CFA® deferred tax: when a liability, not an asset?

A deferred tax liability arises when a temporary difference will make future tax payments higher as an asset is recovered or a liability is settled. For an asset, a carrying amount above its tax base is the usual liability case: the tax return has fewer deductions left than the accounts have value left to recover. A deferred tax asset points in the opposite direction, subject to recognition conditions.

Compare the two values

The carrying amount is the asset value reported in the financial statements. Its tax base is the amount attributed to it for tax purposes. Compare them at the reporting date and ask what happens when the asset is used or sold. The IFRS Foundation’s IAS 12 overview explains that temporary differences arise from a gap between those values and that deferred tax recognition has exceptions.

This is an exam topic because tax expense, tax payable and the balance sheet tax account can move differently. CFA Institute’s income tax reading overview asks candidates to explain how deferred tax assets and liabilities arise and to interpret them in financial analysis.

An illustrative equipment example

Assume an invented company reports a machine with a carrying amount of 80 monetary units and a tax base of 60 at the period end. The lower tax base reflects deductions already taken faster for tax than for accounting. Assume, only for this illustration, a 25% tax rate applicable when the difference reverses. These figures are not a tax rule or company data.

1. Subtract the illustrative tax base of 60 from the carrying amount of 80 to get a taxable temporary difference of 20.
2. Multiply 20 by the hypothetical 25% reversal rate to obtain a deferred tax liability of 5.
3. If later depreciation brings both the carrying amount and tax base to 40, the temporary difference becomes zero and this illustrative liability reverses.

The liability does not mean tax is overdue on the reporting date. It records the future tax effect of having used more tax deductions earlier. Actual tax payments and the timing of reversal depend on the relevant tax law and the way the asset is recovered.

The direction error to avoid

Do not label every book-versus-tax gap a deferred tax asset. For an asset, carrying amount above tax base means taxable amounts will exceed remaining deductions as it is recovered, so the usual result is a liability. If the asset’s tax base is higher, the direction can produce a deferred tax asset. For a liability, the sign test is different: work through future settlement rather than applying the asset shortcut.

Also separate a temporary difference from a permanent one. A permanent difference never reverses, so multiplying it by a rate to create a deferred tax balance is a category error. For the topic sequence, see the CFA programme page; for a study framework, see the methodology page.

Sources

1. Analysis of Income Taxes | CFA Institute · cfainstitute.org · Retrieved 8 Oct 2026
2. IFRS - IAS 12 Income Taxes · ifrs.org · Retrieved 8 Oct 2026