In short
A deferred tax asset is the future tax benefit from deductible temporary differences and carryforwards: items that will reduce taxable income in later years.
Key takeaways
- Measured using the enacted tax rate expected to apply when the difference reverses.
- A valuation allowance reduces it if it is more likely than not (over 50%) that some or all of it won't be realized.
- All deferred tax assets and liabilities are classified as noncurrent on the balance sheet.
Example
A $30,000 warranty accrual deductible for tax next year creates a deferred tax asset of $30,000 × 21% = $6,300.
Where it's tested
FAR: Income Taxes (Deferred Tax Accounting) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has a $300,000 deferred tax asset related to a net operating loss carryforward. Based on a recent history of losses, management concludes it is more likely than not that only $100,000 of this asset will be realized. What should the company record?