Can anyone help me to understand deferred taxation and how to compute it?
Answers:
Molly gives a good overview. The first guy not so much. First off, if there is a permanent difference, this will never be reflected in deferred taxes. Deferred taxes are for temp differences only. One thing Molly points out that is important is the concept of "expected" tax rate in future years. You need to keep this in mind when doing the computation.
Deferred taxation results from temporary and perminant differences between book and tax balances. The amount of the deferred tax asset/liability is calculated by multiplying the effective tax rate times that total of the deferred tax differences.
Read FASB 109
Deferred taxes have to do with timing differences. For example, depreciation is typically calculated in different ways for 'book' and tax. The years and methods differ, but at some point in time the asset will be fully depreciated. We call that a temporary difference. Each year you can see the difference between what has been deducted for book purposes and tax.
Tax depreciation is almost always accelerated compared to book. In the first few years of depreciating an asset, more tax depreciation is taken as compared to book. This means that in those years the company received the benefit of tax deductions ahead of book resulting in a future tax liability (as the two computations catch up with each other).
Each time the deferred taxes are calculated, the total of the temporary differences are multiplied by the tax rate (or expected tax rate) to calculate the amount of tax that would be due/refundable.
There is more to it than that, but it is a start.
Good luck.
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