Deferred Tax Assets or Liabilities

Introduction

Deferred Tax Assets or Liabilities occur when there is time difference in recording the transaction and the actual event of the same. Deferred tax assets can arise when the payable tax is higher than the tax which is actually paid. ‘A deferred tax asset must be recognised for deductible temporary differences, unused tax losses, and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, with the exceptions of initial recognition of an asset/liability and certain investments.’^[1] ‘Deferred tax liabilities (assets) must be measured at the tax rates expected to apply when the liability is settled or asset is realised, using the tax rates/laws that have been enacted or substantively enacted by the reporting date. Discounting of deferred tax assets and liabilities is prohibited.’^[2]

Decision

Discounted cash flow model uses the future cash flows to determine the present value of an asset or a liability. It also requires the future cash flows to be accurate so that an exact present value can be determined. The deferred tax assets and liabilities are mostly based on assumptions which are recorded but have not yet occurred. Since they are merely assumptions, the figures are not reliable and accurate. Hence the discounting cash flow model cannot be used. It cannot consider an amount which may or may not occur in the future. Hence can have to completely rule out time value of money in cases of deferred tax assets and liabilities simply because Discounting Cash Flow requires accurate figures and values.

Other Assets and Liabilities

Important examples can be any particular asset purchased, as in Land and building, Machinery, Insurance etc. Liabilities can include other contingent liabilities, interest, leased liabilities, employee benefits etc.