Deferred Tax Assets & Liabilities | Zell Learnings @ZellEducation

Summary

In this video, the concept of deferred tax assets and liabilities is demystified. The presenter explains that these arise from discrepancies between tax rules and accounting standards, such as different depreciation methods. By focusing on logic and avoiding technical jargon, the video clarifies how paying more or less tax in the current year can lead to deferred tax assets or liabilities. The key distinction between permanent and temporary differences is also discussed, helping students understand when and why these differences reverse in the future. The goal is to simplify a complex topic and make it more accessible to learners.

Takeaways

• 😀 Deferred tax assets and liabilities can be a daunting topic for students, especially when it involves complex terms and jargons.
• 😀 The core concept of deferred tax assets and liabilities is rooted in discrepancies between accounting and tax reporting standards.
• 😀 If a company overpays its taxes in a given year, it will pay less in the future, creating a deferred tax asset.
• 😀 On the other hand, underpaying taxes in one year results in paying more in the future, leading to a deferred tax liability.
• 😀 The primary reason for discrepancies is the difference between tax rules and accounting standards (e.g., US GAAP or IFRS vs. tax laws).
• 😀 Permanent differences, like charity deductions, do not reverse over time and do not result in deferred tax assets or liabilities.
• 😀 Temporary differences, such as depreciation methods, create deferred tax assets or liabilities because they reverse in the future.
• 😀 Depreciation is a common example of a temporary difference where tax and accounting standards differ in how depreciation is calculated.
• 😀 Although depreciation methods may differ, the total tax amount over the asset's life will be the same, but the timing of the tax payments will differ.
• 😀 A clear understanding of basic concepts helps students navigate complex tax calculations, making it easier to solve related sums.
• 😀 The video aims to explain the logic behind deferred tax assets and liabilities without confusing jargons, making it more approachable for students.

Q & A

What is the main reason students find deferred tax assets and liabilities difficult to understand?

Students often find deferred tax assets and liabilities challenging due to the complex jargon and terminology involved. The concept is often seen as daunting because of the confusion around tax rules and accounting standards.

How does the speaker suggest understanding deferred tax assets and liabilities more clearly?

The speaker emphasizes understanding the logic behind deferred tax assets and liabilities, without using jargon or confusing terminology. By focusing on the basics and the logic behind discrepancies in tax payments, students can make sense of these concepts more easily.

What causes discrepancies that lead to deferred tax assets and liabilities?

Discrepancies arise because tax rates and tax rules differ from accounting standards. This misalignment between the tax rules (e.g., IRS or Income Tax Department) and accounting standards (e.g., US GAAP or IFRS) leads to differences in tax computations, which result in deferred tax assets or liabilities.

What is the difference between permanent and temporary differences in taxation?

Permanent differences are tax-related discrepancies that will not reverse in the future, such as deductions that only apply for tax purposes but are not recognized in financial statements. Temporary differences, on the other hand, are differences that will eventually reverse over time, like depreciation calculated differently under tax and accounting standards.

Can you give an example of a permanent difference?

An example of a permanent difference is when a donation to charity is deductible for tax purposes, but the deduction is not recognized in financial reporting. This creates a permanent difference, as it will not reverse in the future.

What are temporary differences, and how do they lead to deferred tax assets or liabilities?

Temporary differences occur when there is a timing discrepancy between tax and accounting standards, such as differing depreciation rates. These differences will eventually reverse, leading to deferred tax assets (if more tax is paid now) or deferred tax liabilities (if less tax is paid now).

Why do tax and accounting standards sometimes differ in their approach to things like depreciation?

Tax and accounting standards may have different rules or prescribed rates for things like depreciation, which causes timing differences in how expenses are recognized. This discrepancy in treatment can lead to either a deferred tax asset or liability, depending on whether taxes are overpaid or underpaid in the current period.

What is a common example of a temporary difference involving depreciation?

A common temporary difference in depreciation arises when accounting standards require a company to depreciate an asset by 30% annually, while tax standards may allow only 20%. This leads to a timing difference, where the company either overpays or underpays taxes in the current year, with the discrepancy reversing in future years.

How does deferred tax liability arise in the case of temporary differences?

A deferred tax liability arises when a company underpays taxes in the current period due to differences in accounting and tax depreciation methods. Over time, as the difference reverses, the company will owe more tax in the future, creating the liability.

What should students focus on to solve deferred tax asset or liability sums correctly?

Students should focus on understanding the basics of how temporary and permanent differences arise between tax and accounting rules. Once the logic is clear, solving sums becomes easier, as they can apply the basic principles to calculate the deferred tax asset or liability.