What does deferred (non-current) taxes refer to in accounting?

Deferred (non-current) taxes refer to the timing differences between when income and expenses are recognized for accounting purposes versus when they are recognized for tax purposes. This concept is primarily linked to the matching principle in accounting, which ensures that income is matched with the expenses associated with it in the period they occur.

When a company reports its income to tax authorities, certain items may be treated differently compared to its financial reporting under generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). This discrepancy can lead to a temporary difference where a company might recognize an income or expense in one accounting period for financial reporting, but the corresponding tax effect will occur in a different period. Consequently, this results in deferred tax assets or liabilities on the company's balance sheet.

For instance, if a company recognizes revenue on its financial statements in one period but does not have to pay taxes on that revenue until a future period, it creates a deferred tax liability. Conversely, if expenses are recognized for financial reporting but not for tax purposes until a later date, it creates a deferred tax asset.

This understanding helps companies manage their financial reporting and tax liabilities effectively, ensuring compliance with tax regulations while optimizing their cash flow strategies.