Final answer:
The deferred tax expense reflects the change in the company's tax obligations due to the increase in deferred tax liabilities minus any increase in deferred tax assets. It represents the amount of taxes to be paid or saved in the future due to timing differences in recognizing revenues and expenses for accounting and tax purposes.
Step-by-step explanation:
The deferred tax expense is calculated based on the changes in the deferred tax assets and liabilities over a fiscal period. Under accounting principles, the deferred tax expense is defined as the increase in balance of deferred tax liability minus the increase in balance of deferred tax assets.
This means that when the deferred tax liability increases more than the deferred tax asset, the company recognizes an expense. Conversely, if the deferred tax asset increases more than the liability, the company would recognize a reduction in expense, which might even be a benefit.
The calculation reflects the changes in taxes that are deferred to future periods due to temporary differences between the financial reporting and tax bases of assets and liabilities. Understanding this concept is essential as it helps stakeholders understand the potential future tax obligations or benefits the company may face.