What Is Deferred Liability and How Does It Work

Deferred liability is a financial concept that allows you to delay paying taxes on certain investments or assets until a future date. This can be a huge relief for businesses and individuals who need to manage their cash flow.

A deferred liability is created when you make a payment or transfer assets to a third party, but the liability for that payment or transfer is not immediately recognized. This can happen when you put up collateral for a loan or make a payment on a deferred interest credit card.

In essence, a deferred liability is a promise to pay a certain amount in the future, rather than paying it immediately. This can give you time to manage your finances and make other financial decisions without the immediate burden of a large payment.

Deferred liabilities can be used in various financial situations, including tax-deferred investments and loans.

A deferred tax liability on a company's balance sheet represents a future tax payment the company must pay. It's calculated as the company's anticipated tax rate times the difference between its taxable income and accounting earnings before taxes.

The tax liability applies to the current year, but the tax will not be paid until the next calendar year. To rectify the accrual/cash timing difference, the tax is recorded as a deferred tax liability.

A deferred tax liability is the amount of taxes a company has "underpaid" which will be made up in the future. This doesn't mean that the company hasn't fulfilled its tax obligations. Rather it recognizes a payment that is not yet due.

The deferred tax liability can be manually calculated by recognising avenues that are treated varyingly by a company and the tax department. These avenues create a disparity between the two financial reports, thus generating a deferred tax liability.

A deferred tax liability is created when the income tax expense on a company's income statement is different from the actual amount paid to the tax authority.

This difference occurs because the tax expense is recorded under Generally Accepted Accounting Principles (GAAP) accounting standards, but the actual taxes paid are based on the Internal Revenue Service (IRS) accounting.

The discrepancy between the tax expense and the actual taxes paid is temporary and should gradually unwind to a balance of zero.

The temporary timing mismatch between the recognized tax expense and the actual taxes paid is treated as a liability because fewer taxes were actually paid than the amount reported on the income statement.

The deferred tax liability represents a future obligation that must be fulfilled, which is why it's categorized as a liability.

A deferred tax liability is created when there's a disparity between a company's financial reports and the tax department's records. This disparity generates a deferred tax liability.

The calculation of a deferred tax liability is based on the difference in tax liabilities appearing in two financial reports. There is no separate deferred tax rate applicable.

A company might sell a piece of furniture for $1,000 plus a 20% sales tax, payable in monthly installments by the customer. The deferred tax liability would be $500 x 20% = $100.

The formula used to calculate the deferred tax liability (DTL) is not explicitly stated, but it can be inferred as the difference between the value of PP&E under book accounting and tax accounting in each period multiplied by the tax rate.

A temporary timing mismatch between the recognized tax expense between GAAP and IRS accounting is treated as a liability because fewer taxes were actually paid to the IRS than the amount reported on the income statement.

The discrepancy between the tax expense on the GAAP-based income statement and the actual taxes paid to the IRS is temporary and should gradually unwind to a balance of zero.

The recognition exemption has been narrowed down, which means not all transactions are eligible for exemption. This change affects how companies account for certain transactions.

Companies will no longer be exempt from recognizing deferred tax for transactions like leases and decommissioning obligations. These transactions give rise to equal and offsetting temporary differences.

A company will now need to reflect the future tax impacts of these transactions. This means they'll have to account for the effects of these transactions on their tax liability.

The amendments clarify that the exemption does not apply to transactions that result in equal and offsetting temporary differences. This is illustrated in an example provided by the company.

Deferred liability is often confused with other accounting concepts, but understanding the differences is crucial for accurate financial reporting.

Deferred tax liability (DTL) is created when profits in a company's income statement are higher than what is mentioned in its tax reports.

A key distinction between DTL and deferred tax asset (DTA) lies in their basis of recognition. DTL arises when tax accrues in the current year but is paid in a later period, whereas DTA is recognized when tax will accrue in a later period but is paid in advance in the current year.

Here's a comparison of DTL and DTA in a table:

Depreciation is an accounting concept where the cost of a capital expenditure is recognized across its useful life assumption.

Companies have the discretion to utilize either straight-line depreciation or accelerated depreciation for GAAP reporting purposes.

The useful life of a fixed asset is the estimated time it's anticipated to continue providing economic value to the company.

Depreciation methods describe the distribution of expense recognition across a fixed asset's useful life, such as straight-line or accelerated depreciation.

The depreciation expense for tax purposes is greater in the earlier stages of a fixed asset's useful life than under straight-line depreciation when accelerated depreciation is used.

The cumulative depreciation recognized is equivalent, irrespective of the method used, which means the deferred tax liability is a temporary timing difference that will unwind over the course of the asset's useful life.

Here are the key differences between straight-line and accelerated depreciation:

The depreciation expense used for tax reporting will eventually reverse and reduce below the amount reported under GAAP until reaching a balance of zero, which means the deferred tax liability will eventually unwind.

Deferred tax liability and deferred tax asset are two related concepts that can be confusing, but understanding the difference between them is crucial for any business owner or accountant.

A deferred tax liability arises when tax accrues in the current year but is paid in a later period, making it a non-current liability on the balance sheet.

This can happen when profits in a company's income statement are higher than what is mentioned in its tax reports.

On the other hand, a deferred tax asset is created when tax will accrue in a later period but is paid in advance in the current year, making it a non-current asset on the balance sheet.

This typically occurs when profits in a company's income statement are lower than what is mentioned in the tax reports.

Here's a summary of the key differences between deferred tax liability and deferred tax asset:

Understanding these differences is essential to making informed financial decisions and avoiding potential issues with cash flow.

A deferred tax liability represents an obligation to pay taxes in the future. This obligation originates when a company or individual delays an event that would cause it to recognize tax expenses in the current period.

For individuals, earning returns in a 401(k) represents a deferred tax liability since the saver will pay taxes on the saved income and gains at withdrawal.

Here are some key facts about deferred tax liabilities:

Companies will need to recognize a deferred tax asset and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision.

Deferred liability can arise in various situations, one such example being an installment sale.

Companies that sell products on credit to be paid off in equal amounts in the future can create a deferred tax liability.

In accounting, the company recognizes full income from the installment sale, but tax laws require income recognition when installment payments are made.

An installment sale is a common example of deferred tax liability. This type of sale allows a company to sell its products on credit, with payments made in equal amounts over time.

The company recognizes full income from the installment sale of general merchandise. This creates a temporary difference between accounting earnings and taxable income.

Tax laws require companies to recognize income when installment payments are made. This creates a deferred tax liability because the company's tax liability is not immediate, but rather when the payments are made.

In M&A transactions, deferred tax liabilities can arise from installment sales, where a company sells products on credit and recognizes income when payments are made, not when the sale is made. This creates a temporary positive difference between accounting earnings and taxable income.

The IFRS 16 Leases standard introduces a right-of-use (ROU) asset and a corresponding lease liability, which can give rise to a temporary difference that may not be reflected in financial statements. Companies may apply different approaches to account for this difference.

For example, a company may recognize the tax impacts in profit or loss when they are incurred, and therefore recognize no deferred tax on the lease. Alternatively, they may assess the ROU asset and lease liability together as a single or 'integrally linked' transaction on a net basis.

The following approaches are used to account for the temporary difference arising from the ROU asset and lease liability:

These approaches highlight the diversity in practice and the need for consistency in accounting for deferred tax on transactions involving both an asset and a liability.