Recognising deferred tax assets and tax losses

Recognition of deferred tax assets is one of the most judgemental areas in financial reporting, and regulators challenge it often, especially for companies with tax losses. This guide sets out the test step by step, explains what counts as convincing evidence, and works through a tax loss example.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Under IAS 12, deferred tax assets are recognised for deductible temporary differences and unused tax losses only to the extent that it is probable that taxable profit will be available against which they can be used. That profit can come from taxable temporary differences reversing in the right periods, from future taxable profits, or from tax planning opportunities. Where a company has a history of recent losses, it needs convincing other evidence before recognising a deferred tax asset for unused tax losses.

At a glance

Recognise
To the extent recovery is probable
Sources of profit
Reversing differences, future profits, tax planning
Recent losses
Need convincing other evidence
Unused tax losses
Same test, plus expiry dates
Reassessed
At each reporting date
Unrecognised amounts
Disclosed
Recognising deferred tax assets and tax lossesRecognise: To the extent recovery is probable; Sources of profit: Reversing differences, future profits, tax planning; Recent losses: Need convincing other evidence; Unused tax losses: Same test, plus expiry dates; Reassessed: At each reporting date; Unrecognised amounts: Disclosed.KEY FACTS AT A GLANCERecognising deferred tax assets and tax lossesRecogniseTo the extent recovery isprobableSources of profitReversing differences,future profits, taxplanningRecent lossesNeed convincing otherevidenceUnused tax lossesSame test, plus expirydatesReassessedAt each reporting dateUnrecognised amountsDisclosedChecked against official sourcesTax BakersRecognising deferred tax assets and tax lossesRecognise: To the extent recovery is probable; Sources of profit: Reversing differences, future profits, tax planning; Recent losses: Need convincing other evidence; Unused tax losses: Same test, plus expiry dates; Reassessed: At each reporting date; Unrecognised amounts: Disclosed.KEY FACTS AT A GLANCERecognising deferred tax assetsand tax lossesRecogniseTo the extent recovery is probableSources of profitReversing differences, future profits, taxplanningRecent lossesNeed convincing other evidenceUnused tax lossesSame test, plus expiry datesReassessedAt each reporting dateUnrecognised amountsDisclosedChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

How is the recognition of deferred tax assets tested?

Can the deferred tax asset be recognised?Can the deferred tax asset be recognised?Do taxable differences reversein time to absorb it?YesRecognise upto that amountNot fullyIs future taxable profit probable,given any history of losses?YesRecognise to theextent probableNoDo not recognise: disclose the amount
Each source of taxable profit supports recognition up to its own amount.
  1. Taxable temporary differences. Deferred tax liabilities with the same tax authority and taxable entity, reversing in the same periods as the asset or in periods into which losses can be carried, support recognition first.
  2. Future taxable profit. Beyond that, the company needs probable future taxable profit, excluding new deductible differences expected to arise, in the right periods and the right entity.
  3. Tax planning opportunities. Actions the company would take to create taxable profit in time, such as selling an appreciated asset, can count.

What about unused tax losses?

The same test applies, but IAS 12 adds that the existence of unused tax losses is strong evidence that future taxable profit may not be available. A company with a history of recent losses recognises a deferred tax asset only to the extent it has sufficient taxable temporary differences or convincing other evidence of future taxable profit. It should also consider whether the losses came from identifiable causes unlikely to recur, and when the losses expire.

A worked example: tax losses carried forward

A company has unused tax losses of 400,000 that do not expire and a tax rate of 25%, so a potential deferred tax asset of 100,000. It has a deferred tax liability of 20,000 on accelerated depreciation that will reverse over the next three years. After two years of losses caused by a closed division, its approved forecast shows taxable profits of 120,000 over the next three years, which the board considers achievable.

CU
Supported by the reversing deferred tax liability20,000
Supported by forecast taxable profit: 120,000 x 25%30,000
Deferred tax asset recognised50,000
Not recognised, disclosed: losses of 200,00050,000

Many companies limit the forecast period they rely on, often to three to five years, because forecasts become less reliable further out, though IAS 12 sets no limit.

What counts as convincing evidence?

  • Losses caused by identifiable, non-recurring events, such as a closed division or a one-off impairment.
  • Signed contracts or a firm order book that will generate taxable profit.
  • A track record of meeting forecasts.
  • Restructuring already completed that has removed the cause of losses.

Optimistic budgets that the company has missed before are not convincing. Auditors also check that the forecasts used here are consistent with those used in impairment testing, such as the cash flows behind value in use.

When is the asset reassessed?

At each reporting date. Previously unrecognised deferred tax assets are recognised once recovery becomes probable, and recognised assets are reduced when it no longer is. The movement goes to profit or loss unless it relates to an item in OCI or equity.

How does US GAAP differ?

US GAAP recognises all deferred tax assets and then deducts a valuation allowance if it is more likely than not that some will not be realised. The answer is often similar; the presentation differs. See IAS 12 vs ASC 740, and for the mechanics, deferred tax with examples.

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Questions people ask

When can a deferred tax asset be recognised under IAS 12?

To the extent it is probable that taxable profit will be available against which the deductible temporary differences or tax losses can be used.

Can deferred tax assets be recognised on tax losses?

Yes, but a history of recent losses requires sufficient taxable temporary differences or convincing other evidence of future taxable profit.

Is there a time limit on forecasts used for deferred tax assets?

IAS 12 sets none, but forecasts further out are less reliable and many companies limit the period they rely on.

Are unrecognised deferred tax assets disclosed?

Yes. The amount of deductible temporary differences and unused tax losses with no deferred tax asset recognised must be disclosed.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 12 Income Taxes

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 12Deferred tax liabilities and assets with examplesIAS 12Temporary differences and tax base under IAS 12IFRS vs US GAAPIAS 12 vs ASC 740: income tax differences

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This guide is general information. It is not tax or legal advice for your situation.