Question

Take a look at the Notes to the Financial Statements of the latest Annual Report for Procter & Gamble. What do these deferred tax assets and liablities mean and why might Procter & Gamble have these?

As of June 30 2017 2016 DEFERRED TAX ASSETS

Pension and postretirement benefits $ 1,775 $ 2,226

Loss and other carryforwards 1,516 1,077

Stock-based compensation 732 845

Unrealized loss on financial and foreign exchange transactions 259 122

Fixed assets 212 216

Accrued marketing and promotion 210 240

Advance payments 121 515

Inventory 75 61

Accrued interest and taxes 30 55

Other 709 764

Valuation allowances (505) (467)

TOTAL $ 5,134 $ 5,654

DEFERRED TAX LIABILITIES

Goodwill and other intangible assets $ 9,403 $ 9,461

Fixed assets 1,495 1,533

Unrealized gain on financial and foreign exchange transactions 314 387

Other 26 105

TOTAL $ 11,238 $ 11,486

Answer 1

A Defered Tax Asset (DTA) is created in a situation when the company has overpaid the taxes or paid taxes in advance. In the above cases, DTA is created as company has pushed these expenses such as retirement benefits, unrealised loss to future years and has paid more taxes today. Since company has psid taxes in advance it has estimated amounts on which the taxes have been paid in advance and created an asset for the taxes.

A Defered Tax Liability(DTL) is exactly opposite of DTA. In this case, the company has delayed of deferred the payment of taxes. This could be due to timing difference like in case of Depreciation (Fixed Assets) wherein depreciation as per books and as per Income Tax is different. In this case Depreciation claimed by company as per Tax is higher and hence a DTL to that extent has been created by the company. Also it may arise due to gains which have not been realised today which lowered the taxes. These gains would have increased the amount of tax. However, since the company has deffered this income to future years, it has created a liability today to account for the taxes underpaid.