What Is a Deferred Tax Liability?
Deferred tax is one of the most misunderstood topics in ACCA FR and SBR. Here's a plain explanation of what a deferred tax liability is, where it comes from, and why it exists at all.
A deferred tax liability is tax that a company will pay in the future because of transactions that have already happened. It arises under IAS 12 from taxable temporary differences — differences between the carrying amount of an asset or liability in the financial statements and its 'tax base', the amount the tax authorities recognise. It exists so that the tax expense in the accounts matches the profits reported, rather than the tax actually paid in a given year.
Where it comes from: the classic example
The most common source is accelerated tax depreciation. Tax authorities often allow capital allowances faster than the accounts depreciate an asset. Early in the asset's life, the tax written-down value is lower than the carrying amount, so less tax is paid now — but that's a timing difference. The tax will be paid later, and the deferred tax liability recognises that future obligation today.
Temporary difference, not permanent
The key word is temporary. A deferred tax liability reverses over time — the tax saved now is paid later, and vice versa. Permanent differences (income never taxed, or expenses never allowed) don't create deferred tax at all. Distinguishing the two is essential to getting the topic right.
How it's measured
A deferred tax liability is measured at the tax rate expected to apply when the difference reverses, applied to the temporary difference. It is not discounted. A taxable temporary difference (carrying amount above tax base for an asset) gives a liability; a deductible temporary difference gives a deferred tax asset, recognised only to the extent future profits are probable.
Deferred tax is heavily examined precisely because it's counter-intuitive. The 50% Club marks your practice FR and SBR answers against the official ACCA scheme, showing exactly where a temporary-difference calculation or a recognition judgement lost a mark — so the topic finally clicks into marks.