Final answer:
A company determines if a deferred tax asset or liability should be classified as current or non-current based on the expected timing of their realization or settlement.
Step-by-step explanation:
Deferred tax assets and liabilities are recorded on a company's balance sheet to account for differences between taxable income and financial statement income. The classification of these items as current or non-current depends on the expected timing of their realization or settlement.
If a deferred tax asset or liability is expected to be realized or settled within one year, it is classified as current. Examples of current deferred tax assets include prepaid expenses and tax credits that will be utilized within the next year. On the other hand, if a deferred tax asset or liability is expected to be realized or settled after one year, it is classified as non-current.
It's important to note that the classification of deferred tax assets and liabilities may change over time as the company's circumstances or tax laws evolve.