Deferred tax explained

[@TheFinanceStoryteller]

Enjoyed this video? Then subscribe to the channel right now, and let's go through the background and journal entries of how deferred tax assets build up: kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@Faska_]

As a Tax Director, I use your video's to train in house Accounting colleagues on the concepts. That's how good they are. Thank you Philip!

[@TheFinanceStoryteller]

That's wonderful, Faska!!! Thank you for sharing the videos. I have 3 in total on deferred taxes (this one + a dedicated one on deferred tax assets + a dedicated one on deferred tax liabilities), one on VAT kzbin.info/www/bejne/l2e1c2eoft2Kp6s and one on effective tax rate kzbin.info/www/bejne/e6GVnH2qr7Sgo7s Just in case you missed one of them. 😉

[@zenanancynyagabona-zaharia9233]

for the first time in my 10 years as an accountant - Deferred Tax accounting makes sense! than you for your video!

[@TheFinanceStoryteller]

Wonderful to hear!!! It took me a long time as well, but once you see it, you can't "unsee" it. 😉

[@TheFinanceStoryteller]

The video you commented on focuses mostly on the journal entries. Related videos specifically on deferred tax assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s and deferred tax liabilities kzbin.info/www/bejne/raDQaHx4g9OLg5o dive into the cause/origin of them to occur. These might be useful to watch too!

[@TomKaren94]

I listened at .75 speed to keep up. I need to go over this subject a few more times to feel comfortable with it. An example of how a company might encounter this issue for the very first time would be helpful.

[@TheFinanceStoryteller]

Thank you! That is good feedback. I sometimes go a bit fast when I am excited about a topic. ;-) Will try to pace myself better. Did you watch the companion video on Deferred Tax Assets as well? That one is built up a bit more slowly with what I think is a good example around how a company could first get exposed to Deferred Tax Assets. kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@TheFinanceStoryteller]

What might also help is to switch on the subtitles while watching the video. That way, you have visuals, audio and transcripts in front of you.

[@enriquegonzaleznieto7946]

Thank you soooo much..! Finally I understood these concepts. I am preparing for my CMA certification exam and, thanks God, I found your video. Explanation is crystal-clear, like no other. Thanks again.

[@TheFinanceStoryteller]

Great to hear that, Enrique!!! I am happy I started diving into this myself a few years ago, and then summarized it for others in my videos. I have made specific videos on deferred tax assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s and deferred tax liabilities kzbin.info/www/bejne/raDQaHx4g9OLg5o as well, those might be good to review as well!

[@jasminekushwaha8092]

Have you earned your CMA certification sir , I am heading towards it to

[@manamejeff2465]

Thanks! Taking the CPA FAR exam tomorrow and your explanation cleared it up for me!

[@TheFinanceStoryteller]

Nice to hear that, Jeff! Wishing you all the best with your exam.

[@anthonyfowler4466]

I’m super late. But how did you do? I’m just now learning about finance and hopefully I’ll be taking some exams and passing them in the future as well. Right now I’m self studying with CFI

[@lsansco3012]

jfc

[@osamarashad312]

thank you that was useful for cma

[@TheFinanceStoryteller]

Glad to hear that! Please tell your fellow students about it, and have a look at my specific video on deferred tax assets, and the specific video on deferred tax liabilities, as well. Once you grasp the point of net operating loss carry forward (DTA), and tax-incentives on depreciation (DTL), then it's very easy to remember: kzbin.info/www/bejne/g6e7cp-ghqlnf6s&pp=gAQBiAQB

[@jamesperry3837]

*This is great.......simply great. Thank you!* _And thank you for the real-life examples._

[@TheFinanceStoryteller]

Hey James, looks like you are doing well making your way through my videos. Enjoy! Thanks for the support.

[@veasnapech1298]

Brief and clear, great.

[@TheFinanceStoryteller]

Thank you, Veasna! That's great to hear. I have specific videos on deferred tax assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s as well as deferred tax liabilities kzbin.info/www/bejne/raDQaHx4g9OLg5o as well, that provide some additional information.

