Financial Reporting · Taxation

Deferred Tax on Non-Current Assets and Provisions in ACCA FR

Updated 11 October 2026 · Fact-checked

Deferred tax is tax on temporary differences between an item's carrying amount and its tax base. Compute the difference, multiply by the tax rate, compare with the opening balance, and post the movement to profit or loss, or to other comprehensive income for revaluations. Recognise deferred tax assets only if future taxable profit is probable.

Understand Deferred Tax on Non-Current Assets and Provisions

Accounting profit and taxable profit differ. Some differences are permanent, such as fines that are never deductible. Others are temporary differences: the item is taxed or relieved in a different period from when it is recognised in the accounts. IAS 12 requires deferred tax on temporary differences.

Each asset and liability has a carrying amount (its value in the statement of financial position) and a tax base (the amount that will be deductible or taxable for tax purposes in future). The temporary difference is the gap between the two. You apply the tax rate to that gap.

A taxable temporary difference gives a deferred tax liability: you will pay more tax in future. A deductible temporary difference gives a deferred tax asset: you will pay less tax in future. For a non-current asset, the tax base is its cost less the tax depreciation (capital allowances) claimed so far. If tax relief has been faster than depreciation, the carrying amount is higher than the tax base, so you have a liability.

For a provision, the tax base is the carrying amount less any amount that will be deductible in future. If tax relief is given only when the cash is paid, the tax base is nil. The carrying amount exceeds the tax base on the liability side, so there is a deductible difference and a deferred tax asset. Unrealised profit in inventory in a group also creates a deductible difference, because the group carrying amount is lower than the tax base.

Where the underlying item is charged to other comprehensive income, so is the deferred tax. A revaluation gain raises the carrying amount but not the tax base, so the deferred tax goes to other comprehensive income and the revaluation surplus is shown net of it. Use the tax rate expected to apply when the difference reverses, based on rates enacted or substantively enacted at the reporting date. Do not discount deferred tax.

Key rules to remember

Temporary difference: Temporary difference = Carrying amount − Tax base; For assets, a positive result (carrying amount above tax base) is a taxable difference (liability). A negative result (carrying amount below tax base) is a deductible difference (asset). For liabilities, a positive result is a deductible difference (asset) and a negative result is a taxable difference (liability).
Deferred tax balance: Deferred tax = Temporary difference × tax rate; Use the rate enacted or substantively enacted at the reporting date. No discounting.
Tax base of a non-current asset: Tax base = Cost − capital allowances claimed to date; Equals the amount still available for tax relief in future.
Tax base of a provision: Tax base = Carrying amount − amount deductible in future; If relief comes only on payment, the tax base is nil.
Movement for the year: Charge or credit = Closing deferred tax − Opening deferred tax; Split between profit or loss and OCI according to where the related item was recognised. If the tax rate changes, restate the opening balance at the new rate first and split that adjustment in the same way.
Deferred tax asset recognition: Recognise only if it is probable that future taxable profit will be available to use the deductible difference; Review the asset at each reporting date.

How to solve Deferred Tax on Non-Current Assets and Provisions questions

Use the same table approach for every question. It stops you mixing up assets, liabilities and where the entry goes.

1List each item involved: non-current assets, revalued assets, provisions, unrealised profits and losses.
2For each item, write the carrying amount at the reporting date.
3Work out the tax base. For assets, cost less capital allowances. For provisions, carrying amount less future deductible amount.
4Subtract to find the temporary difference and decide if it is taxable (liability) or deductible (asset).
5Multiply the total net difference by the tax rate to get the closing deferred tax balance.
6Compare with the opening balance to get the movement.
7Split the movement: revaluation-related tax to OCI, everything else to profit or loss. Adjust for any rate change.
8For a net asset, check that future taxable profit is probable before recognising it. Then show the balance in the statement of financial position and the charge in the tax expense.

Quickest way: Net difference shortcut

When to use it: Only when all items reverse at the same tax rate (for example, one jurisdiction and one rate) and the question asks only for the closing balance and the charge. If items reverse at different rates, calculate each item at its own rate.

Check that every item reverses at the same tax rate. If not, do not use this shortcut.
Add up all taxable differences and deduct all deductible differences to get one net figure.
Multiply by the tax rate once.
Subtract the opening balance to get the movement.
Take out any part that relates to revaluation first, and send it to OCI. The rest goes to profit or loss.
Write the working as a small table so you earn method marks even if a figure is wrong.

Common mistakes in Deferred Tax on Non-Current Assets and Provisions

Applying the tax rate to depreciation or to the capital allowance rather than to the difference between carrying amount and tax base.
Students see the allowance and depreciation figures and forget the cumulative position matters.
Fix: Always compute carrying amount and tax base at the year end, then subtract.
Putting all deferred tax through profit or loss.
Students treat deferred tax as just another tax expense.
Fix: Follow the item. Tax on a revaluation gain goes to OCI and reduces the revaluation surplus; tax on other items goes to profit or loss.
Creating a deferred tax liability on a provision.
Students remember that assets give liabilities and apply the same direction to everything.
Fix: A provision is a liability with a nil tax base when relief comes on payment. That gives a deductible difference and so a deferred tax asset.
Recognising a deferred tax asset without checking recoverability.
The calculation looks the same as for a liability, so the test gets skipped.
Fix: State whether future taxable profit is probable. If not, do not recognise the asset, or recognise only part of it.
Using the opening balance as the charge, or forgetting to deduct it.
Students stop once they have the closing balance.
Fix: The statement of profit or loss shows the movement. Always subtract the opening balance.
Discounting the deferred tax balance or using the wrong rate.
Students carry over present value ideas from other topics or use the current rate when a new rate has been enacted.
Fix: Never discount. Use the enacted or substantively enacted rate expected to apply when the difference reverses.

