Deferred tax - What does deferred tax mean for accounting reporting purposes? Read more here
Learn about deferred tax, what it means in an accounting context and see a practical example of how it is calculated. Understand how deferred tax affects your company's financial statements
How organisations manage deferred tax to ensure accurate financial statements
What is deferred tax?
Deferred tax is a tax liability or asset that arises when there are differences between the tax and accounting valuations of a company's assets and liabilities. These differences can result from varying timing or valuation methods and must be reflected in the financial statements to provide an accurate representation of the company’s financial position.
How is deferred tax used in accounting?
Deferred tax is used to account for timing differences that occur over time. This can happen, for example, when a company has expenses that are deductible in the financial statements but can only be deducted for tax purposes in the future. In such cases, a temporary difference arises, which must be recorded as deferred tax.
Practical example of deferred tax
Imagine your company purchases a machine for 100,000 DKK. In the financial statements, the machine is depreciated over 5 years at 20,000 DKK per year. However, for tax purposes, there is an option to make an immediate deduction of 50,000 DKK in the first year, with the remaining amount depreciated over the next 4 years.
In this case, there will be a difference between the accounting and tax depreciation in the first year:
- Accounting depreciation: 20,000 DKK
- Tax depreciation: 50,000 DKK
This difference of 30,000 DKK (50,000 DKK - 20,000 DKK) creates a deferred tax asset that needs to be recorded in the financial statements.
How to calculate deferred tax
To calculate deferred tax, you need to know the company’s tax rate and the temporary differences between the accounting and tax values.
If we assume the tax rate is 22%, deferred tax can be calculated as:
Deferred tax = Temporary difference * Tax rate
In our example, it would be:
Deferred tax = 30,000 DKK * 22% = 6,600 DKK
This amount of 6,600 DKK would be recorded as a deferred tax asset in the financial statements.
Why is deferred tax important?
Deferred tax is important because it ensures that the financial statements provide a true and fair view of the company’s financial situation. By including deferred tax in the financial statements, the company can show the future tax implications of the current accounting valuations and decisions.
Learn about deferred tax, what it means in an accounting context and see a practical example of how it is calculated. Understand how deferred tax affects your company's financial statements