Key Concepts: Deferred Tax Assets (DTA) & Deferred Tax Liabilities (DTL)

  • DTL: Arises when the carrying amount of an asset is greater than its tax base (or a liability’s carrying amount is less than its tax base), creating future taxable income.
  • DTA: Arises when the carrying amount of an asset is less than its tax base (or a liability’s carrying amount is greater than its tax base), creating future tax deductions.

Methodology for Adjusting Entries
Instead of reversing prior-period DTAs/DTLs, we determine the movement from opening to closing balances and record that movement as a journal entry.

  • Movement in DTA = Closing DTA – Opening DTA
  • Movement in DTL = Closing DTL – Opening DTL

This ensures that the final recorded DTA and DTL balances align with the calculated closing amounts.

Required Inputs

  • Account Name
  • Carrying Amount
  • Tax Base
  • Tax Rate
  • Opening DTA and DTL
  • Calculated Temporary Differences (Taxable or Deductible)
  • Closing DTA and DTL

Deriving Journal Entries from Movements

  1. DTL Movements:
    • If Closing DTL > Opening DTL:
      Dr Income Tax Expense / Cr Deferred Tax Liability (Increase in future tax payable)
    • If Closing DTL < Opening DTL:
      Dr Deferred Tax Liability / Cr Income Tax Expense (Decrease in future tax payable)
  2. DTA Movements:
    • If Closing DTA > Opening DTA:
      Dr Deferred Tax Asset / Cr Income Tax Expense (Increase in future tax benefit)
    • If Closing DTA < Opening DTA:
      Dr Income Tax Expense / Cr Deferred Tax Asset (Decrease in future tax benefit)

General Causes of Temporary Differences

  • DTLs often from assets depreciating slower for accounting than for tax, or revaluations not yet taxed.
  • DTAs often from provisions, impairments, or unearned revenue recognized earlier for tax than for accounting.

Determining Temporary Differences

  • For Assets:
    • Carrying Amount > Tax Base ⇒ Taxable Temporary Difference ⇒ DTL
    • Carrying Amount < Tax Base ⇒ Deductible Temporary Difference ⇒ DTA
  • For Liabilities:
    • Carrying Amount > Tax Base ⇒ Deductible Temporary Difference ⇒ DTA
    • Carrying Amount < Tax Base ⇒ Taxable Temporary Difference ⇒ DTL

Tax Base

  • Defined by tax law, it’s the amount that will be deductible or taxable in the future when the asset’s benefits are realized or the liability is settled.

Practical Steps

  1. Determine each account’s carrying amount and tax base.
  2. Identify whether the difference is taxable (leads to DTL) or deductible (leads to DTA).
  3. Apply the tax rate to find the corresponding DTA or DTL.
  4. Compare closing DTA/DTL to the opening DTA/DTL.
  5. Record the movement via the appropriate journal entry.

This approach ensures accurate and efficient updating of the related accounting system for deferred tax items.