How should companies account for deferred taxes?
Under the old system of accounting only for current taxes, the company’s profits would be artificially high in the first year (due to the tax savings). The profits would, however, be lower in the subsequent years, as the tax laws in subsequent years would not recognise the depreciation charge or the amortised expense, as the case may be. In order to improve reporting to shareholders and respect the principle of matching revenues with expenses, accounting standards were modified. More recent accounting standards require that a company carve out a part of its current year’s profits (equal to the future tax liability on such transactions) as a deferred tax liability. The deferred tax liability serves the purpose of a reserve, which will be drawn down in the future years to meet the company’s higher tax liability in those years. Under International Financial Reporting Standards, deferred tax should be accounted for using the principles in IAS 12: Income Taxes. In Hong Kong, deferred tax sh
