Taxes, as Benjamin Franklin said, are one of the few certainties in this world. But the intricacy and obscurity of “deferred” taxation make it something of an exception. Perhaps to signify the change, and hopefully to reduce misunderstandings, the new standard adopts the terms “future income-tax assets” and “future income-tax liabilities” rather than continuing to use the term deferred income taxes. A company might pay a deferred tax at some point in the future, which is a result of transactions undertaken during the current yearFor example, Moore Corp.’s deferred taxes switches from a credit balance of $35 million to a debit balance of $142 million largely became of the impact of the liability for post-retirement benefits being included under the U.S. accounting numbers.

Recording an asset future, tax assets can arise when a company has deductible temporary differences or tax loss carry forwards. These items have the potential to reduce future income taxes payable; however the benefit is conditional on the company generating income in the future. The benefit of loss carry forward not recognized in one period could be recognized in a later period. By recording, or not recording the benefit of the loss carry forward, management will be providing valuable insights into their assessment as to future profitability. Impact of acquisitions, when one corporation purchases another corporation, the takeover is accomplished by acquiring shares. For financial accounting purposes, the target company’s assets and liabilities are adjusted to reflect fair value on the consolidated financial statements. Goodwill arises to the extent that the purchase price exceeds the fair value of the target company’s net identifiable assets. For income tax purposes, the target company’s assets and liabilities are not revalued. As a result, temporary differences arise for any differences between the tax value of the target company’s assets and liabilities and the value these assets and liabilities are recorded at on the consolidated financial statements.

Assuming that the fair value of the acquired company’s assets exceed the tax value, an additional liability will have to be recorded for the future income tax. To offset this additional liability, it will be necessary to increase the value of goodwill. While total income in the future will not be changed by the new rules, the timing of future income will be impacted by the amortization period for goodwill and how quickly the temporary differences reverse. In addition to the current requirements to disclose why a company’s effective tax rate differs from the statutory or anticipated rate, companies will have to disclose the major components of income tax expense, and the nature and tax effect of the various components that comprise future income tax assets and liabilities.

Where on acquisition of another entity or operation a deferred tax liability or asset is recognized which was not recognized prior to the acquisition, it must be recognized in the statement of financial position and taken into account in measuring goodwill or discount on acquisition. Where a discount arises, the fair values of non-monetary assets that are reduced proportionately must not include deferred tax assets. On the other hand, when a deferred tax asset which is not recognized at the date of acquisition is subsequently recognized, it must be recognized as revenue in net profit or loss and goodwill and, any related accumulated amortization must be adjusted and the net adjustment recognized as an expense in net profit or loss.

In my opinion, the tax asset accounting treatment is different from the usual meaning of probable within the standards. According to the examples above mentioned, the problems in formulating accounting standards for intangible assets and water-tight tax law indicate that the progress may not be really straightforward. Issues as to fairness, the difficulties of taxing such receipts have been raised.

A deferred tax liability or asset must be recognized for temporary differences when an entity changes from being a non-taxable entity to a taxable entity. “A change from taxable to non-taxable status involves elimination of all deferred tax balances. Adjustments are to be recognized in profit or loss, or where appropriate, in equity.”

Furthermore, Zheng presents evidence on what determines the valuation of future tax assets and liabilities. He states that it is argued that the future tax assets are more or less valuable if (no) sufficient future income will be generated in the near future to utilize these tax assets. The future tax liabilities will thus reduce share prices more or less if there is a higher or a lower possibility of reversal in the short run. His results support the argument.

“It is shown that (1) future tax assets are less valuable if the firm’s value allowance is higher (i.e., the management does not expect the firm will generate sufficient taxable income in the future years to utilize these tax assets), or the firm’s leverage is higher (another proxy for no sufficient future taxable income), and (2) future tax liabilities reduce share prices less if the firm’s investment in capital properties is increased (if firms continue to invest in capital properties, then the future tax liability of depreciation and amortization, which is the major component of future tax liabilities, is less likely to be utilized).”

In conclusion, I do believe that a tax asset constitutes a gain contingency. In fact, for most companies, they will easily represent the primary cause of future income taxes. Future income taxes are initially recorded at the tax rate in effect when the temporary difference first arises. They are then re-measured at each balance sheet date using the income tax rate that is expected to apply when the tax asset is recovered or the tax liability is settled. This re-measurement of future tax assets and liabilities will result in increased variance in reported income because the full impact of the change will be included in income tax expense in the period the change in tax rate or tax law is substantively enacted.