When can a deferred tax asset be recognised under IAS 12?

A deferred tax asset (DTA) may be recognised only to the extent it is probable that sufficient future taxable profit will be available against which the deductible temporary difference, unused tax loss, or unused tax credit can be utilised (IAS 12.24, IAS 12.34). - Deductible temporary differences (IAS 12.24): A DTA arises when the tax base of an asset or liability exceeds its carrying amount in a way that will produce deductible amounts in future periods — for example, a provision recognised for accounting purposes but not yet deductible for tax, or an asset written down for impairment before tax relief is available. - Unused tax losses and credits (IAS 12.34): A DTA is also recognised for carried-forward tax losses and unused tax credits, but the probability threshold demands especially rigorous evidence, because the existence of losses is itself strong counter-evidence that future taxable profit may not materialise. - Probability assessment (IAS 12.28–29): "Probable" is generally interpreted as "more likely than not" (>50%). Management must assess: (a) whether sufficient taxable temporary differences exist that will reverse in the same period; (b) whether there will be taxable profit in future periods before the DTA expires; (c) whether tax-planning opportunities are available. All four sources of future taxable profit in IAS 12.28 should be evaluated.

How should a deferred tax asset for carried-forward tax losses be measured when different tax rates apply to different future periods?

- Reassessment at each reporting date (IAS 12.37): The carrying amount of a DTA must be reviewed every period. If it is no longer probable that sufficient taxable profit will be available, the DTA is reduced (a write-down). Conversely, previously unrecognised DTAs are reassessed and recognised when recovery becomes probable. - Initial recognition exception (IAS 12.15(b) and IAS 12.24): No DTA is recognised when it arises from the initial recognition of an asset or liability in a transaction that (i) is not a business combination and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit. This is a narrow exemption — most DTAs arising from ongoing operations do not fall within it. - Presentation and offset (IAS 12.71–74): Deferred tax assets and liabilities are offset on the statement of financial position only when the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxation authority. DTAs are always non-current under IAS 1.56. A company recognises a warranty provision of €500,000 in Year 1. Under local tax law, the deduction is only available when cash is paid — expected in Year 2. The tax rate is 25%. The tax base of the provision liability is €0; carrying amount is €500,000, creating a deductible temporary difference of €500,000.

What evidence is sufficient under IAS 12.35 to overcome the presumption against recognising a DTA after a history of recent losses?

Probability assessment: The entity has strong taxable profit forecasts for Year 2 well exceeding €500,000. Recognition is appropriate. | Account | Dr (€) | Cr (€) | |---|---|---| | Deferred Tax Asset (SFP) | 125,000 | | | Deferred Tax Income (P&L) | | 125,000 | Year 2 — Reversal when warranty paid and tax deduction taken: | Account | Dr (€) | Cr (€) | |---|---|---| | Deferred Tax Expense (P&L) | 125,000 | | | Deferred Tax Asset (SFP) | | 125,000 |

How does the initial recognition exemption under IAS 12.15(b) interact with deferred tax on assets acquired in a business combination?

- Over-reliance on projections for loss-making entities: Recognising a DTA purely on management's optimistic forecasts, without objectively verifiable evidence, violates IAS 12.35. Auditors will scrutinise the consistency of forecasts with business plans approved by the board and historical accuracy of prior-year projections. - Ignoring the reversal pattern of taxable temporary differences: When assessing whether sufficient taxable profit exists, practitioners sometimes aggregate DTAs and DTLs across different reversal periods. IAS 12.28(a) requires matching: a deductible difference reversing in Year 5 cannot be offset against a taxable difference reversing in Year 1. - Failing to reassess previously unrecognised DTAs (IAS 12.37): After a period of losses, entities often leave DTAs off the balance sheet even after a return to sustained profitability — missing a significant asset and understating retained earnings when recognition finally becomes appropriate. - IAS 12.24 — Core recognition criterion for DTAs arising from deductible temporary differences. - IAS 12.34–36 — Recognition of DTAs for unused tax losses and credits; the evidence burden. - IAS 12.28–29 — The four sources of future taxable profit and the probability assessment framework. - IAS 12.37 — Mandatory reassessment of DTAs at every reporting date. - IAS 12.15(b) — Initial recognition exemption (the "no DTA/DTL" exception for certain transactions).

