How is deferred tax accounted for under IAS 12?

IAS 12 requires entities to recognise deferred tax assets (DTAs) and deferred tax liabilities (DTLs) for temporary differences between the carrying amount of assets/liabilities in the financial statements and their tax base. This approach — the balance sheet liability method — ensures that all future tax consequences of recovering assets or settling liabilities are captured in the period in which the underlying event occurs. A DTA represents a future tax deduction: the entity will pay less tax when the temporary difference reverses. A DTL represents a future tax charge: additional tax becomes payable when the difference reverses. Both must be recognised unless a specific exemption applies (IAS 12.15). The tax base is the amount attributed to an asset or liability for tax purposes: - Tax base of an asset: the amount deductible against future taxable income when the carrying amount is recovered. If recovery generates no taxable amounts, the tax base equals the carrying amount. - Tax base of a liability: the carrying amount minus amounts that will be deductible for tax in future periods. For revenue received in advance, the tax base is typically zero (already taxed on receipt). The temporary difference is the gap between carrying amount and tax base. Common examples: - Depreciation timing differences (different rates for accounting vs. tax) - Provisions recognised for accounting but not deductible until paid (e.g. restructuring, bad debts) - Fair value uplifts on assets acquired in a business combination - Undistributed profits of subsidiaries where remittance is not controlled by the parent A DTA is recognised when it is probable that sufficient taxable profit will be available in future periods against which the deductible temporary difference (or unused tax loss/credit) can be utilised.

How do you assess the 'probable' threshold under IAS 12.34 for a loss-making subsidiary with unused tax losses?

- Sources of future taxable profit: reversing taxable temporary differences, projected future earnings, and viable tax planning strategies - Loss-making entities: a DTA may still be recognised if convincing evidence of future profitability exists — for example, a firm contract backlog, an improving trading environment, or large reversing DTLs - Partial recognition: if future profitability is sufficient to utilise only part of a DTA, only that portion is recognised - Reassessment each period: if the probability condition is no longer met, the DTA is written down; if previously unrecognised DTAs become realisable, they are recognised immediately IAS 12.34 is the most frequently contested area in income tax audits — boards must document the assumptions underlying forecasted taxable profits, and auditors scrutinise these carefully. Deferred tax must be measured using the tax rate that has been enacted or substantively enacted at the reporting date and is expected to apply when the temporary difference reverses (IAS 12.47). - The enacted rate at period-end is locked in — prospective changes are not anticipated - "Substantively enacted" means the legislative process is sufficiently advanced that the outcome is not in doubt; the definition varies by jurisdiction - Scheduled rate changes: if a rate is already enacted to change in a future year, use the rate applicable in the year of expected reversal (IAS 12.49) - Different rates may apply to DTAs and DTLs if they are expected to reverse in periods with different enacted rates Deferred tax assets and liabilities are classified as non-current on the balance sheet (IAS 12.73), regardless of when the underlying temporary difference is expected to reverse. Netting is permitted only when both conditions are met (IAS 12.74): - The entity has a legally enforceable right to offset current tax assets against current tax liabilities; and - The DTAs and DTLs relate to income taxes levied by the same tax authority on the same taxable entity (or different entities that intend to settle net)

Should deferred tax be recognised on goodwill impairments, and why does IAS 12.15(c) exclude initial recognition from deferred tax?

(The DTA reverses as the tax deduction is realised; the cash tax benefit flows through profit or loss.) - Ignoring the "probable" threshold: Mechanically recognising all DTAs without assessing whether sufficient taxable profit will be available. IAS 12.34 explicitly restricts recognition; auditors frequently challenge DTAs on loss-making or consistently unprofitable entities. - Using incorrect tax rates: Applying current or estimated future rates instead of the rate enacted or substantively enacted at period-end. Uncertainty about future tax law does not delay recognition — the enacted rate is used even if a change is anticipated. - Omitting DTLs on revaluations: When an asset is revalued upward (e.g. investment property carried at fair value), the corresponding DTL is often missed. IAS 12.51(b) requires a DTL for all taxable temporary differences, even where no immediate cash tax impact exists. - Netting across jurisdictions: DTAs and DTLs from different tax authorities or different taxable entities cannot be offset, even within the same consolidated group.

IAS 12 Deferred Tax — Recognition & Measurement

IAS 12.5 — Balance sheet liability method

IAS 12 requires entities to recognise deferred tax assets (DTAs) and deferred tax liabilities (DTLs) for temporary differences between the carrying amount of assets/liabilities in the financial statements and their tax base. This approach — the balance sheet liability method — ensures that all future tax consequences of recovering assets or settling liabilities are captured in the period in which the underlying event occurs.

A DTA represents a future tax deduction: the entity will pay less tax when the temporary difference reverses. A DTL represents a future tax charge: additional tax becomes payable when the difference reverses. Both must be recognised unless a specific exemption applies (IAS 12.15).

