An assumption underlying a balance sheet is that assets will be recovered and liabilities will be settled. When that happens, assets and liabilities typically create taxable or deductible amounts.

Deferred tax assets and liabilities can be computed from temporary book-tax differences: 

• Book value of an asset or liability: Its original value reduced by amortization, impairment, or other amounts recognized for accounting purposes

• Tax basis of an asset or liability: Its original value for tax purposes reduced by any amounts included to date on tax returns

The related deferred tax asset or liability balance can be calculated by multiplying the temporary book-tax difference by the applicable tax rate.