Ace the 2025 Financial Accounting Blitz – Conquer the CPA Practice Test!

Deferred assets and liabilities arise due to temporary differences between the financial reporting and tax reporting of income. These temporary differences create taxable or deductible amounts that will result in future taxes payable or recoverable.

The correct approach to calculating deferred assets and liabilities involves recognizing these temporary differences and multiplying them by the enacted future tax rate. This is because, when the timing differences reverse in future periods, the company will be required to pay taxes or may receive tax benefits based on these differences.

For instance, if a company has a temporary difference that leads to a future taxable amount, such as revenue recognized for financial reporting purposes but not yet recognized for tax purposes, that difference will result in a deferred tax liability. To quantify this liability, one must consider the future income tax rate that has been enacted because it represents the rate that will apply when the temporary difference reverses.

This method enables companies to appropriately match their tax liabilities and assets with their reported financial performance, adhering to the accrual basis of accounting. Thus, understanding the future enacted tax rate is crucial for accurately measuring the impact of these deferred items on future tax obligations or benefits.