IAS 12 DEFERRED TAX

hey,

let me try to explain in my own words from my understanding;

deferred tax liability arises from taxable temporary differences. example is a revaluation of an asset. in accounting principle this is reflected immediately, however in tax principles the amount stays at original price until asset is disposed off, therefore this transaction gives rise to a diffference which is referred to as temporary because it will be recovered when asset is eventually sold at which point the company has a liability to pay tax on the difference between accounting figure & tax figure of asset.

Deferred tax assest is simply the opposite. it arises from deductable temporary differences. example is where a company incures development costs which is immeidately recognised under accounting principle but due to tax rules these may not be reflected until the whole phase of the development work is complet.
given that its an expense which reduces your taxable income the difference between the tax & accounting figure gives rise to deductable amount which is the tax assest the company can use against taxable income.

the reversal bit refers to when the income/expenditure is eventually recovered or settled at which point accounting & taxable income evens out.
until an expenditure is settled in full or an income recovered there will always be this temporary difference.

thanks.