Our Products
Loans
Cards
Insurance
Investment
Stock Market
Electronics Mall
CIBIL Score
Knowledge Centre
Calculators
Our Services
My Account
Do not call
En
Deferred tax assets arise from timing differences between accounting income and taxable income. These differences occur when certain expenses or losses are recognised in financial statements before they are allowed for tax purposes. A deferred tax asset represents a future tax benefit that a company may realise when these differences reverse. Understanding how deferred tax assets work is essential for interpreting a company’s financial position and tax disclosures accurately.
A deferred tax asset refers to a tax amount that a company can recover in future periods due to deductible temporary differences, unused tax losses, or tax credits. These assets arise when expenses are recognised earlier in accounting records than in tax filings, or when income is taxed before it is recognised in financial statements.
In practical terms, a deferred tax asset reflects taxes already paid or recognised that may reduce future tax liabilities. It is recorded on the balance sheet only when there is reasonable certainty that sufficient taxable income will be available in future periods. Deferred tax assets are governed by accounting standards such as Ind AS 12 and are subject to strict recognition conditions.
Deferred tax asset meaning refers to the recognition of future tax relief arising from timing differences between accounting and tax treatment. These differences may occur due to varying depreciation methods, provisions allowed later for tax purposes, or carried-forward losses. While not representing cash or receivables, deferred tax assets signify a potential reduction in future tax payments, which can affect the allocation of operating expenses and ultimately impact shareholder value. Their recognition depends on the likelihood that the company will generate taxable profits against which the asset can be utilised, making deferred tax assets closely monitored and reassessed at each reporting date.
Deferred tax assets function by aligning accounting income with tax outcomes over time. The process typically follows this structure:
An expense or loss is recognised in the financial statements.
The same item is not immediately allowed as a tax deduction.
This creates a temporary difference between accounting profit and taxable profit.
The tax impact of this difference is recorded as a deferred tax asset.
When the item becomes tax-deductible in future periods, the deferred tax asset reverses.
This mechanism ensures that tax effects are matched with the periods in which related income or expenses are recognised.
A deferred tax asset is created in situations where future tax benefits are expected. Common scenarios include:
Carry-forward of business losses or unabsorbed depreciation
Expenses recognised in books but allowed later for tax purposes
Provisions that are deductible only upon payment
Differences in depreciation methods between accounting and tax laws
Recognition occurs only when future taxable income is considered reasonably probable, as per applicable accounting standards.
Consider a company that recognises a provision for employee benefits of ₹10,00,000 in its financial statements. Tax laws allow this deduction only when the amount is actually paid.
If the applicable tax rate is 30%, the temporary difference creates a deferred tax asset of ₹3,00,000. This amount represents the tax benefit the company may claim in the future when the expense becomes tax-deductible. The deferred tax asset reverses once the payment is made and tax deduction is claimed.
Deferred tax asset calculation involves identifying deductible temporary differences and applying the relevant tax rate. The process generally includes:
Identifying differences between accounting income and taxable income
Determining which differences will reverse in future periods
Applying the enacted tax rate applicable at the time of reversal
Assessing whether future taxable profits are probable
The resulting amount represents the deferred tax asset recorded in the balance sheet.
The computation of deferred tax asset typically follows these steps:
Determine deductible temporary differences
Identify carry-forward losses or unused tax credits
Apply the applicable tax rate
Evaluate certainty of future taxable income
Record the deferred tax asset, subject to recognition criteria
Reassessment is required at each reporting date to ensure continued validity.
| Basis | Deferred Tax Asset | Deferred Tax Liability |
|---|---|---|
Nature |
Future tax benefit |
Future tax obligation |
Arises from |
Deductible temporary differences |
Taxable temporary differences |
Impact |
Reduces future tax payments |
Increases future tax payments |
Recognition |
Subject to probability of profits |
Generally recognised |
Several factors influence deferred tax asset recognition and measurement:
Future profitability expectations
Applicable tax rates and tax laws
Nature of temporary differences
Utilisation period for losses or credits
Changes in accounting standards or tax regulations
Deferred tax assets reflect:
Alignment of tax expense with accounting income
Recognition of future tax benefits
Improved comparability across financial periods
Transparent reporting of tax timing differences
Despite their usefulness, deferred tax assets have constraints:
Dependence on future taxable income
Subjectivity in recognition assumptions
Potential reversals if profitability declines
Sensitivity to tax law changes
Deferred tax assets represent future tax benefits arising from timing differences between accounting and taxation. Their recognition depends on expected future profitability and compliance with accounting standards. Understanding their calculation, examples, and limitations helps in interpreting financial statements accurately and assessing a company’s tax position objectively.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A deferred tax asset represents a future tax benefit that arises when expenses or losses are recognised earlier in accounting records than for tax purposes.
It is created when deductible temporary differences, tax losses, or credits exist that can reduce future taxable income.
An example includes a provision recorded in accounts but allowed as a tax deduction only in future periods.
It is calculated by applying the applicable tax rate to deductible temporary differences or carry-forward losses.
A deferred tax asset is neither an expense nor income; it is a balance sheet item representing future tax relief.
A deferred tax asset reduces future tax payments, while a deferred tax liability increases them due to taxable timing differences.
Deferred tax assets can be carried forward as long as recognition conditions are met and future taxable income is probable.
.jpeg)
250 Views
| 1min read
Posted on 19 Dec
Academy 
.jpeg "image not found"){kind=small}
