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Was this article helpful? Have a query? In these latter situations the temporary differences result in a deferred tax asset arising or where the entity has other larger temporary differences that create deferred tax liabilities, a reduced deferred tax liability. If the temporary difference is negative, a deferred tax asset will arise. In this scenario, the carrying value of the asset has been written down to below the tax base. This might be because an impairment loss has been recorded on the asset which is not allowable for tax purposes until the asset is sold.
The entity will therefore receive tax relief on the impairment loss in the future when the asset is sold. It is worth noting here that revaluation gains, which increase the carrying value of the asset and leave the tax base unchanged, result in a deferred tax liability. Conversely, impairment losses, which decrease the carrying value of the asset and leave the tax base unchanged, result in a deferred tax asset.
The write down is ignored for tax purposes until the goods are sold. The write off of inventory will generate tax relief, but only in the future when the goods are sold. Hence the tax base of the inventory is not reduced by the write off.
Tax relief is available on pension contributions only when they are paid. The contributions will only be recognised for tax purposes when they are paid in the future. Hence the pension expense is currently ignored within the tax computations and so the liability has a nil tax base, as shown in Table 8.
When dealing with deferred tax in group accounts, it is important to remember that a group does not legally exist and so is not subject to tax. Instead, tax is levied on the individual legal entities within the group and their individual tax assets and liabilities are cross-cast in the consolidation process.
The fair value adjustments may not alter the tax base of the net assets and hence a temporary difference may arise. Goodwill Goodwill only arises on consolidation — it is not recognised as an asset within the individual financial statements.
Theoretically, goodwill gives rise to a temporary difference that would result in a deferred tax liability as it is an asset with a carrying value within the group accounts but will have a nil tax base. However, IAS 12 specifically excludes a deferred tax liability being recognised in respect of goodwill. Provisions for unrealised profits PUPs When goods are sold between group companies and remain in the inventory of the buying company at the year-end, an adjustment is made to remove the unrealised profit from the consolidated accounts.
This adjustment also reduces the inventory to the original cost when a group company first purchased it. However, the tax base of the inventory will be based on individual financial statements and so will be at the higher transfer price.
Consequently, a deferred tax asset will arise. All of the goods remain in the inventory of S at the year-end. Normally, current tax rates are used to calculate deferred tax on the basis that they are a reasonable approximation of future tax rates and that it would be too unreliable to estimate future tax rates. Deferred tax assets and liabilities represent future taxes that will be recovered or that will be payable.
It may therefore be expected that they should be discounted to reflect the time value of money, which would be consistent with the way in which other liabilities are measured. IAS 12, however, does not permit or allow the discounting of deferred tax assets or liabilities on practical grounds.
The primary reason behind this is that it would be necessary for entities to determine when the future tax would be recovered or paid. In practice this is highly complex and subjective. Therefore, to require discounting of deferred tax liabilities would result in a high degree of unreliability.
Furthermore, to allow but not require discounting would result in inconsistency and so a lack of comparability between entities. As we have seen, IAS 12 considers deferred tax by taking a balance sheet approach to the accounting problem by considering temporary differences in terms of the difference between the carrying values and the tax values of assets and liabilities — also known as the valuation approach.
However, the valuation approach is applied regardless of whether the resulting deferred tax will meet the definition of an asset or liability in its own right. The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary differences.
There are three exceptions to the requirement to recognise a deferred tax liability, as follows:. An entity undertaken a business combination which results in the recognition of goodwill in accordance with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise recognised for tax purposes.
As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a taxable temporary difference arises in respect of the entire carrying amount of the goodwill. However, the taxable temporary difference does not result in the recognition of a deferred tax liability because of the recognition exception for deferred tax liabilities arising from goodwill. A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, unless the deferred tax asset arises from: [IAS Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, are only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference will be utilised.
The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. A deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or credit carryforward can be utilised.
Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are recognised in the same way as the items giving rise to those tax consequences. Accordingly, current and deferred tax is recognised as income or expense and included in profit or loss for the period, except to the extent that the tax arises from: [IAS An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity transaction, including regulatory fees, legal costs and stamp duties.
In accordance with the requirements of IAS 32 Financial Instruments: Presentation , the costs are accounted for as a deduction from equity. Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount of current tax payable for the period.
When the tax benefit of the deductions is recognised, the current tax amount associated with the costs of the equity transaction is recognised directly in equity, consistent with the treatment of the costs themselves. IAS 12 provides the following additional guidance on the recognition of income tax for the period:.
Current tax assets and current tax liabilities can only be offset in the statement of financial position if the entity has the legal right and the intention to settle on a net basis. Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the same taxing authority on the same entity or different entities that intend to realise the asset and settle the liability at the same time.
A deferred tax asset represents a financial benefit, while a deferred tax liability indicates a future tax obligation or payment due. For instance, retirement savers with traditional k plans make contributions to their accounts using pre-tax income.
When that money is eventually withdrawn, income tax is due on those contributions. That is a deferred tax liability. Internal Revenue Service. Financial Accounting Standards Board. Accessed Sept. Income Tax. Financial Statements. Tax Laws. Corporate Finance. Actively scan device characteristics for identification.
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