Final answer:
The asset and liability approach taken by ASC 740 involves recognizing the temporary differences between a company's assets and liabilities for financial reporting purposes and their tax bases, resulting in deferred tax liabilities or assets. It ensures that a company's tax provision accurately reflects the future tax consequences of its assets and liabilities.
Step-by-step explanation:
The asset and liability approach taken by ASC 740 in computing a corporation's deferred tax provision refers to the way in which a company accounts for its assets and liabilities for tax purposes.
It involves recognizing the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. These differences result in deferred tax liabilities or assets, which impact the calculation of the deferred tax provision.
For example, if a company has a piece of equipment that is depreciated for tax purposes at a faster rate than for financial reporting purposes, there will be a temporary difference.
This temporary difference creates a deferred tax liability because the company will need to pay additional taxes in the future when it recovers the difference between the tax basis and the financial reporting basis of the equipment.
Overall, the asset and liability approach ensures that a company's tax provision accurately reflects the future tax consequences of its assets and liabilities.