[@houshangy]

excellent , no nonsense, explanation right to the point.

[@TheFinanceStoryteller]

Thank you! Yep, that's my style. ;-)

[@somaansa939]

Excellent explanation. Thanks!

[@TheFinanceStoryteller]

You're welcome! A bit more specific information on tax assets and tax liabilities respectively in this playlist: kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@MsYA007]

Please post a video on Valuation allowance booked against DTA.

[@TheFinanceStoryteller]

Not much to say about that topic.... debit income tax expense (P&L) credit DTA valuation allowance (balance sheet, contra-asset account).

[@MsYA007]

@@TheFinanceStoryteller isnt VA calculated to reduce DTA which are a result of old losses which dont seem to be recovering anytime soon?

[@LuxxomannLU]

Hi Phillip, are you Dutch? (From your acccent)

[@TheFinanceStoryteller]

Yes indeed!!! 😎

[@KrishanSingh-gz9op]

What are current tax assets in balance sheet?

[@TheFinanceStoryteller]

Current assets are cash and other assets that are expected to be converted to cash within a year. So I would guess, without specifically having analyzed the annual report of the company you are investigating, that current tax assets are that part of the deferred tax assets that is expected to be converted to cash within a year.

[@muhammadumer7833]

Thank you so much for this. I studied IAS 12 3 years back and completely forgot 😂

[@TheFinanceStoryteller]

Happy to help! It's a challenging concept, many people struggle with it. Check out the individual videos as well on deferred tax assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s&pp=gAQBiAQB and the one on deferred tax liabilities kzbin.info/www/bejne/raDQaHx4g9OLg5o&pp=gAQBiAQB

[@MercedesBenxx]

Quick question. If the book tax = 35K But the actual tax = 40k How is that an expense? It should be a liability right? If book tax = 40k But actual tax = 35k Then it would actually be an asset, because you paid accounted for 5k too much. Am i missing something here?

[@TheFinanceStoryteller]

Hello! Yes, you are missing something here. Please watch the first part of the video again, section Key deferred tax concepts. “Book” profit is the primary perspective, you make the “tax reality” fit in. Per your first question: if you recorded income tax expense of 35K (per the US GAAP accounting rules), but actually paid 40K (per the tax code rules, cash out), then you "overpaid" by 5K according to the primary perspective of "book" profit. The 5K difference is something you will be able to offset against future tax payments, hence a deferred tax asset. Per your second example, you "underpaid" by 5K hence a deferred tax liability as you will have to pay it in the future. Maybe watching my specific video on deferred tax liabilities will help: kzbin.info/www/bejne/raDQaHx4g9OLg5o

[@MercedesBenxx]

@@TheFinanceStoryteller Dank je wel! I thought that what you actually pay to the tax authorities should be the perspective of deciding whether or not it is an asset or liability. But now i understand. Thanks!

[@TheFinanceStoryteller]

Graag gedaan!

[@syadiyahsabri3499]

it was really helpful thank u !!!

[@TheFinanceStoryteller]

Great to hear that, Syadiyah! Thank you. I think you will like the related video on deferred taxes assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s and the video on analyzing the effective tax rate in the income statement kzbin.info/www/bejne/e6GVnH2qr7Sgo7s as well!

[@jasonyuan5466]

thank you! this certainly helpful!

[@TheFinanceStoryteller]

Great to hear that, Jason! Thank you for watching.

[@elbaymammadyarov8120]

Is keeping the balance between Asset and Equity side major reason for this? For example, if we calculated 1000 tax for this year, and tax authorities 2000. Liability will increase by 2000, since we recognized our tax expenses 1000, retained earning will be decreased by 1000. Overall there is 1000 increase in Capital+Liability side, for keeping balance we create Defferred tax asset on the Asset side of 1000. Is this approach true or there is something else lies behind this?

