How deferred taxes are presented in the cash flow statement

2. Basic deferred tax computation rules

If an asset carrying value is more than its tax base then a taxable temporary difference arises resulting in a deferred tax liability.

If an asset carrying value is less than its tax base then a deductible temporary difference arises resulting in a deferred tax asset.

And on the contrary, if a liability carrying value is more than its tax base then a deductible temporary difference arises resulting in a deferred tax asset.

If a liability carrying value is less than its tax base then a taxable temporary difference arises resulting in a deferred tax liability.

For example, at the balance sheet date a company has an interest receivable of $5,000; this amount will only be taxed in the next accounting period upon receipt. The tax rate is 30%. In this case, the carrying value of the asset amounts to $5,000, while its tax base is zero. In the current year, a taxable temporary difference arises resulting in a deferred tax liability of $1,500 (i.e., $5,000 x 30%).

3. Presentation of deferred taxes in the cash flow statement

Deferred tax is a non-cash item; therefore, it is not presented in the cash flow under the direct method. Under the indirect method, deferred taxes are shown in the operating cash flow section as an adjustment to the profit (loss) before tax.

Any increase in a deferred tax asset or decrease in a deferred tax liability is subtracted as part of adjustments to net income (loss). Vice versa, any decrease in a deferred tax asset or increase in a deferred tax liability is added back to net profit (loss).

For instance, the published 2013 Annual Report of General Motors shows:

Consolidated Statements of Cash Flows

(in millions)

2013

2012

Cash flows from operating activities

   

Net income

5,331

6,136

   

Provision (benefit) for deferred taxes

1,561

(35,561)

Namely, in 2012 the company reversed its deferred tax asset for a material amount due to increased profitability, while in 2013 the decrease in deferred tax asset is added back in the cash flow computation.

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