Worked examples

Example 1

Delta bought equipment on 1 January Year 1 for ₹10,00,000. It depreciates it straight line over 5 years with no residual value. For tax, capital allowances of ₹4,00,000 were claimed in Year 1 and ₹3,00,000 in Year 2. The tax rate is 25%. Calculate the deferred tax balance at the end of Year 2 and the charge in Year 2.

Show the solution

Year 1 closing carrying amount = ₹10,00,000 − ₹2,00,000 = ₹8,00,000. Year 1 tax base = ₹10,00,000 − ₹4,00,000 = ₹6,00,000.
Year 1 temporary difference = ₹8,00,000 − ₹6,00,000 = ₹2,00,000. Deferred tax liability = ₹2,00,000 × 25% = ₹50,000.
Year 2 closing carrying amount = ₹10,00,000 − ₹4,00,000 = ₹6,00,000.
Year 2 tax base = ₹10,00,000 − ₹7,00,000 = ₹3,00,000.
Year 2 temporary difference = ₹6,00,000 − ₹3,00,000 = ₹3,00,000. Closing liability = ₹3,00,000 × 25% = ₹75,000.
Year 2 charge to profit or loss = ₹75,000 − ₹50,000 = ₹25,000.

Answer: Deferred tax liability at the end of Year 2 is ₹75,000. The Year 2 charge to profit or loss is ₹25,000.

Example 2

Sigma has land carried at cost of ₹20,00,000. At the year end it revalues the land to ₹26,00,000. Tax would be payable on any gain when the land is sold, at 20%. Sigma also has a warranty provision of ₹4,00,000, deductible for tax only when paid. Opening deferred tax was nil. Assume the provision is new this year and future taxable profits are probable. Calculate the closing deferred tax and show where the entries go.

Show the solution

Revaluation: carrying amount ₹26,00,000, tax base ₹20,00,000 (cost). Taxable difference = ₹6,00,000.
Deferred tax liability on revaluation = ₹6,00,000 × 20% = ₹1,20,000. Debit OCI (revaluation surplus) and credit deferred tax.
Provision: carrying amount ₹4,00,000, tax base nil. Deductible difference = ₹4,00,000.
Deferred tax asset = ₹4,00,000 × 20% = ₹80,000. Debit deferred tax, credit profit or loss, since the provision expense went through profit or loss.
Net closing deferred tax = ₹1,20,000 liability − ₹80,000 asset = ₹40,000 net liability. As opening deferred tax was nil, this is also the movement for the year.
Revaluation surplus is shown in OCI at ₹6,00,000 − ₹1,20,000 = ₹4,80,000.

Answer: Net deferred tax liability is ₹40,000. OCI shows a revaluation gain of ₹4,80,000 net of tax of ₹1,20,000. Profit or loss shows a deferred tax credit of ₹80,000.

Example 3

Parent sells inventory that cost it ₹90,000 to its subsidiary for ₹1,20,000. The subsidiary still holds all of it at the year end. The tax rate is 20%, opening deferred tax on this item was nil, and future taxable profit is probable. Calculate the deferred tax in the group accounts and show where the entry goes.

Show the solution

Unrealised profit = ₹1,20,000 − ₹90,000 = ₹30,000. The consolidation removes it, so the group carrying amount of the inventory is ₹90,000 (cost to the group).
Tax base = ₹1,20,000, the amount the subsidiary paid and will be able to deduct for tax when it sells the inventory.
Temporary difference = carrying amount − tax base = ₹90,000 − ₹1,20,000 = −₹30,000. For an asset, a negative result is a deductible difference.
Deferred tax asset = ₹30,000 × 20% = ₹6,000.
Debit deferred tax asset ₹6,000 and credit the group tax expense in profit or loss ₹6,000. Opening balance was nil, so the movement equals the closing balance.

Answer: The group recognises a deferred tax asset of ₹6,000, with a credit of ₹6,000 to profit or loss.

Exam tips

Draw a three-column table of carrying amount, tax base and difference for every item. It earns method marks.
In objective test questions, check which way the difference runs before choosing between asset and liability. A single wrong direction loses the whole mark.
For revaluations, always say the tax goes to OCI. Written questions often reward that explanation.
If the question mentions losses or deductible differences, add a sentence on whether future taxable profit is probable.
When the tax rate changes, restate the opening balance at the new rate and take the effect through profit or loss unless it relates to an item in OCI.

Practice questions from Taxation

Deferred Tax on Non-Current Assets and Provisions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deferred Tax on Non-Current Assets and Provisions: frequently asked questions

Why does accelerated capital allowance create a deferred tax liability?

Tax relief is given faster than depreciation, so the tax base falls below the carrying amount. The difference is a taxable temporary difference. You will pay more tax in later years when allowances run out, so you provide for it now.

Where does deferred tax on a revaluation go?

It goes to other comprehensive income, not profit or loss. The revaluation gain is recognised in OCI, so the related tax follows it. The revaluation surplus in equity is shown net of the deferred tax.

Is a provision a deferred tax asset or liability?

Normally it gives a deferred tax asset. If tax relief is given only when the cost is paid, the tax base of the provision is nil. The carrying amount of the liability exceeds that, so the difference is deductible.

When can you recognise a deferred tax asset under IAS 12?

Only to the extent that it is probable that future taxable profit will be available against which the deductible difference can be used. You review this at each reporting date and reduce the asset if the profit is no longer probable.