A deferred tax liability is the deferred tax consequences attributable to taxable temporary differences, and it is measured using the applicable enacted tax rate and provisions of the enacted tax law (FASB Statement No. 109, Appendix E). It records tax that the entity will owe in a later year because an amount already reflected in the accounts has not yet been taxed.
Which book-to-tax timing patterns produce one, and which produce the asset instead, are worked through in deferred income tax. What this entry covers is the part a reviewer actually spends time on: the cases where the balance is not recognized, and how it has to be presented.
Recognition Is the Default
The standard states it as a basic principle rather than as an election. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards, and the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, with the effects of future changes in tax laws or rates not anticipated (FASB Statement No. 109, paragraph 8).
Enacted is doing real work in that sentence. A rate change that has been announced, proposed or passed by one chamber is not enacted, so it does not touch the measurement until it is.
The Asset Side Has a Valve, and This Side Does Not
The same paragraph carries one asymmetry that is easy to miss. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized (FASB Statement No. 109, paragraph 8).
There is no parallel reduction on the liability side. A deferred tax liability is not written down because management expects to avoid it, and there is no equivalent of the valuation allowance to apply to it. The asset side and its allowance are set out in deferred tax assets.
Where a Deferred Tax Liability Is Prohibited
Two prohibitions sit in the standard’s own list of exceptions, and both catch real balances.
The standard prohibits recognition of a deferred tax liability or asset related to goodwill, or the portion of it, for which amortization is not deductible for tax purposes (FASB Statement No. 109, paragraph 9). So a nondeductible goodwill balance does not generate a deferred tax liability however large the book-to-tax gap looks.
It also prohibits recognition of a deferred tax liability or asset for differences related to assets and liabilities that are remeasured from the local currency into the functional currency using historical exchange rates, and that result from changes in exchange rates or from indexing for tax purposes (FASB Statement No. 109, paragraph 9).
Where It Is Deferred Rather Than Prohibited
A separate list holds the balance back on a condition instead of removing it. A deferred tax liability is not recognized for those types of temporary differences unless it becomes apparent that they will reverse in the foreseeable future (FASB Statement No. 109, paragraph 31).
The types are named and dated:
- An excess of the amount for financial reporting over the tax basis of an investment in a foreign subsidiary or a foreign corporate joint venture that is essentially permanent in duration (FASB Statement No. 109, paragraph 31).
- Undistributed earnings of a domestic subsidiary or a domestic corporate joint venture that is essentially permanent in duration and arose in fiscal years beginning on or before December 15, 1992 (FASB Statement No. 109, paragraph 31).
- Bad debt reserves for tax purposes of US savings and loan associations and other qualified thrift lenders that arose in tax years beginning before December 31, 1987 (FASB Statement No. 109, paragraph 31).
- Policyholders’ surplus of stock life insurance companies that arose in fiscal years beginning on or before December 15, 1992 (FASB Statement No. 109, paragraph 31).
Then a sentence that closes the door on reasoning by analogy. The indefinite reversal criterion in Opinion 23 shall not be applied to analogous types of temporary differences (FASB Statement No. 109, paragraph 31). A difference that resembles one on that list but is not on it gets a deferred tax liability.
And Where It Must Be Recognized
The paragraph immediately after sets out the mirror cases, so the boundary is drawn from both sides. A deferred tax liability shall be recognized for an excess of the amount for financial reporting over the tax basis of an investment in a domestic subsidiary arising in fiscal years beginning after December 15, 1992, and for such an excess on an investment in a 50-percent-or-less-owned investee, except where the corporate joint venture exception applies (FASB Statement No. 109, paragraph 32).
The date is the hinge on the domestic subsidiary line. The same kind of difference is held back on one side of it and recognized on the other.
How It Sits on the Balance Sheet
Presentation is shared with the asset side and is settled in deferred tax assets: noncurrent in a classified statement of financial position, offset within one tax-paying component and one tax jurisdiction, and never offset across components or jurisdictions.
The consequence for this side is worth naming. Because the offset runs in one direction only, a client whose statement shows no deferred tax liability at all may still carry several, netted against assets inside each component, and the schedule underneath is where the exceptions above have to be visible.
Common Questions
No. Nothing in it is payable to a taxing authority now, and it changes as balances move rather than as cash moves. How that deferred movement combines with the amount actually payable is set out in accounting for income taxes.
At the applicable enacted tax rate and under the provisions of the enacted tax law (FASB Statement No. 109, Appendix E), with future changes in law or rates not anticipated (FASB Statement No. 109, paragraph 8).
No. The reduction for benefits not expected to be realized applies to the measurement of deferred tax assets (FASB Statement No. 109, paragraph 8), and the standard provides nothing equivalent on the liability side.
Noncurrent, in a classified statement of financial position, on the same rule that governs the asset side and with the same offsetting limits, set out in deferred tax assets.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade a real block of its own provision and deferred schedule work through a trial task before anything client facing depends on it.
