Deferred Tax Assets: Meaning, Examples, and Impact

One of the most complex but essential elements of a company’s balance sheet is the Deferred Tax Asset (DTA). DTA is critical because it’s a financial instrument that demonstrates a business’s ability to reduce its future tax obligations.

A deferred tax asset might indicate a solid financial plan, efficient tax planning, and potential benefits even when it doesn’t represent immediate cash flow. Let’s explore the concept of deferred tax and its various aspects, as this article will explain deferred tax assets, provide an example, and discuss their impact on business operations.

What Is a Deferred Tax Asset?

Deferred Tax Asset (DTA) exists when a business pays more taxes to the government than it owes based on its financial reporting, and it can utilize it to lower its taxable income in future periods. This asset comes from timing discrepancies between financial accounting’s reporting of revenue and expenses.

These timing discrepancies affect when taxes are paid, but not the total amount paid over time. Prepaid taxes or future tax benefits that the business will receive in the form of reduced tax payments in later years are represented by a deferred tax asset.

Deferred tax assets (DTAs) are highly relevant to businesses in Singapore as they represent future tax savings arising from deductible temporary differences. A deferred tax asset is not recognised when it is not probable that the company will generate sufficient future taxable profits to utilize the deductible temporary differences, unused tax losses, or tax credits.

Common Causes of Deferred Tax Assets

Deferred tax assets arise when there is a mismatch between how income and expenses are recognized in financial statements and tax returns. Here are the three most common causes of Deferred Tax Assets (DTAs):

1. Net Operating Loss (NOL) carryforwards

In many cases, a business that incurs tax-deductible losses in a given year is unable to utilize them immediately and must carry them forward to deduct future taxable profits. Because the business anticipates paying less in taxes in the future, this generates a deferred tax asset. For example, an SGD 100,000 loss carried forward with a 17% tax rate results in a SGD 17,000 deduction from taxable income (DTA).

2. Overpayment or prepayment of taxes

When a company pays more income tax than it is required to, this is known as overpayment or prepayment of taxes. This is frequently the result of projected assessments, updated tax calculations, or voluntary tax payments made ahead of schedule.

Such overpayment sums are recognized as current tax receivables. They may still be related to the broader concept of recoverable tax advantages, even though they are not strictly categorized as a “deferred tax asset” under generally accepted accounting principles.

For example, if a company pays SGD 51,000 based on an estimated chargeable income but later reports an actual tax of only SGD 42,500, the SGD 8,500 overpaid becomes a recoverable amount, which will either be refunded by IRAS or applied to future tax payments.

3. Differences in revenue and expense recognition

The differences in revenue and expense recognition in Singapore are due to tax reporting under the Singapore Income Tax Act, which complies with specific tax regulations that may be more aligned with a cash basis or legally mandated timing.

In contrast, financial reporting is based on the accrual basis and follows Singapore Financial Reporting Standards (SFRS). Temporary differences resulting from these accounting and tax timing differences are shown in the financial statements as deferred tax assets or liabilities.

How to Account for Deferred Tax Assets

The Singapore Financial Reporting Standards (SFRS), which align with International Financial Reporting Standards (IFRS), govern the reporting of deferred tax assets (DTAs) in Singapore. Here’s how to account for DTAs in Singapore:

1. Recognition criteria under relevant accounting standards

To calculate a Deferred Tax Asset (DTA) in Singapore under SB-FRS(I) 12 (aligned with IAS 12), you need to identify deductible temporary differences, unused tax losses, or tax credits, then apply the corporate tax rate to determine the amount. Recognition is only allowed if it is foreseeable that future taxable earnings will be available to use the asset.

2. Measurement and estimation of deferred tax amounts

To calculate deferred tax assets (DTAs) with enough measurement and estimation under Singapore Financial Reporting Standards (SFRS(I) 12), you must identify deductible temporary differences, apply the relevant tax rate, and create accurate forecasts of future taxable income.

Both quantitative measurement and qualitative assessment of the DTA’s recoverability must be reflected in the procedure.

What Is a Deferred Tax Asset vs. a Deferred Tax Liability?

In Singapore, deferred tax assets (DTAs) and deferred tax liabilities (DTLs) arise from temporary differences between how income and expenses are recognized for accounting purposes and tax purposes.

• Deferred Tax Asset

A DTA comes up when a company has paid more tax in the current period or has deductible differences that will reduce its taxable revenue in the future. It represents a future tax benefit. If a company in Singapore accrues $100,000 in staff incentives (deductible when paid) and plans to pay them next year, it can recognize a DTA of:

$100,000 × 17% = SGD 17,000

• Deferred Tax Liability (DTL)

When a company pays less tax now but will have to pay more later, this is known as a deferred tax liability (DTL). Due to temporary differences, it represents future taxable amounts. If a business only records SGD 100,000 as depreciation in accounting but claims SGD 150,000 in capital allowances for tax purposes:

DTL = SGD 50,000 × 17% = $8,500 is the temporary difference.

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Leveraging HashMicro Accounting Software to Navigate Deferred Tax Assets

Manually managing deferred tax assets can be time-consuming and challenging to monitor, particularly as a company expands and its financial transactions become more complex. HashMicro Accounting provides an innovative, automated solution that streamlines the entire procedure.

Hashy AI from HashMicro helps you automate payment collection with smart follow-ups. It tracks overdue invoices, confirms payment promises, updates records, ensuring that every transaction is verified and accounted for, and ensures that all transactions are accurately recorded in the books.

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Here are the key features of HashMicro Accounting:

• Financial statement with budget comparison: Displays budget targets and actual financial results, allowing users to identify discrepancies and assess the overall financial condition.
• Automated currency update: Ensures accuracy in foreign exchange transactions by automatically updating exchange rates based on reliable data sources.
• Cash flow reports: Provide thorough insights into cash inputs and outflows, facilitating strategic financial planning and more efficient financial oversight.
• Forecast budget: Enhances the budgeting process by utilizing past financial data and forecasts to facilitate more effective resource allocation and planning.
• Budget S curve: Illustrates budget usage over time with a graphical S-curve, which makes it simpler to keep an eye on expenditure trends in comparison to original plans.

Conclusion

A company’s long-term planning, tax compliance, and financial accuracy may all be impacted by the improper handling of deferred tax assets. Maintaining transparency and making informed business decisions require an understanding of DTA’s causes and how to account for them.

With automation, accurate reporting, and complete compliance with accounting standards, HashMicro Accounting Software provides a complete solution that streamlines the tax calculation process. It enables financial teams to focus on strategic results, save time, and minimize manual errors.

To find out how HashMicro can help your company manage deferred tax assets effectively and confidently, request a free demo now!

FAQ About Deferred Tax Assets

• How do you record a deferred tax asset?

  Debit the deferred tax asset account and credit the income tax expense (or deferred tax benefit) account. Present on financial statements: Report the deferred tax asset on your balance sheet, typically as a non-current asset. Disclose details about its composition in the notes.

• Is a deferred tax asset a current liability?

  DTA is presented under non-current assets, and DTL under the head non-current liabilities.

• When to recognise a deferred tax asset?

  Deferred tax assets are only recognised to the extent that they will probably be recovered against the reversal of deferred tax liabilities or other future taxable profits.