A company may have deferred income tax liabilities if it uses different depreciation methods for tax reporting and financial accounting. For instance, if it uses an accelerated depreciation method for tax purposes, it will incur lower taxes in the initial years but higher taxes later compared to the straight-line method used in its financial statements. This creates a deferred tax liability on its balance sheet.

During the financial review, the CFO explained that the increase in deferred income taxes was due to accelerated depreciation on new equipment, which will balance out over the coming years.