How Deferred Tax Liabilities Are Shown on the Balance Sheet

Graziano Stefanelli
9 hours ago
3 min read

Deferred tax liabilities (DTLs) represent amounts of income taxes a company expects to pay in future periods as a result of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases for tax reporting purposes. They arise when accounting income exceeds taxable income in a given period, deferring tax payments to the future. The reporting of deferred tax liabilities on the balance sheet ensures that financial statements reflect both present and future tax consequences of current transactions.

Deferred tax liabilities arise from temporary differences.

A deferred tax liability does not mean that taxes are overdue or unpaid. Instead, it results from timing differences in recognizing revenues and expenses under accounting rules versus tax rules.

Common examples include:

Depreciation differences: Companies may use straight-line depreciation for accounting but accelerated depreciation for tax purposes, reducing current taxable income but increasing future taxes.
Revenue recognition differences: For tax purposes, revenue may be recognized when cash is received, while for accounting purposes it may be recognized earlier.
Inventory valuation differences: Tax rules may allow methods that differ from those applied in financial reporting.

For example, if a machine has accounting depreciation of 10,000 but tax depreciation of 15,000 in the current year, taxable income is lower, reducing current tax expense. However, this creates a deferred tax liability because future taxable income will be higher when accounting depreciation exceeds tax depreciation.

Presentation on the balance sheet highlights long-term obligations.

Deferred tax liabilities are generally classified as non-current liabilities under both IFRS and US GAAP, regardless of when they are expected to reverse. They are presented separately from current tax liabilities to emphasize their future nature.

For example:

Income Taxes Payable (current): 30,000
Deferred Tax Liabilities: 50,000
Total Tax Liabilities: 80,000

This separation clarifies how much of the company’s tax obligation is due in the near term versus deferred to future periods.

Journal entries illustrate recognition of deferred taxes.

To record deferred tax liability arising from temporary differences:

Debit: Income Tax Expense 5,000
Credit: Deferred Tax Liability 5,000

When the temporary difference reverses in a future period:

Debit: Deferred Tax Liability 5,000
Credit: Income Tax Expense 5,000

These entries show how deferred tax liabilities increase current tax expense when timing differences occur and reduce expense when they reverse.

Standards guide recognition and measurement of deferred taxes.

Under IAS 12: Income Taxes (IFRS) and ASC 740: Income Taxes (US GAAP), companies must recognize deferred tax liabilities for all taxable temporary differences, with certain exceptions such as the initial recognition of goodwill. Measurement is based on the enacted tax rates expected to apply when the temporary differences reverse.

This ensures that reported liabilities reflect future tax obligations using currently known rates and rules.

Deferred tax liabilities affect solvency and performance analysis.

Although non-cash in nature, deferred tax liabilities increase total liabilities on the balance sheet, impacting leverage ratios and measures of solvency. For example, if total assets are 1,200,000 and total liabilities including 100,000 of deferred tax liabilities are 800,000, the debt ratio is 0.67. Without the deferred tax liability, the ratio would be 0.58, a material difference in financial analysis.

Deferred tax liabilities also affect effective tax rates in the income statement, since they adjust total tax expense beyond the current tax payable.

Disclosures provide clarity on timing differences and assumptions.

Both IFRS and US GAAP require disclosure of:

The types of temporary differences giving rise to deferred tax liabilities.
The amounts and expected reversal periods.
Changes in tax rates or legislation affecting measurement.
Reconciliations between statutory tax rates and effective tax rates.

These disclosures help users understand the sources of deferred taxes and assess their impact on future cash flows and profitability.

Deferred tax liabilities link accounting profit with future tax obligations.

By reporting deferred tax liabilities on the balance sheet, companies acknowledge that current accounting choices create future tax consequences. This ensures that stakeholders are aware of obligations that may reduce future net income and cash flows. Accurate recognition and disclosure of deferred tax liabilities strengthen the transparency of financial statements, allowing investors and creditors to evaluate both present financial position and anticipated fiscal impacts.

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