When can deferred tax asset be Recognised?

Recognition of Deferred Tax Assets

Deferred tax assets are financial assets that reduce a company’s taxable income in the future. They are recognized when it is probable that there will be sufficient taxable profits available to realize the deductible temporary difference or carryforward of unused tax losses or tax credits (US GAAP and IFRS).

Sources of Deferred Tax Assets

Deferred tax assets can arise from various sources, including:

Overpayment of Taxes

When a company overpays its taxes, the overpayment becomes a deferred tax asset.

Differences between Tax and Accounting Rules

Differences between tax rules and accounting rules can create deferred tax assets. For example, when expenses are recognized in a company’s income statement before they are required to be recognized by the tax authorities or when revenue is subject to taxes before it is taxable in the income statement.

Carryover of Tax Losses

If a business incurs a loss in a financial year, it can usually carry over that loss to lower its taxable income in the following years. This loss becomes a deferred tax asset.

Recognition Criteria

To be recognized, a deferred tax asset must meet the following criteria:

• It is probable that there will be sufficient taxable profits available to realize the deductible temporary difference or carryforward of unused tax losses or tax credits.
• The deferred tax asset is not related to an uncertain tax position.

Measurement

Deferred tax assets are measured at the amount of the deferred tax benefit that is expected to be realized. The deferred tax benefit is calculated by multiplying the deductible temporary difference or carryforward of unused tax losses or tax credits by the applicable tax rate.

No Time Limit

Deferred tax assets do not have a time limit and can be used when it makes the most financial sense for a company.

Sources

• PwC. “Recognition of Deferred Tax Assets.” Viewpoint, 31 Mar. 2023, https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/ifrs_and_us_gaap_sim/ifrs_and_us_gaap_sim_US/chapter_8_liabilitie_US/85_recognition_of_de_US.html.
• Investopedia. “Deferred Tax Asset: Calculation, Uses, and Examples.” Investopedia, 23 Nov. 2023, https://www.investopedia.com/terms/d/deferredtaxasset.asp.
• PwC. “Identify and Measure Deferred Tax Assets and Liabilities.” Viewpoint, 31 Mar. 2023, https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/income_taxes/income_taxes__16_US/chapter_10_business__US/104_identify_and_mea_US.html.

FAQs

What is a deferred tax asset?

A deferred tax asset is a financial asset that reduces a company’s taxable income in the future.

When can a deferred tax asset be recognized?

A deferred tax asset can be recognized when it is probable that there will be sufficient taxable profits available to realize the deductible temporary difference or carryforward of unused tax losses or tax credits.

What are some examples of sources of deferred tax assets?

Some examples of sources of deferred tax assets include overpayment of taxes, differences between tax and accounting rules, and carryover of tax losses.

How are deferred tax assets measured?

Deferred tax assets are measured at the amount of the deferred tax benefit that is expected to be realized.

Is there a time limit on deferred tax assets?

No, deferred tax assets do not have a time limit and can be used when it makes the most financial sense for a company.

What is the difference between a deferred tax asset and a deferred tax liability?

A deferred tax asset reduces a company’s taxable income in the future, while a deferred tax liability increases a company’s taxable income in the future.

How are deferred tax assets reported on the balance sheet?

Deferred tax assets are reported on the balance sheet as non-current assets.

What are the tax implications of recognizing a deferred tax asset?

Recognizing a deferred tax asset reduces a company’s current tax liability and defers the payment of taxes to a future period.