Deferred tax items can change over time. Let's have a look at an example. Here we're just looking at year one to start, and I can see that the tax allowable deduction of 300 is greater than the accounting expense that we'd see in the income statements. So my relative expense says the tax allowable expense is greater than the accounting expense.

What impact does that have on the cash taxes? Well, if I think my tax allowable deduction is very high, then that means my taxable profits are going to be very low. And low profits means your cash paid is very low as well. Fantastic, so my cash taxes will be low. If I go through that one more time, tax allowable deduction is high, which means my taxable profits are low, and thus my taxes paid will be low. So impact on cash tax is good, I'll pay less, because my cash taxes paid were very low, whereas tax expense is based on the accounting expense, and that's gonna be higher. So I pay less tax today than I expected if I've just looked at my income statements. Fantastic, so if I'm gonna pay less of taxes today, that means I'm gonna have to pay more in the future, so that creates a deferred tax liability. Now, what happens over time? If we have a look, in years one, two, and three, I can see the tax allowable deduction is greater than the accounting expense. Impact from cash taxes, good, good, good, cash taxes versus tax expense, pay less pay, pay less, pay less. However, in year four, the situation reverses. The accounting expense is higher this time, that's bad for my cash taxes, I have to pay more. It's very tempting at this point to say, "Ah, my deferred tax liability changes to a deferred tax asset." No, absolutely not. What actually happens is that in year one you create the deferred tax liability. In year two, that liability increases, in year three it increases again, and then in year four it decreases, and then in year five decreases again. The total expense for the five years is 750 when you look at the accounting expense and the tax allowable deduction. So this is just a temporary difference or a timing difference, because it's a temporary or timing difference we're allowed to create deferred tax items. So very important, the deferred tax asset or deferred tax liability decision is made in the first year, in this case, it was a deferred tax liability, and it does not change. Let's have a look at another example using a deferred tax asset this time. Here I can see my tax allowable deduction is less than the accounting expense. What's the impact on my cash taxes, the taxes that will actually be paid to the tax authorities? Well, it's going to be bad, because my tax allowable deduction was 0, that means my taxable profits will be very high, and high profits means high taxes paid, so that's bad for my cash taxes, I'm gonna have to pay lots. But if I'm gonna pay more now, in the future, I'll get to pay less, so that creates a deferred tax asset. An asset is where I get to enjoy benefit in the future. Let's see what happens over time. Years one and two are very similar, the tax allowable deduction is less than the accounting expense. In year three, they're the same, but in year four, the situation reverses. But remember, the decision as to whether we made an asset or liability was made in year one, and it stays, it does not change. So I create the asset in year one, that asset increases in year two, that asset will stay constant in year three, and then the asset goes down in four and down in five to 0.