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IAS 12 - Recognition and measurement of deferred tax when an entity is loss making

Date recorded:

The Committee received a request for guidance on the recognition and measurement of deferred tax assets when an entity is loss-making. The Committee was asked to clarify:

  1. whether IAS 12 Income Taxes requires that a deferred tax asset is recognised regardless of an entity’s expectations of future tax losses when there are suitable reversing taxable temporary differences (‘Issue 1’); and
  2. how the guidance in IAS 12 is applied when tax laws limit the extent to which losses can be recovered against future profits (‘Issue 2’).

Staff performed outreach on this topic with national accounting standard-setters and regulators. The results of this outreach are included as part of the staff’s analysis of this issue.

Staff concluded that the Committee should recommend to the IASB that it should amend IAS 12 to clarify that the Standard requires that deferred tax assets are recognised only to the extent that an entity expects that the reversal of the deductible temporary differences will reduce tax payments. Consequently, deferred tax assets are not recognised independent of an entity’s expectations of future losses, when there are suitable reversing taxable temporary differences. In other words, the existence of taxable temporary differences is merely an indicator, not actual evidence, that future taxable profits are probable.

Staff also think that the Committee should recommend to the IASB that it should include this proposed amendment in the narrow-scope amendment to IAS 12 Recognition of deferred tax assets for unrealised losses.

If the Committee agree with the recommendations made by Staff, Staff will present a draft of the proposed amendment to IAS 12 in a future meeting.

A member started by disagreeing with Staff and said that with issue 1 there is limited diversity and with issue 2 there is diversity in practice. The principle of IAS 12 is that deferred taxes should reflect the consequences of recovering deferred tax assets and liabilities, whereas the approach Staff have taken is the opposite.

Another member also disagreed with Staff and said that IAS 12 is clear in that entities start by offsetting deferred tax assets and liabilities as with existing tax losses or profits. This is the predominant view in France, Germany and Italy.

Another member agreed with staff's view and said judgement is required to determine if the deferred taxes can be recovered.

A member said that one should look at all the temporary differences first and then focus on the future tax differences when determining the recoverability of deferred tax assets.

Another member said the recoverability of deferred tax assets is dependent on managerial judgement and the Standard may be unclear on this. However, the Standard does require the recoverability of taxes by reference to management’s expectation of future activities to be considered as per paragraph 39 of IAS 12. This can be problematic for entities that are going through liquidation. These are the ideas that staff should present to the board.

The meeting concluded that with issue one Staff are to prepare a draft agenda decision and with issue 2 Staff would look at two different fact patterns: the first where the legislation limits recoverability to 40% within a time frame and another where there is no time limit but recoverability is restricted to 40%.

Another member said that the first assessment should be that deferred tax assets should be limited to the percentage authorised by the law and then secondly to assess how much is left. The meeting concluded that staff would bring issue 2 back to a future meeting.

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