Strategic Business Reporting (International) · Income taxes

Deferred Tax Assets and Unused Tax Losses under IAS 12

Updated 11 October 2026 · Fact-checked

A deferred tax asset is tax that will be recoverable in future periods, arising from deductible temporary differences, unused tax losses and unused tax credits. IAS 12 lets you recognise it only to the extent that it is probable that future taxable profit will be available to use it. Reassess this at each reporting date.

Understand Deferred Tax Assets and Unused Tax Losses

A deferred tax asset (DTA) is the tax you expect to save in future periods. It arises from three sources: deductible temporary differences, unused tax losses and unused tax credits. A deductible temporary difference exists when the carrying amount of an asset is below its tax base, or the carrying amount of a liability is above its tax base. The future tax deduction will be larger than the accounting expense.

The key test is recoverability. A DTA is only worth something if the entity will have taxable profit against which to use it. So IAS 12 allows recognition only to the extent that it is probable that sufficient taxable profit will be available. IAS 12 does not define probable. In practice it is generally interpreted as more likely than not.

Evidence of future taxable profit comes from several places. First, taxable temporary differences relating to the same tax authority and the same taxable entity that will reverse in the right period (or in a period into which the loss can be carried). Second, probable future taxable profits, ignoring the reversal of deductible differences themselves. Third, tax planning opportunities that would create taxable profit in the period in which the DTA is used.

Unused tax losses need extra care. A history of recent losses is strong evidence against recovery. If the entity has no taxable temporary differences that will reverse, a DTA for losses is recognised only to the extent there is convincing other evidence of sufficient future taxable profit. IAS 12 also considers whether the unused losses result from identifiable causes that are unlikely to recur. Losses from a one-off cause, such as an unusual event that is unlikely to recur, are easier to support. You must disclose the amount of the DTA and the nature of the evidence when the entity has suffered a loss in the current or preceding period in the relevant tax jurisdiction and recovery of the DTA depends on future taxable profits exceeding those arising from the reversal of existing taxable temporary differences.

A DTA is not set once and forgotten. At each reporting date you reassess unrecognised DTAs and the carrying amount of recognised DTAs. Write the asset down if profits are no longer probable. Recognise a previously unrecognised asset if profits become probable. Measure the DTA at the tax rates enacted or substantively enacted at the reporting date, and never discount it.

Key rules to remember

Deferred tax asset: DTA = deductible temporary difference × tax rate; Deductible difference = tax base − carrying amount for an asset, or carrying amount − tax base for a liability.
DTA on unused tax losses: DTA = unused tax loss × tax rate expected to apply when the loss is used; Recognise only to the extent future taxable profit is probable.
Recognition rule: Recognise DTA to the extent it is probable that taxable profit will be available against which it can be used; IAS 12 does not define probable; in practice it is generally read as more likely than not. Same tax authority and same taxable entity are required.
Recoverable amount of DTA: Recognised DTA = lower of full DTA and tax rate × supportable future taxable profit; Reassess at each reporting date and adjust.
Measurement: Use tax rates enacted or substantively enacted at the reporting date; do not discount; Rate changes go to profit or loss unless the item was originally recognised in OCI or equity.
Offset: Offset DTA and DTL only if there is a legally enforceable right to offset current tax and both relate to the same tax authority; The same taxable entity, or entities intending to settle net, is also needed.

How to solve Deferred Tax Assets and Unused Tax Losses questions

Use this method for any question on whether and how much DTA to recognise.

1Identify the source of each potential asset: deductible temporary difference, unused tax loss or unused tax credit.
2Calculate the gross DTA: amount × the enacted or substantively enacted rate expected when it will be used.
3Look for taxable temporary differences (deferred tax liabilities) with the same authority and entity that reverse in a suitable period. These support the DTA.
4Assess other evidence of future taxable profit: forecasts, order books, past profit history, whether the losses result from identifiable causes unlikely to recur, any expiry period for losses, and tax planning opportunities that would create taxable profit in the period the DTA is used.
5Decide the amount to recognise: the full DTA if probable, a partial amount to the extent supported, or nil. Do not rely on unrealistic forecasts or tax planning you would not carry out.
6Record the entry: Dr Deferred tax asset, Cr Tax income in profit or loss (or OCI or equity if the item arose there).
7Consider offset against deferred tax liabilities and the disclosures required, including the evidence supporting a DTA where the entity has recently made losses.
8State the annual reassessment: unrecognised and recognised DTAs are reviewed at each reporting date.

Quickest way: Three-question recoverability check

When to use it: Use this when time is short and the question asks if a DTA can be recognised, not the full computation.

Ask: what is the gross DTA (amount × rate)?
Ask: is there enough taxable profit to absorb it? Check reversing taxable differences first, then credible forecasts.
Ask: what does the loss history say? Recent losses with no convincing evidence mean limited or nil recognition.
Write the answer: recognise up to the supported amount, explain the evidence, and say you will reassess at each year end.

