting and tax circumstances change. This uncertainty can make
it difficult for companies to make long-term plans and budgeting decisions.
3. Misuse: Deferred tax accounting can be misused to manipulate financial statements and
mislead investors. This can lead to regulatory issues and penalties.
In summary, while deferred tax can provide many advantages, it also comes with some
disadvantages, including complexity, uncertainty, and the potential for misuse. Companies must
carefully manage their deferred tax positions to ensure that they are accurate and transparent.
some common circumstances that can cause to change deferred tax assets and
liabilities
Deferred tax assets and liabilities can change due to a variety of circumstances, including:
1. Changes in Tax Rates: If the tax rate changes, the value of the deferred tax assets and
liabilities will also change.

5. 2. Changes in Accounting Methods: If a company changes its accounting methods, it can affect
the timing of when income and expenses are recognized for accounting purposes, which can in
turn affect the deferred tax assets and liabilities.
3. Changes in Business Operations: If a company expands or contracts its operations, it can
affect the amount of taxable income it generates, which can affect the deferred tax assets and
liabilities.
4. Changes in Tax Law: Changes in tax law can affect the timing and amount of tax deductions
and credits, which can affect the deferred tax assets and liabilities.
5. Changes in Asset Values: Changes in the value of assets, such as property, plant, and
equipment, can affect the amount of depreciation expense recognized for accounting purposes,
which can in turn affect the deferred tax assets and liabilities.
6. Changes in the Timing of Cash Flows: Changes in the timing of cash flows, such as when a
company makes a payment for a tax liability, can affect the timing of when tax deductions and
credits are recognized for accounting purposes, which can in turn affect the deferred tax assets
and liabilities.
In summary, any change in the underlying accounting or tax circumstances can potentially affect
the value of deferred tax assets and liabilities. Companies must regularly assess and update their
deferred tax positions to ensure they are accurate and reflective of the current situation.
some common methods that companies use to manage their deferred tax
assets and liabilities
Companies can use a variety of methods to manage their deferred tax assets and liabilities,
including:
1. Tax Planning: Companies can engage in tax planning to minimize their tax liabilities and
maximize their tax benefits. This can involve structuring transactions in a tax-efficient manner or
taking advantage of tax credits and deductions.

6. 2. Valuation Allowances: Companies can establish valuation allowances to offset the risk of not
being able to realize their deferred tax assets in the future. This can help to reduce the impact of
potentially adverse tax or business circumstances.
3. Changes in Accounting Methods: Companies can change their accounting methods to better
align with their tax position and reduce the amount of deferred tax assets and liabilities.
4. Tax Loss Carrybacks or Carryforwards: Companies can use tax loss carrybacks or
carryforwards to offset taxable income in prior or future periods, respectively. This can help to
reduce the impact of temporary differences in the timing of when income and expenses are
recognized for accounting and tax purposes.
5. Asset Sales or Restructurings: Companies can sell assets or restructure their operations to
generate tax benefits or reduce their tax liabilities. This can involve transferring assets to
subsidiaries or moving operations to jurisdictions with lower tax rates.
In general, companies must carefully manage their deferred tax assets and liabilities to ensure
that they are accurate and reflective of the current situation. This can involve a combination of
tax planning, accounting methods, valuation allowances, and other strategies to minimize tax
liabilities and maximize tax benefits.