How are deferred tax liabilities related to depreciation methods?

The statement that accelerated depreciation can create deferred tax liabilities (DTLs) due to timing differences is accurate. This is because accelerated depreciation methods, such as the double-declining balance method, allow a company to write off the cost of an asset more quickly in the earlier years of the asset's life, resulting in lower taxable income in those years.

In a typical scenario, for financial reporting purposes under GAAP, companies may use straight-line depreciation, which spreads the cost of the asset evenly over its useful life. This difference between the depreciation methods leads to a situation where the company's taxable income is lower than its reported net income in the early years. Consequently, this creates a timing difference because the tax payable is reduced in the short term, but will eventually increase when the depreciation expense is lower in the later years, resulting in a deferred tax liability.

This connection highlights how the choice of depreciation method can impact tax obligations and financial reporting, establishing a basis for understanding the relationship between accelerated depreciation and deferred tax liabilities.