An explanation of FASB #96

Deferred taxes exist because Generally Accepted Accounting Principles CGAAP and tax laws differ. These differing rules require companies to prepare two sets of financial statements, one for their stockholders and other financial statement users (GAAP) and one for the Internal Revenue Service. The two sets of financial records result in a net income for GAAP purposes which differs from the income on which the tax is computed. Since 1967, the reconciliation of these two sets of books was prescribed by Accounting Principle Board Opinion #11. The reconciIiation is necessary because expenses are usually recognized faster and revenue recognized later under tax law than under GAAP. The amount which reconciles the difference between the reported tax expense and the taxes actually paid to the federal government is called deferred taxes. The taxes are said to be deferred since the events which cause the initial difference in tax and book income should eventually reverse and the taxes will have to be paid. In this way the taxes associated with GAAP income are not eliminated, but are deferred or postponed to later years