Deferred Tax Asset / Liability

Deferred tax assets and liabilities sit on a company’s balance sheet as recognition that the income entered into a corporate tax return differs from income as recognised in the company’s financial reports. Deferred tax assets indicate the accumulation of future tax deductions (and by extension positive cash flow). A company will incur more expenses in its corporate tax return in future years than recognised by its financial reporting. Higher future expenses reduce taxable income but also cut future tax liabilities. With deferred tax liabilities, taxable income will be higher in future years than accounting income. The differentiation arises from the differences between financial accounting (as laid out by accounting standards) and tax accounting (as laid down by formal tax rules). The differences are typically related to timing factors.