Deferred Taxes
Tax effects of temporary differences between book and tax treatment recorded as deferred tax assets or liabilities.
FAR loves a calculation where book income is given and you must back into the provision: start with pretax book income, strip out permanent differences (municipal bond interest, fines, the dividends-received deduction) toward taxable income, then split the total into current versus deferred. The “tell” is a difference labeled as reversing in a future year. The high-yield rule: measure deferred balances using the enacted tax rate expected in the reversal period (not the current rate, and never a merely “proposed” rate), and run any rate-change effect entirely through continuing operations in the period that includes the enactment date.
The classic trap is direction. A future taxable amount (excess tax depreciation, installment receivables) builds a DTL, while a future deductible amount (warranty accruals, unearned revenue, NOL carryforwards) builds a DTA. Don’t confuse these with permanent items, which shift the effective tax rate but create zero deferred balance. Under current GAAP, deferred tax assets and liabilities are netted within each tax-paying jurisdiction and reported entirely as noncurrent (some older question banks still split current/noncurrent — that was eliminated by ASU 2015-17).
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