[@TheFinanceStoryteller]

Yes, you need to always comply with the accounting equation: assets = liabilities + equity. Deferred tax is all about timing differences between the tax approach to recognizing profit and the book approach to recognizing profit. In your example, for book purposes, you have a 1000 "receivable" on the tax authorities (as you "overpaid") that you can someday reclaim. More information in my video specifically addressing deferred tax assets: kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@elbaymammadyarov8120]

@@TheFinanceStoryteller Thank so much for info)

[@TheFinanceStoryteller]

@@elbaymammadyarov8120 Happy to help, Elbay!

[@RobertSmith-pp9oe]

Fantastic, thank you!

[@TheFinanceStoryteller]

Good to hear that, Robert! Did you see the companion video on deferred tax assets as well: kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@antonioromero878]

Thank you!

[@TheFinanceStoryteller]

You're welcome! Have a look at the related videos as well that specifically discuss deferred tax assets and deferred tax liabilities separately: kzbin.info/www/bejne/g6e7cp-ghqlnf6s&pp=gAQBiAQB

[@zander9486]

now this is how you explain something! thanks

[@TheFinanceStoryteller]

Glad it was helpful! :-) Have you seen the related video as well that specifically covers deferred tax assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@amberliwentee402]

The speaker sounds great 💓👀

[@TheFinanceStoryteller]

Thank you, Amber!

[@ronaldluwis5893]

I see some missing links on the other arm of dta ot dtl ...hence confuses pipo

[@TheFinanceStoryteller]

Hello Ronald! Are you referring to the journal entries? In a future period, because you have a DTA, there will be a period of time where less cash has to be transferred to the tax authorities, that's where you credit the DTA (you "use your raincheck"). With a DTL, you put money aside, as there will be a period of time in the future where more cash has to be transferred to the tax authorities. You then debit the DTL, and used the money you "put aside".

[@ronaldluwis5893]

@@TheFinanceStoryteller well answered ...thank you

[@TheFinanceStoryteller]

@@ronaldluwis5893 You're welcome! Happy to help. Sometimes questions from viewers spark ideas for new videos!

[@ronaldluwis5893]

@@TheFinanceStoryteller thank you there is this part of un utilised tax losses how does it go about

[@TheFinanceStoryteller]

Those are deferred tax assets. Check out the related video specific to DTAs: kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@vxylduldprrodd9421]

What about deferred tax expenses?

[@TheFinanceStoryteller]

These just go into the regular corporate income tax expense line. See my discussion of effective tax rate: kzbin.info/www/bejne/e6GVnH2qr7Sgo7s

[@loganyang619]

Thank you so much!

[@TheFinanceStoryteller]

You are very welcome!!!

[@amrullashahbazov6621]

Thank you

[@TheFinanceStoryteller]

You're welcome, Amrulla!

[@kanalensomermads]

If you calculate an income tax expense at 10.000 and the actual bill is 12.000, then you've sold yourself short of 2.000. How is that an asset for you? You pay 12.000 which is 2.000 more than you accounted for. Those 2.000 are paid because thats what you owe. How do you have 2.000 'left over' to expense at a later time?

[@TheFinanceStoryteller]

Hi Mads. I don't think you are getting the point here. Income tax expense for the year is recorded in the financial statements of a company based on the accounting principles and rules of US GAAP or IFRS. If the tax accounting principles and rules lead to a different outcome of what is payable in the current year, and this difference is of a temporary nature, then for US GAAP / IFRS purposes you record this difference on the balance sheet as deferred tax asset or deferred tax liability. Please watch the video on deferred tax assets first: kzbin.info/www/bejne/g6e7cp-ghqlnf6s

[@carlosp4250]

Thanks!

[@TheFinanceStoryteller]

You're welcome, Carlos! Thank you for watching.

[@Sihamsedap]

Thank you

[@TheFinanceStoryteller]

You're welcome! I am actually working on a follow-up video right now, with a simple example of deferred tax liabilities. Should be out soon!