Running head: ASSET-LIABILITY METHOD
Case 12-5 – Asset-Liability Method
Janet Holman
Liberty University
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ASSET-LIABILITY METHOD2
Case 12-5 – Asset-Liability Method
Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income
Taxes” (Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 740), “requires companies to use the asset-liability method of interperiod income tax
allocation” (Schroeder, Clark & Cathey, 2017, p. 404). This post will discuss the criteria for
recognizing deferred tax assets and deferred tax liabilities under the provisions of FASB ASC
740. It will also compare and contrast the asset-liability method and the deferred method.
Recognizing Deferred Tax Assets and Liabilities under FASB ASC 740
The FASB was committed to the idea that deferred tax assets and liabilities should be
treated similarly and remained committed to the asset-liability method. SFAS No. 109 allows for
separate reporting of deferred tax assets and liabilities without regard to future income
considerations (Schroeder et al., 2017). The objective of SFAS No. 109 is to recognize “(a) the
amount of taxes payable or refundable for the current year and (b) deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an enterprise's
financial statements or tax returns” (FASB, 1992, p. 4).
Deferred Tax Assets
A deferred tax asset is recognized when there is a temporary difference has future tax
consequences resulting in an asset when the reversal is a future deductible amount (FASB, 1992).
The FASB determined that deferred tax assets must meet all three characteristics of asset as
defined in Statement of Financial Accounting Concepts (SFAC) No. 6 (Schroeder et al, 2017).
1.It must embody a probable future benefit that involves a capacity to contribute to
future net cash inflows.
2.The entity must be able to obtain the benefit and control other entities’ access to it.
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3.The transaction or other event resulting in the entity' s right to or control of the
benefit has already occurred (Schroeder et al., 2017, p. 389).
Deferred Tax Liabilities
A deferred tax liability is recognized when there is a temporary difference has future tax
consequences resulting in a liability when the reversal is a future taxable amount (FASB, 1992).
The FASB also determined that deferred tax liabilities must meet all three characteristics of
liabilities as defined in SFAC No. 6 (Schroeder et al, 2017).
1.It must embody a present responsibility to another entity that involves settlement by
probable future transfer or use of assets at a specified or determinable date, on
occurrence of a specified event, or on demand.
2.The responsibility obligates the entity, leaving it little or no discretion to avoid the
future sacrifice.
3.The transaction or event obligating the entity has already happened (Schroeder et al.,
2017, p. 389).
Compare and Contrast the Asset-Liability Method and the Deferred Method
The asset-liability method is oriented based on the balance sheet, whereas the deferred
method is based on an income statement approach (Schroeder et al., 2017). The interperiod tax
allocation acknowledges deferred tax equivalent to the difference between the financial
accounting tax provision and the current-year tax liability. This method is supposed to a better
indicator of earnings and is thought to better match income and taxes. The asset-liability method
takes it a set further by adjusting the deferred tax to the appropriate balance, which is an
adjustment to the current-year tax effect (Stone, Bergner, & Koehn, 2013).
Conclusion
ASSET-LIABILITY METHOD4
According to Schroeder et al. (2017), most economic events and/or transactions have tax
consequence. The bible commands us in Matthew 22:21 (New International Version) that we
should pay Caesar what belongs to Caesar. The Internal Revenue Code reporting requirements
differ from that defined by U.S. GAAP. This difference creates a temporary difference in taxable
income and pretax financial accounting income. The FASB issued SFAS No. 109 to address
these temporary differences. This post discussed the criteria for recognizing deferred tax assets
and deferred tax liabilities under the provisions of FASB ASC 740. It also compared and
contrasted the asset-liability method and the deferred method.
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References
FASB. (1992). Accounting for income taxes. Statement of Financial Accounting Standards No.
109. Retrieved from http://www.fasb.org/summary/stsum109.shtml
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017). Financial accounting theory and
analysis: Text and cases (12th ed.). Hoboken, NJ: Wiley.
Stone, K. E., Bergner, J., & Koehn, J. L. (2013). relevant interperiod tax allocation. The Journal
of Theoretical Accounting Research, 9(1), 150-164. Retrieved from https://search-
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