IAS 12 Deferred Tax: A Practical Guide for Accountants

What Is Deferred Tax?

Deferred tax arises because the tax base of an asset or liability — the amount attributed to it for tax purposes — differs from its carrying amount in the financial statements. These differences create deferred tax assets (DTAs) and deferred tax liabilities (DTLs) that represent the estimated future tax consequences of those differences. IAS 12 Income Taxes governs how deferred tax is recognised and measured under IFRS.

Temporary vs Permanent Differences

Only temporary differences give rise to deferred tax — these are differences that will reverse in future periods. Permanent differences (items that are never taxable or deductible) do not create deferred tax. Examples of temporary differences: accelerated capital allowances (tax depreciation exceeds accounting depreciation — creates a DTL); provisions for bad debts deductible only when written off (creates a DTA); revaluation of property to fair value above cost (creates a DTL); unrelieved tax losses carried forward (creates a DTA).

Recognition Criteria

Deferred tax liabilities: Recognised for all taxable temporary differences unless specifically exempted (initial recognition exemption, investments in subsidiaries where the parent controls timing of reversal). Deferred tax assets: Recognised only to the extent it is probable that sufficient future taxable profit will be available against which the DTA can be utilised. This recoverability assessment is one of the most judgemental areas in financial reporting.

Measurement

Deferred tax is measured at the tax rates expected to apply when the temporary difference reverses — using rates enacted or substantively enacted at the balance sheet date. The UK corporation tax rate increase from 19% to 25% (for profits above £250,000) in April 2023 required remeasurement of deferred tax balances at the new rate, creating significant P&L charges for many companies.

Common Practical Challenges

Deferred tax on business combinations (IFRS 3): the fair value uplift of acquired assets creates DTLs not present in the acquiree's standalone accounts. Deferred tax on share-based payments: the deduction available for tax often differs from the accounting charge — requiring careful tracking. Uncertain tax positions: IAS 12 requires reflection of uncertain tax treatments in the tax charge where it is probable the authority will not accept the treatment.

Further Reading

• IFRS 3 Business Combinations
• FRS 102 vs IFRS
• Accounting Standards CPD

Study with Learnsignal: Financial reporting CPD for qualified accountants. Browse CPD.