Question

Essay Format 350-400 words : 1. Brief introduction 2. Main/detail explanation 3. Brief summary/conclusion

Question: Why do we need to follow GAAP rule that a deferred tax liability meets the definition of a liability? Explain in detail.

Answer 1

A deferred tax liability is the result of differences in the way a company does its financial accounting for reporting purposes according to generally accepted accounting principles (GAAP) versus tax accounting. The deferred tax liability represents an obligation to pay taxes in the future.

The deferral comes from the difference in timing between when the tax is accrued and when the tax is paid. A deferred tax liability records the fact the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable.

Under GAAP, tax benefits of special deductions for financial reporting purposes are recognized no earlier than the year in which they are available to reduce taxable income on the tax return. Which is profitable for companies to reduce tax.

Under GAAP, the deferred tax recorded on share-based compensation is computed on the basis of the expense recognized in the financial statements. Therefore, changes in an entity's share price do not affect the deferred tax asset recorded on the entity's financial statements.

Under 0GAAP, a deferred tax is generally required on undistributed earnings arising after 1992 that relate to a domestic subsidiary or a domestic joint venture. However, no deferred tax is recognized on the undistributed profits of an investment in a foreign subsidiary or foreign corporate joint venture if such foreign investments are considered permanent in duration.

GAAP guidelines help businesses maintain consistency in their presentation of financial information, reduce the risk of misrepresentation and avoid fraud. GAAP was created to safeguard the rights of stakeholders, including investors. It holds companies responsible for their financial reporting activities, thus providing greater assurance to all interested parties. Through the use of GAAP guidelines, companies provide true and fair presentation of financial information

Complying with GAAP guidelines gives assurance to anyone interested in your company that your financial statements were prepared using standard guidelines.