Financial Accounting and Reporting-CPA Practice Exam 2025 – Your All-in-One Guide to Exam Success!

Recognizing a deferred tax asset under GAAP indicates that future economic benefits are expected to result from temporary differences between accounting income and taxable income. A deferred tax asset arises when a company has overpaid taxes or has tax attributes that can reduce future taxable income. These assets are based on the expectation that the company will realize these benefits in the future when it files tax returns, effectively lowering future tax payments.

In the context of GAAP, the recognition of a deferred tax asset conveys that the company anticipates it will be able to utilize these tax benefits in future periods, either through carrying forward losses or benefiting from certain expenses that are recognized for financial reporting purposes but not for tax purposes in the current period. This is directly tied to the principle that tax obligations should align with economic activity, allowing for more accurate future forecasting and planning for tax liabilities.

Other options suggest incorrect implications: a permanent difference does not reflect the essence of a deferred tax asset, which is inherently related to temporary differences. The idea that it guarantees taxes will be lower than reported is misleading, as it doesn’t assure a reduction but rather anticipates a reduction when the asset is utilized. Additionally, deferred tax assets do not need to be amortized; they are essentially realized as the company incurs