Common mistakes in Deferred Tax Assets and Unused Tax Losses

Recognising the full DTA on tax losses because the losses are legally available to carry forward.
Students treat the legal right to carry forward as proof of recoverability.
Fix: Legal right is not enough. You need probable future taxable profit. Always test the evidence.
Ignoring the loss history of the entity.
Students focus on management's optimistic forecast in the scenario.
Fix: Recent losses are strong negative evidence. Say that convincing other evidence is needed and discuss the cause of the losses.
Discounting the deferred tax asset.
Students link it to present value ideas used in other standards.
Fix: IAS 12 prohibits discounting deferred tax. Use the undiscounted amount at the enacted rate.
Using the current tax rate when a different rate has been substantively enacted for the period of use.
Students overlook rate change details in the scenario.
Fix: Use the rate enacted or substantively enacted at the reporting date that applies when the asset is expected to be realised.
Reassessing only recognised DTAs and forgetting unrecognised ones.
Students think no entry means no further work.
Fix: Review both at each reporting date. Recognise an asset previously unrecognised once profits become probable.
Offsetting DTAs and DTLs of different tax authorities or entities.
Students net everything in the group.
Fix: Offset only with a legally enforceable right and the same tax authority. Otherwise present separately.

Worked examples

Example 1

Alpha has an unused tax loss of $400,000 at 31 December 20X1. The tax rate is 25%. Tax losses can be carried forward indefinitely. The loss arose from a one-off flood that closed the factory for six months. The factory has reopened and budgets show taxable profits of $300,000 a year for the next three years. Alpha has no deferred tax liabilities. Should Alpha recognise a deferred tax asset, and for how much?

Show the solution

Gross DTA = $400,000 × 25% = $100,000.
Assess evidence: the loss has an identifiable one-off cause that is unlikely to recur, and the factory has reopened. Budgeted taxable profits are $300,000 a year.
Profits over three years total $900,000, well above $400,000, so the loss can be fully used. The forecast must be reasonable and supportable, and this should be checked against the trading history before the flood.
Entry: Dr Deferred tax asset $100,000, Cr Deferred tax income in profit or loss $100,000.
Disclose the amount of the DTA and the nature of the evidence. The disclosure applies where the entity has suffered a loss in the current or preceding period in the jurisdiction and use of the DTA depends on future taxable profits exceeding those from reversing taxable differences. Both conditions are met: Alpha has made a loss in the current period, and it has no deferred tax liabilities, so recovery depends entirely on future profits.

Answer: Recognise a deferred tax asset of $100,000, provided the forecasts are supportable. Reassess at each reporting date.

Example 2

Beta has a deductible temporary difference of $200,000 and unused tax losses of $300,000 at the year end. The tax rate is 20%. Beta has a history of losses and no convincing evidence of future profits, but it has a taxable temporary difference of $120,000 that will reverse next year, with the same tax authority and the same taxable entity. The deductible temporary difference also reverses next year, so the reversing taxable difference is used against it first. The losses can be carried forward indefinitely. Calculate the deferred tax to recognise.

Show the solution

Gross DTA on deductible difference = $200,000 × 20% = $40,000.
Gross DTA on losses = $300,000 × 20% = $60,000. Total gross DTA = $100,000.
The taxable temporary difference of $120,000 gives a DTL of $120,000 × 20% = $24,000. This DTL is recognised in full as a liability.
When the taxable difference reverses, it provides $120,000 of taxable profit against which deductible differences or losses can be used. With a history of losses and no other convincing evidence, this is the only profit that supports a DTA. The facts say the deductible difference reverses in the same period, so the $120,000 is allocated to it first. The remaining $80,000 of the deductible difference and all the losses have no supporting profit.
DTA recognised = $120,000 × 20% = $24,000, all relating to the deductible difference.
DTA unrecognised = $100,000 − $24,000 = $76,000. This is $80,000 × 20% = $16,000 on the deductible difference plus $300,000 × 20% = $60,000 on the losses. Review it at each reporting date.
Net position: the DTL of $24,000 and the DTA of $24,000 net to nil if the offset conditions are met. If they are not met, present both gross.

Answer: Recognise a DTL of $24,000 in full and a DTA of $24,000, supported by the $120,000 of taxable profit from the reversing taxable temporary difference. The net deferred tax position is nil if offset criteria are met. The unrecognised DTA is $76,000, reviewed at each reporting date.

Exam tips

Write the word "probable" and then give the evidence. Markers want application to the scenario, not just the rule.
When the scenario mentions recent losses, always discuss it. It is the usual trap in SBR questions.
Show the gross DTA calculation first, then the amount you recognise. This secures method marks even if your judgement differs.
Mention annual reassessment in your conclusion for easy marks.
For professional skills marks, challenge optimistic forecasts and say what evidence you would ask management for.

Practice questions from Income taxes

Deferred Tax Assets and Unused Tax Losses in other exams

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

CMA FinalDeferred Tax Assets and Unused Tax Losses

Deferred Tax Assets and Unused Tax Losses: frequently asked questions

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

You recognise a DTA to the extent it is probable that taxable profit will be available against which the deductible difference, loss or credit can be used. IAS 12 does not define probable, but in practice it is generally read as more likely than not. Evidence includes reversing taxable differences, forecasts and credible tax planning.

Can I recognise a DTA on unused tax losses if the company has a history of losses?

Only to the extent there are sufficient taxable temporary differences, or there is convincing other evidence of future taxable profit. A recent loss history makes this harder. You must disclose the amount and the evidence if the entity has made a loss in the current or preceding period in that jurisdiction and recovery depends on future taxable profits exceeding those from reversing taxable differences.

Is a deferred tax asset discounted?

No. IAS 12 prohibits discounting deferred tax assets and liabilities. Measure them at the enacted or substantively enacted tax rate expected to apply when the asset is realised.

How often is the recoverability of a DTA reviewed?

At the end of each reporting period. You reduce the carrying amount if it is no longer probable that enough taxable profit will be available. You also recognise a previously unrecognised DTA when it becomes probable.