DEFERRED TAX ASSET

Advance payment of taxes

Overpayment of taxes
DEFERRED TAX ASSET

❏ Are the amounts of income taxes recoverable in

future periods in respect of:

a) Deductible temporary differences

b) Carryforward of unused tax losses
c) Carryforward of unused tax credits
Temporary Differences

❏ Differences between the carrying amount of an asset or liability in the

balance sheet and its tax base
❏ May be either:

Taxable Temporary Deductible Temporary

Differences Differences
 Taxable Temporary
Differences

Taxable Income (TI) > Accounting Income (AI)

May arise due to timing

differences
 Taxable temporary differences

Expenses & Losses

Revenue & Gains

Deducted from AI in
included in: CURRENT but are
❏ TI of CURRENT period deductible for tax
❏ AI of FUTURE period purpose in FUTURE
 Future Deductible Temporary Differences

❏ Probable & measurable litigation loss

❏ Estimated product warranty cost
❏ Research cost
❏ Impairment loss
❏ Doubtful accounts
Recognized in accounting purposes but are
deductible and/or not deductible to tax purposes
 Other Deductible Temporary Differences

❏ Asset is revalued downward

❏ Tax base of investment in subsidiary,
associate or joint venture is higher than
the carrying amount

Not timing differences but give rise to DTA

 Exempt Temporary Differences

Recognition of DTA is prohibited:

❏ Initial recognition of an asset or liability in transaction which:

1) Not a business combination
2) At the time of the transaction, affects neither accounting profit nor
taxable profit [IAS 12.24]
 WHY IT ARISES

Differences between Accounting Income and Taxable

Income

Difference in allowance of expenses in

Income Tax Act

Provision for Bad/doubtful debts

 Charging Depreciation

Accrual Basis vs Receipt Basis

TYPES OF DEFERRED TAX

DEFERRED TAX LIABILITY

DEFERRED TAX ASSET

Deferred Tax Liability
❏ Deferred tax can arise when there is a difference between what a
company can deduct as tax and the tax that is for accounting purposes
❏ Deferred tax signifies that a company may in future pay more income tax
due to a transaction in the present.

Prepaid Revenues Companies push

Expenses taxed later current profits to
when received reduce tax burden
Deferred Tax Assets
❏ Deferred tax can arise as a result of timing difference or temporary
differences in accounting.
❏ Deferred tax assets arise when the tax amount has been paid or has been
carried forward but has still not been recognized in the income statement

Entity Profit Status Future Effect

Current
Book profit is less Creates
Pay more tax Pay less tax
than the Taxable Deferred Tax
now in future Asset (DTA)
 Deferred Taxes

Temporary Tax base

Difference

DTA/DTL Temporary
Difference
 Deferred Taxes

Deferred Tax Expense

DTL DT
A
Tax Expense Current Tax Expense Deferred Tax Expense
 Deferred Taxes arising from unused tax
losses or unused tax credits:

Deferred Tax Asset

Unused tax losses or unused

tax credits
PRESENTATION

Current Tax Assets &

Current Tax Liabilities

❏ Can only be offset in the SOFP if entity has the legal

right and intention to settle on net basis
PRESENTATION

DEFERRED TAXES

❏ Noncurrent asset or liability

❏ Shall not be discounted
PRESENTATION

Deferred Tax Assets &

Deferred Tax Liabilities

❏ Can only be offset if entity has the legal right to settle CURRENT
TAX AMOUNTS on net basis and the deferred tax amounts are
levied by the same taxing authority on the same entity or different
entities that intend to realize the asset and settle the liability at
the same time
 RECOGNITION OF
DEFERRED TAX ASSETS

All deductible temporary differences

and operating loss carryforward

❏ When it is probable then taxable income will be

available against which the deferred tax asset
can be used

[PAS 12, paragraph 24]

 Deductible temporary differences arising from
investments in subsidiaries, branches and
associates, and interests in joint arrangements

❏ 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 utilized.
 Carrying amount of deferred tax assets

❏ 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 utilized
 For unused tax losses and unused tax credits

❏ It is probable that future taxable profit will

be available against which the unused tax
losses and unused tax credits can be
utilized
There is no time limit on deferred tax
assets. They can be used when it
makes the most financial sense for a
company. However, deferred tax
assets can't be used with tax returns
that have already been filed.
OPERATING LOSS
CARRYFORWARD

OVER

❏ Excess of tax deductions over gross income

in a year that may be carried forward to
reduce taxable income in a future year
 CARRY
OVER

❏ BOI-registered entities can carry over net operating losses for tax
purposes,subject to limitations of the relevant law and
implementing regulations of the board of investments.
METHOD OF ACCOUNTING

INCOME STATEMENT APPROACH

STATEMENT OF FINANCIAL POSITION

APPROACH
 INCOME STATEMENT APPROACH

❏ Focuses on TIMING DIFFERENCES only in the computation of

DTA or DTL

❏ Affect the income statement

of one period and will reverse
in the income statement of TIMING DIFFERENCES
one or more subsequent
periods
 STATEMENT OF FINANCIAL POSITION
APPROACH
❏ Considers all TEMPORARY DIFFERENCES including timing
differences

❏ Affect the SOFP only and

therefore technically are not
timing differences but TEMPORARY DIFFERENCES
nonetheless are recognized in
computing DTA or DTL
 Pitfalls - Recognition of DTA

Recoverability of DTA where taxable

differences are available

Lookout period for Recognition of DTA in interim

future taxable profits financial statements