Deferred tax arises from temporary differences between the carrying amount of an asset or liability in the financial statements and its tax base. IAS 12 requires entities to recognise deferred tax liabilities and (subject to certain conditions) deferred tax assets using the balance sheet liability method (IAS 12.15, IAS 12.24).

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Temporary Differences

A temporary difference is the difference between the tax base of an asset or liability and its carrying amount in the statement of financial position (IAS 12.5). These can be:

• Taxable temporary differences – give rise to deferred tax liabilities (DTLs), as they will result in taxable amounts in future periods (IAS 12.15)
• Deductible temporary differences – give rise to deferred tax assets (DTAs), as they will result in amounts deductible in future periods (IAS 12.24)

Common examples include accelerated tax depreciation, unrealised intercompany profits, provisions not yet deductible for tax, and fair value adjustments on business combinations.

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Recognition of Deferred Tax Liabilities

IAS 12 requires recognition of a DTL for all taxable temporary differences, with limited exceptions (IAS 12.15). Key exceptions include:

• Initial recognition of goodwill (IAS 12.15a)
• Initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting nor taxable profit at the time of the transaction (IAS 12.15b)
• Differences arising from investments in subsidiaries, associates, and joint arrangements where the parent can control the timing of reversal and it is probable the difference will not reverse in the foreseeable future (IAS 12.39)

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Recognition of Deferred Tax Assets

A DTA is recognised only to the extent that it is probable that sufficient future taxable profit will be available against which the deductible temporary difference can be utilised (IAS 12.24). Additionally:

• DTAs for unused tax losses and credits are recognised only when it is probable that future taxable profit will be available (IAS 12.34)
• An entity reassesses unrecognised DTAs at each reporting date (IAS 12.37)
• The carrying amount of a DTA must be reviewed and reduced if it is no longer probable that sufficient taxable profit will be available (IAS 12.56)

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Measurement

Deferred tax assets and liabilities are measured at the tax rates expected to apply in the period when the asset is realised or the liability is settled, based on laws that are enacted or substantively enacted by the reporting date (IAS 12.47). Importantly:

• Deferred tax is not discounted (IAS 12.53)
• Measurement must reflect the expected manner of recovery or settlement of the carrying amount (IAS 12.51)

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Presentation

• Current and deferred tax are recognised in profit or loss, unless they relate to items recognised in OCI or directly in equity, in which case the tax follows the same treatment (IAS 12.58)
• DTAs and DTLs must be offset when the entity has a legally enforceable right to set off and intends to settle on a net basis or simultaneously (IAS 12.74)
• Deferred tax balances are always classified as non-current on the face of the statement of financial position

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Practical Tip

Always ensure the tax base of each asset and liability is clearly identified, as this is the foundation of the entire deferred tax calculation under IAS 12.5.