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An Understanding of the Deferred Tax Accounting Methods

Accounting in the present times is one of the most complex subjects as well as area of study and practice. Quite unlike the earlier accounting procedures that were quite simple as well as straight, the present times require a more focused as well as a specialized approach. As a result the field of accounting has been divided into several sub domains with each one catering to the specific requirements of the various organizations as well as governments.  Some of the sub domains of the field of accounting are the financial accounting, the management accounting, the forensic accounting, the staff accounting, the cost accounting as well as the most important field of tax accounting. One of the key areas in the field of tax accounting is that of the deferred tax accounting.

The deferred tax accounting is an accounting concept that means a future tax liability or asset, that might be due to the temporary differences or the timing differences between the accounting value of the assets and liabilities and their taxation values. In the modern day accounting, the deferred tax has to be shown by the organizations in accordance with the temporary difference or the time difference approach. Different countries have separate principles for the showing of the deferred taxes. For instance:
  1. UK GAAP uses the principle of timing difference approach
  2. Canadian GAAP uses the temporary difference approach just like the US GAAP
  3. The Russian PBU (2002) uses the timing difference approach

The main two principles of deferred tax accounting are:

  1. The Temporary Difference Approach: In this approach the difference between the carrying amount of an asset or the liability in the balance sheet and the amount that is attributed to the same asset as well as liability for the tax purposes. The temporary difference is further divided into two categories that are:
  • Taxable temporary differences: The taxable temporary difference that would result in the determination of the taxable profits in the future periods when the carrying amount would be settled.

  •  Deductible temporary differences: The temporary differences that would result in a deductible amount while determining the taxable profit of the future periods at the time when the asset amount as well as the liability amount would be settled.
  1. The Timing Differences Approach: This happens when the asset or the liability is recognized for the accounting purposes but not for the taxation purposes.  

In the deferred tax accounting, on many occasions, the outcome might be similar for the temporary difference as well as the timing difference though they might differ in a few cases due to some factors.