deferred income tax

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Deferred Income Tax

On a balance sheet, a tax that a company will owe on its income, but that has not yet been assessed. Because of differences between tax regulations and the Generally Accepted Accounting Principles, income may be recognized on a balance sheet for accounting purposes, but not for tax purposes. However, that income will eventually be recognized for tax purposes and income tax will then be assessed. This tax is called deferred income tax, and is recorded as a liability on the balance sheet.

deferred income tax

A liability created by income recognized for accounting purposes but not for tax purposes. The liability recognizes future taxes due when earned income is later reported for tax purposes. Use of accelerated depreciation for reporting to the Internal Revenue Service and straight-line depreciation for reporting to stockholders is one of the major reasons a firm includes deferred income taxes as a liability on its balance sheet.
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A variation of the aggregate approach, which several Board members appear to support, would require scheduling for additional years in order to determine (1) the balance sheet classification of deferred taxes as either current or noncurrent , and (2) the effects of phased-in tax rate changes.
The IASB and FASB have established different accounting standards for deferred taxes on intercompany profits in inventory.
109 says deferred taxes should be recognized when the tax basis of assets or liabilities differs from the financial accounting basis and the resulting differences are not permanent.
The major purpose of SFAS 96 was to make the balance sheet accounts for deferred taxes more meaningful in keeping with the FASB's conceptual framework.
Deferred taxes arise when the accountant uses an accounting method for financial statement reporting different from income tax reporting.
In addition to the obvious impact, the proposal will have a subtle effect on an item found on the liability side of virtually every balance sheet: deferred taxes. A small but meaningful number of companies have deferred tax assets, not deferred tax liabilities, on their books.
We therefore believe that, if the Board wishes to recognize deferred taxes when the foreign currency value of assets reported at fixed, historical dollar values inflates, then it should also recognize the likely effect of tax basis adjustments and eliminate the requirement of establishing the deferred tax liability.
The liability approach of income tax allocation requires that deferred taxes meet the definition of assets and liabilities before they can be recognized in the books; furthermore, deferred taxes must be measured using the tax rates of the year in which the assets are recovered or liabilities settled, provided that these rates were reenacted and known at the date of measurement.
SFAS 96 generally requires a rigid and mechanical approach to computing deferred taxes. Many of the complexities encountered result from the changing tax laws.
* Accounting for deferred taxes in fresh-start reporting, particularly to determine reorganization value.
* The balance sheet is unclassified or the current portion of deferred taxes can be determined without scheduling.
Accounting problem: Should the deferred taxes on the temporary differences arising from a change in functional currency when an economy ceases to be considered highly inflationary be reflected as an adjustment to the cumulative translation adjustment component of stockholders' equity?