IAS 12 Deferred Tax Asset Recognition

IAS 12 Deferred Tax Asset Recognition — Core Rule

A deferred tax asset (DTA) may be recognised only to the extent it is probable that sufficient future taxable profit will be available against which the deductible temporary difference, unused tax loss, or unused tax credit can be utilised (IAS 12.24, IAS 12.34).

How IAS 12 Deferred Tax Asset Recognition Works

Deductible temporary differences (IAS 12.24): A DTA arises when the tax base of an asset or liability exceeds its carrying amount in a way that will produce deductible amounts in future periods — for example, a provision recognised for accounting purposes but not yet deductible for tax, or an asset written down for impairment before tax relief is available.

Unused tax losses and credits (IAS 12.34): A DTA is also recognised for carried-forward tax losses and unused tax credits, but the probability threshold demands especially rigorous evidence, because the existence of losses is itself strong counter-evidence that future taxable profit may not materialise.

Probability assessment (IAS 12.28–29): "Probable" is generally interpreted as "more likely than not" (>50%). Management must assess: (a) whether sufficient taxable temporary differences exist that will reverse in the same period; (b) whether there will be taxable profit in future periods before the DTA expires; (c) whether tax-planning opportunities are available. All four sources of future taxable profit in IAS 12.28 should be evaluated.

Reassessment at each reporting date (IAS 12.37): The carrying amount of a DTA must be reviewed every period. If it is no longer probable that sufficient taxable profit will be available, the DTA is reduced (a write-down). Conversely, previously unrecognised DTAs are reassessed and recognised when recovery becomes probable.

Initial recognition exception (IAS 12.15(b) and IAS 12.24): No DTA is recognised when it arises from the initial recognition of an asset or liability in a transaction that (i) is not a business combination and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit. This is a narrow exemption — most DTAs arising from ongoing operations do not fall within it.

Presentation and offset (IAS 12.71–74): Deferred tax assets and liabilities are offset on the statement of financial position only when the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxation authority. DTAs are always non-current under IAS 1.56.

IAS 12 Deferred Tax Asset Recognition — Practical Example

A company recognises a warranty provision of €500,000 in Year 1. Under local tax law, the deduction is only available when cash is paid — expected in Year 2. The tax rate is 25%. The tax base of the provision liability is €0; carrying amount is €500,000, creating a deductible temporary difference of €500,000.

Probability assessment: The entity has strong taxable profit forecasts for Year 2 well exceeding €500,000. Recognition is appropriate.

DTA = €500,000 × 25% = €125,000

Year 1 — Recognition of deferred tax asset

Account	Dr (€)	Cr (€)
Deferred Tax Asset (SFP)	125,000
Deferred Tax Income (P&L)		125,000

Year 2 — Reversal when warranty paid and tax deduction taken

Account	Dr (€)	Cr (€)
Deferred Tax Expense (P&L)	125,000
Deferred Tax Asset (SFP)		125,000

IAS 12 Deferred Tax Asset Recognition — Common Pitfalls

Over-reliance on projections for loss-making entities: Recognising a DTA purely on management's optimistic forecasts, without objectively verifiable evidence, violates IAS 12.35. Auditors will scrutinise the consistency of forecasts with business plans approved by the board and historical accuracy of prior-year projections.

Ignoring the reversal pattern of taxable temporary differences: When assessing whether sufficient taxable profit exists, practitioners sometimes aggregate DTAs and DTLs across different reversal periods. IAS 12.28(a) requires matching: a deductible difference reversing in Year 5 cannot be offset against a taxable difference reversing in Year 1.

Failing to reassess previously unrecognised DTAs (IAS 12.37): After a period of losses, entities often leave DTAs off the balance sheet even after a return to sustained profitability — missing a significant asset and understating retained earnings when recognition finally becomes appropriate.

IAS 12 Deferred Tax Asset Recognition — Key Paragraphs

IAS 12.24 — Core recognition criterion for DTAs arising from deductible temporary differences.
IAS 12.34–36 — Recognition of DTAs for unused tax losses and credits; the evidence burden.
IAS 12.28–29 — The four sources of future taxable profit and the probability assessment framework.
IAS 12.37 — Mandatory reassessment of DTAs at every reporting date.
IAS 12.15(b) — Initial recognition exemption (the "no DTA/DTL" exception for certain transactions).