How is deferred tax accounted for under IAS 12?

Core rule IAS 12 Income Taxes requires entities to recognise deferred tax assets and liabilities for temporary differences between the carrying amount of assets/liabilities and their tax base, using the balance sheet liability method (IAS 12.5, IAS 12.15). How it works - Temporary difference definition: A temporary difference arises whenever the book value of an asset or liability differs from its tax base. Deferred tax is calculated on these differences at the applicable tax rate (IAS 12.5, IAS 12.24). Common examples include: depreciation timing differences, provisions recognised for accounting but not deductible for tax until paid, fair value adjustments to investment property, and goodwill impairment. - Tax base concept: The tax base of an asset is the amount deductible against taxable income in future periods (or recovery of the carrying amount if no deduction applies). For a liability, it is the carrying amount minus the deductible amount (IAS 12.7). This is the starting point for all DTA/DTL calculations. - Recognition of DTAs: A deferred tax asset is recognised when a temporary difference will result in a deduction against future taxable profit. However, DTAs are recognised only to the extent it is probable that taxable profit will be available (IAS 12.34). Thi

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

s probability threshold is a key control point; unused tax losses and carry-forwards also require this assessment. - Measurement at enacted/substantively enacted rates: Deferred tax must be measured using the tax rate (and tax law) that is enacted or substantively enacted at the reporting date, not estimated future rates (IAS 12.47, IAS 12.49). This is critical for jurisdictions with multi-year tax rate changes; you lock in the rate at period-end. - Presentation on the balance sheet: DTAs and DTLs relating to the same taxable entity and jurisdiction may be netted (IAS 12.74). They are presented as non-current assets/liabilities (IAS 12.73). On the income statement, deferred tax is normally shown in profit or loss, but movements relating to OCI items or equity transactions flow through OCI or equity respectively (IAS 12.61A, IAS 12.68). - Deferred tax on recognition of assets/liabilities: When an asset or liability is first recognised and does not affect taxable profit or accounting profit at recognition (e.g. a business combination), no deferred tax is recognised at that moment unless it is part of the acquisition accounting (IAS 12.15(c)). This prevents double-counting in M&A transactions. Practical example Scenario: ABC Ltd reports a €5 million provision for employee

What is the accounting treatment if tax legislation substantively enacts a rate change between reporting date and financial statement authorisation date?

restructuring at 31 December 20X3. The provision is accrued for accounting purposes but will only be 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 (assume €5 million cash paid): | Account | Dr (€000) | Cr (€000) | |---|---|---| | Provision | 5,000 | | | Cash | | 5,000 | | Cash | 1,250 | | | Deferred Tax Asset | | 1,250 | | Tax Expense (P&L) | | 1,250 | (The second entry reverses the DTA as the deduction is realised; the tax cash benefit flows through profit.) Common pitfalls - Ignoring the "probable" threshold: Many practitioners mechanically recognise all DTAs without assessing whether the entity will generate sufficient taxable profit to utilise the asset. IAS 12.34 explicitly restricts recognition to situations where it is probable profit will be availabl

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

e. Auditors frequently challenge DTAs on loss-making entities or those with limited future earnings visibility. - Using incorrect tax rates: Applying current/expected tax rates instead of the rate enacted or substantively enacted at period-end. This is especially critical in jurisdictions with scheduled rate changes or pending legislation. The enacted rate must be locked in; uncertainty about future laws does not delay recognition. - Failing to reverse DTLs on fair value movements: When an asset is revalued upward (e.g. investment property under IFRS 13), practitioners sometimes forget to recognise the corresponding deferred tax liability. IAS 12.51(b) requires a DTA/DTL for all temporary differences; a revaluation creates one even if no immediate cash tax impact exists. Key paragraphs to know - IAS 12.5 — Definition of deferred tax asset/liability and the balance sheet method. - IAS 12.15 — Recognition criteria and exclusion for initial recognition of assets/liabilities in non-business combinations. - IAS 12.24 — Measurement of temporary differences. - IAS 12.34 — Probability threshold for recognition of deferred tax assets. - IAS 12.47, IAS 12.49 — Enacted/substantively enacted rate requirement. - IAS 12.73, IAS 12.74 — Balance sheet presentation and offsetting rules

IAS 12 Deferred Tax — Recognition & Measurement

IAS 12 Income Taxes — Core Rule

IAS 12 Income Taxes requires entities to recognise deferred tax assets and liabilities for temporary differences between the carrying amount of assets/liabilities and their tax base, using the balance sheet liability method (IAS 12.5, IAS 12.15).

IAS 12 Income Taxes

IAS 12 Income Taxes — Core Rule

How IAS 12 Income Taxes Works