The recognition of a deferred tax asset resulting from tax losses is one of the most critical points in the application of IAS 12: Income Taxes. This process requires a rigorous assessment of the probability of generating future taxable profits.
Recognition Criteria
According to international standards, a deferred tax asset must be recognized for the carryforward of unused tax losses to the extent that:
- It is probable that future taxable profit will be available against which the unused tax losses can be utilized.
- There is convincing evidence that sufficient taxable profit will be available, especially if the entity has a history of recent losses.
How to Explain It in the Financial Statements?
When an entity recognizes these assets, it must provide a clear explanation in the notes to the financial statements. This includes:
- The nature of the evidence supporting the recognition of the asset.
- The projections of taxable income that justify the recovery of the loss within the legally established timeframe.
- Any tax planning opportunities that the entity intends to implement to realize the asset.
Importance of Professional Judgment
The decision to recognize or not recognize a deferred tax asset is not merely a mathematical calculation; it involves a high degree of professional judgment. An overvaluation could lead to presenting a distorted financial position, while non-recognition could hide future tax benefits for the company.
