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Understanding Deferred Tax Assets and Liabilities: Real World Examples and Calculations



Deferred tax assets and liabilities


Deferred tax assets and liabilities are an important aspect of financial reporting that reflects the difference between accounting income and taxable income. Here are some key points to understand:

  • Deferred tax assets and liabilities arise when there is a difference between the tax and accounting treatment of an item.

  • When the tax treatment of an item results in higher taxable income than accounting income, a deferred tax liability arises. When the tax treatment of an item results in lower taxable income than accounting income, a deferred tax asset arises.

  • Deferred tax assets and liabilities are calculated using the tax rate that is expected to apply when the temporary differences reverse. Temporary differences are the differences between the carrying amount of an asset or liability for accounting purposes and its tax base. The tax base is the amount that will be deductible for tax purposes in the future.

Deferred tax assets and liabilities can be reversed over time as the underlying temporary differences are resolved. Here are some examples:

  • If a company has a deferred tax liability because it recognized revenue for accounting purposes in the current year but did not recognize it for tax purposes until the following year, the deferred tax liability will be reversed when the revenue is recognized for tax purposes. This may result in a tax benefit for the company.

  • Similarly, a deferred tax asset arising from a tax loss carryforward can be utilized to offset future taxable income, resulting in a tax benefit for the company.


Reversals


Deferred tax assets and liabilities can change over time due to changes in tax laws, changes in estimates of future taxable income or deductible amounts, and changes in the actual amount of taxable income or deductible amounts. Here are some key points to understand:

  • Companies must regularly assess the realizability of their deferred tax assets and liabilities and adjust them accordingly in their financial statements.

  • It's important to note that deferred tax assets and liabilities can have a significant impact on a company's financial statements.

  • Companies must ensure that their financial statements accurately reflect the value of these assets and liabilities and that they are properly disclosed to investors and other stakeholders.

In conclusion, deferred tax assets and liabilities are an important aspect of financial reporting that companies must understand and manage. By understanding how these assets and liabilities arise, how they can be reversed, and how they can change over time, companies can ensure that their financial statements accurately reflect their financial position and performance.


How to calculate DTA and DTL?


Assume a company purchases a piece of equipment for $10,000 that it will depreciate over five years. For tax purposes, the equipment is eligible for bonus depreciation, which allows the company to deduct 100% of the cost in the year of purchase. For accounting purposes, the company will depreciate the equipment using straight-line depreciation.

In this case, there is a temporary difference between the tax and accounting treatment of the equipment. The tax base of the equipment is $0 (since it was fully deducted in the year of purchase), while the carrying amount for accounting purposes is $8,000 ($10,000 cost - $2,000 accumulated depreciation after the first year). Assume the tax rate is 21%.


The calculation of the deferred tax liability would be:

Deferred tax liability = (tax rate) x (temporary difference) = 0.21 x ($8,000 - $0) = $1,680 This means the company would need to pay $1,680 in taxes when the equipment is sold or otherwise disposed of, since the tax base is $0.

Now, let's look at an example of a deferred tax asset. Assume a company incurs a tax loss of $100,000 in the current year. This loss can be carried forward and used to offset future taxable income. For accounting purposes, the company recognizes a deferred tax asset of $21,000 (21% tax rate x $100,000 tax loss).

Assuming the company expects to generate sufficient taxable income in future years to utilize the full tax loss carryforward, the deferred tax asset is considered realizable and will not be reversed. However, if the company were to experience a significant downturn in its business and no longer expected to generate sufficient taxable income, it would need to reassess the realizability of the deferred tax asset and potentially reverse some or all of it.


Some real world examples

1) Apple Inc.


In its 2021 Annual Report, Apple reported deferred tax assets of $2.8 billion and deferred tax liabilities of $4.3 billion. The company's deferred tax liabilities primarily relate to the tax effects of the difference between book and tax basis of property and equipment, and the deferred tax assets primarily relate to operating loss carryforwards, stock-based compensation, and foreign tax credits.


2) Amazon.com, Inc.


In its 2020 Annual Report, Amazon reported deferred tax assets of $5.5 billion and deferred tax liabilities of $5.7 billion. The company's deferred tax liabilities primarily relate to the tax effects of the difference between book and tax basis of property and equipment, while the deferred tax assets primarily relate to net operating loss carryforwards and employee-related items.


3) Ford Motor Company


In its 2020 Annual Report, Ford reported deferred tax assets of $11.1 billion and deferred tax liabilities of $8.9 billion. The company's deferred tax assets primarily relate to operating loss carryforwards, pension and other post-retirement benefits, and employee-related items, while the deferred tax liabilities primarily relate to the tax effects of the difference between book and tax basis of property and equipment.


4) JPMorgan Chase & Co.


In its 2020 Annual Report, JPMorgan Chase reported deferred tax assets of $4.4 billion and deferred tax liabilities of $1.8 billion. The company's deferred tax assets primarily relate to tax credits, employee-related items, and operating loss carryforwards, while the deferred tax liabilities primarily relate to the tax effects of the difference between book and tax basis of property and equipment.


These examples demonstrate how deferred tax assets and liabilities can vary significantly between companies and industries, depending on the specific tax and accounting treatments of different items. Companies must carefully manage these assets and liabilities and regularly assess their realizability to ensure that their financial statements accurately reflect their financial position and performance.



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