Question

How does a company disclose deferred tax assets and liabilities on its balance sheet?

Answer 1

A deferred tax asset is the opposite of a deferred tax liability. Deferred tax assets are reductions in future taxes payable, because the company has already paid the taxes on book income to be recognized in the future (like a prepaid tax).

A deferred tax liability occurs when taxable income is smaller than the income reported on the income statements. This is a result of the accounting difference of certain income and expense accounts. This is only a temporary difference. The most common reason behind deferred tax liability is the use of different depreciation methods for financial reporting and the IRS.

Deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a separate heading in the balance sheet of the enterprise, separately from current assets and current liabilities.

Deferred tax assets (net of the deferred tax liabilities, if any) is disclosed on the face of the balance sheet separately after the head ‘Investments’ and deferred tax liabilities (net of the deferred tax assets, if any,) is disclosed on the face of the balance sheet separately after the head ‘Unsecured Loans’.