15.6 Deferred Tax Assets
As we have seen, deferred tax assets are created when there are loss carryforwards or deductible temporary differences. Consistent with the conceptual framework, IAS 12 only allows recognition of these assets when their future realization is probable. However, as discussed previously, there can be a fair degree of uncertainty in making this determination. As a result of this uncertainty, IAS 12 requires a review of any deferred tax assets at the end of every reporting period. If the initial recognition assessment has changed, and it is no longer probable that part or all of the deferred tax asset will be realized, then the carrying value of the asset should be reduced and charged against profit as part of the deferred tax expense.
The opposite situation, however, can also occur. If a deferred tax asset was not recognized in a previous period because the future realization was not probable, and conditions in the current year have changed to the point that future realization is now probable, then the deferred tax asset can be established and the income can be reported on the income statement. Although this may create unusual effects on the company’s income statement, the recognition or non-recognition of deferred tax assets is consistent with the conceptual framework’s balance sheet approach to financial reporting.
An important rule of thumb to remember:
- If Accounting Profit < Taxable Profit then, Deferred Tax Asset
- If Accounting Profit > Taxable Profit, then, Deferred Tax Liability
Finally, in order to assist with calculating either a deferred tax asset or deferred tax liability, the following chart may be helpful:
| Deferred Tax | |||||
| Tax | Carrying | Asset | |||
| Balance Sheet | Base | Value | Difference | Tax Rate | (Liability) |
| Account Name | per tax calc | on balance sheet | Tax - CV | % Given | Diff x Tax Rate |
