Deferred tax assets represent taxes that have been paid (or often the carryforward of losses) but which have not yet flowed through the income statement. A deferred tax liability represents tax payments that have appeared on the income statement but not yet been paid. They usually arise when accounting standards and tax authorities recognize the timing of taxes due at different times. For example, when a company uses accelerated depreciation when reporting to the tax authority (to increase expense and lower tax payments in the early years) but uses the straight-line method on the financial statements. Since these differences will correct over the course of the asset’s depreciable life, they are called “temporary differences.

Under IAS 12 and US GAAP (SFAS 109), deferred taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are recognized when there is a temporary difference between the stated value of an asset or liability for tax purposes and the value for financial reporting purposes. The deferred tax is also contingent upon the expectation that future revenue and income will be sufficient to offset the deferred tax.

To determine the deferred tax treatment under various circumstances: