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IAS 12 — Recognition of deferred tax assets for unrealised losses

Date recorded:

The staff introduced the paper which relates to a requested for clarification received by the IC:

  1. whether IAS 12 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’).

Re issue 1:

Reversing taxable temporary differences enable the utilisation of the deductible temporary differences and are sufficient to justify the recognition of deferred tax assets. Consequently, it is not necessary to take into consideration future tax losses. The Interpretations Committee tentatively decided that the agenda criteria were not met for Issue 1

The objective of this paper is to:

  1. provide background information on Issue 2;
  2. provide an analysis of Issue 2;
  3. make a recommendation that the Committee should not take Issue 2 onto its agenda; and
  4. ask the Committee whether they agree with the staff recommendation.

Description of issue 2:

Issue 2 assumes that the answer to Issue 1 is that a deferred tax asset is recognised to the extent of the taxable temporary differences of an appropriate type that reverse in an appropriate period.

The submitter asked the Interpretations Committee to clarify how the guidance in IAS 12 should be applied when tax laws restrict the recovery of tax losses to a certain portion of taxable profits in each year.

The fact pattern is the following:

  1. an entity has tax losses carried forward of CU100 and taxable temporary differences of CU100 that will reverse next year and create CU100 of taxable profit;
  2. the entity expects to incur losses before and after the reversal of the taxable temporary differences; and
  3. the tax law restricts the recovery of tax losses to 60 per cent of taxable profit in each year.

The submitter thinks that there are two views on this issue:

  1. View 1: deferred tax asset restricted to 60 per cent of the taxable temporary differences.
  2. View 2: deferred tax asset recognised to the full extent of sufficient taxable temporary differences.

Staff recommendation:

On the basis of the previous Interpretations Committee’s discussions and staff analysis, the staff thinks that the guidance in IAS 12 on the recognition and measurement of deferred tax assets when an entity is loss-making is sufficiently clear. Consequently, they recommend that the Interpretations Committee should take neither Issue 1 nor Issue 2 onto its agenda.

Comments raised by IC members:

Several members indicated agreement with the staff analysis and proposed approach

One member expressed concern as to why there is diversity in practice; the staff responded that based on their outreach activities they identified for example one jurisdiction that applies view 2.

The chairman asked whether the members have any objection and there were no objections raised.

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