IAS 12.7 — Tax base concept

The tax base is the amount attributed to an asset or liability for tax purposes:

Tax base of an asset: the amount deductible against future taxable income when the carrying amount is recovered. If recovery generates no taxable amounts, the tax base equals the carrying amount.

Tax base of a liability: the carrying amount minus amounts that will be deductible for tax in future periods. For revenue received in advance, the tax base is typically zero (already taxed on receipt).

The temporary difference is the gap between carrying amount and tax base. Common examples:

Depreciation timing differences (different rates for accounting vs. tax)

Provisions recognised for accounting but not deductible until paid (e.g. restructuring, bad debts)
Fair value uplifts on assets acquired in a business combination
Undistributed profits of subsidiaries where remittance is not controlled by the parent

IAS 12.34 — Deferred tax asset recognition

A DTA is recognised when it is probable that sufficient taxable profit will be available in future periods against which the deductible temporary difference (or unused tax loss/credit) can be utilised.

Key considerations:

Sources of future taxable profit: reversing taxable temporary differences, projected future earnings, and viable tax planning strategies

Loss-making entities: a DTA may still be recognised if convincing evidence of future profitability exists — for example, a firm contract backlog, an improving trading environment, or large reversing DTLs
Partial recognition: if future profitability is sufficient to utilise only part of a DTA, only that portion is recognised
Reassessment each period: if the probability condition is no longer met, the DTA is written down; if previously unrecognised DTAs become realisable, they are recognised immediately

IAS 12.34 is the most frequently contested area in income tax audits — boards must document the assumptions underlying forecasted taxable profits, and auditors scrutinise these carefully.

IAS 12.47 — Measurement: enacted tax rates

Deferred tax must be measured using the tax rate that has been enacted or substantively enacted at the reporting date and is expected to apply when the temporary difference reverses (IAS 12.47).

Critical rules:

The enacted rate at period-end is locked in — prospective changes are not anticipated

"Substantively enacted" means the legislative process is sufficiently advanced that the outcome is not in doubt; the definition varies by jurisdiction
Scheduled rate changes: if a rate is already enacted to change in a future year, use the rate applicable in the year of expected reversal (IAS 12.49)
Different rates may apply to DTAs and DTLs if they are expected to reverse in periods with different enacted rates

IAS 12.73 — Presentation and offsetting

Deferred tax assets and liabilities are classified as non-current on the balance sheet (IAS 12.73), regardless of when the underlying temporary difference is expected to reverse.

Netting is permitted only when both conditions are met (IAS 12.74):

The entity has a legally enforceable right to offset current tax assets against current tax liabilities; and

The DTAs and DTLs relate to income taxes levied by the same tax authority on the same taxable entity (or different entities that intend to settle net)

Cross-entity or cross-jurisdiction netting is not permitted. On the income statement, deferred tax is included in tax expense (profit or loss) — except for items recognised in OCI or equity transactions, which flow through those same components (IAS 12.61A, IAS 12.68).

IAS 12 Deferred Tax Accounting — Practical Example

Scenario: ABC Ltd reports a €5 million provision for employee restructuring at 31 December 20X3. The provision is accrued for accounting purposes but is only tax-deductible when employees are paid (expected Q2 20X4). The applicable tax rate is 25%.

Temporary difference calculation:

Carrying amount of provision (accounting): €5 million
Tax base of provision: €0 (non-deductible until paid)
Temporary difference: €5 million (deductible temporary difference)

Deferred tax asset:

€5 million × 25% = €1.25 million DTA

Journal entry at 31 Dec 20X3:

Account	Dr (€000)	Cr (€000)
Deferred Tax Asset	1,250
Tax Expense (P&L)		1,250

When the restructuring payments are made in Q2 20X4 (€5 million cash paid):

Account	Dr (€000)	Cr (€000)
Provision	5,000
Cash		5,000
Tax Expense (P&L)	1,250
Deferred Tax Asset		1,250

(The DTA reverses as the tax deduction is realised; the cash tax benefit flows through profit or loss.)

IAS 12 Deferred Tax Accounting — Common Pitfalls

Ignoring the "probable" threshold: Mechanically recognising all DTAs without assessing whether sufficient taxable profit will be available. IAS 12.34 explicitly restricts recognition; auditors frequently challenge DTAs on loss-making or consistently unprofitable entities.

Using incorrect tax rates: Applying current or estimated future rates instead of the rate enacted or substantively enacted at period-end. Uncertainty about future tax law does not delay recognition — the enacted rate is used even if a change is anticipated.

Omitting DTLs on revaluations: When an asset is revalued upward (e.g. investment property carried at fair value), the corresponding DTL is often missed. IAS 12.51(b) requires a DTL for all taxable temporary differences, even where no immediate cash tax impact exists.

Netting across jurisdictions: DTAs and DTLs from different tax authorities or different taxable entities cannot be offset, even within the same consolidated group.