Corporate Financial Reporting · Income Taxes (Ind AS 12)

Deferred Tax Assets and Unused Tax Losses under Ind AS 12

Updated 11 October 2026 · Fact-checked

A deferred tax asset is income tax recoverable in future periods on deductible temporary differences, unused tax losses and unused tax credits. Ind AS 12 lets you recognise it only to the extent that future taxable profit is probable. To solve a problem, compute the potential asset, test the evidence of profit, recognise the supportable part, and reassess each year.

Understand Deferred Tax Assets and Unused Tax Losses

Start with the idea behind it. Sometimes you charge an expense in the books before the tax law allows the deduction. Or you carry forward a tax loss. In both cases you will pay less tax in future. That future saving is a deferred tax asset (DTA).

Paragraph 5 of Ind AS 12 defines deferred tax assets as income taxes recoverable in future periods in respect of three things: deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused tax credits. A deductible temporary difference arises from a gap between an asset's or liability's carrying amount and its tax base that will produce amounts deductible in determining future taxable profit.

The key test is probability. Paragraph 34 says a DTA is recognised for unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which they can be used. The same criteria apply to deductible temporary differences. The saving is real only if you earn profit to absorb it.

Paragraph 35 adds a caution. Unused tax losses are strong evidence that future taxable profit may not be available. If the entity has a history of recent losses, it recognises a DTA on them only to the extent of sufficient taxable temporary differences, or where there is convincing other evidence of sufficient taxable profit. It must then disclose the amount of the DTA and the nature of the evidence (paragraph 82).

Note the wording. Ind AS 12 uses probable. It does not use the phrases "virtual certainty" or "reasonable certainty", which belong to the older Indian AS 22. Use "probable" in your answers, and say that convincing evidence is needed where there is a loss history.

Key rules to remember

Deferred tax asset definition: DTA = amounts of income taxes recoverable in future periods on (a) deductible temporary differences, (b) unused tax losses, (c) unused tax credits; Paragraph 5. All three heads qualify as DTA.
DTA computation: DTA = Deductible temporary difference (or unused loss) × Tax rate expected to apply when the asset is realised; Use the rate enacted or substantively enacted at the end of the reporting period. The rate rule is stated here without a paragraph number.
Recognition test (losses and credits): Recognise DTA to the extent it is probable that future taxable profit will be available to use the losses or credits; Paragraph 34. Same criteria as deductible temporary differences.
History of recent losses: Recognise only to the extent of (i) sufficient taxable temporary differences, or (ii) convincing other evidence of sufficient taxable profit; Paragraph 35. Disclose the amount and the nature of the evidence (paragraph 82).
Criteria for assessing probability: (a) taxable temporary differences, same authority and same taxable entity, reversing before expiry; (b) probable taxable profits before expiry; (c) losses from identifiable causes unlikely to recur; (d) tax planning opportunities; Paragraph 36. If profit is not probable, the DTA is not recognised.
Reassessment: At each reporting date, recognise a previously unrecognised DTA to the extent it has become probable that future taxable profit will allow recovery; Paragraph 37. An improvement in trading conditions is an example.
Tax planning limit: Tax planning only advances profit from a later period to an earlier one; use of losses still needs future profit from sources other than future originating temporary differences; Paragraph 30.

How to solve Deferred Tax Assets and Unused Tax Losses questions

Use this order for any question on deferred tax assets and unused losses.

1List each item: deductible temporary differences, unused tax losses and unused tax credits. Note any expiry period.
2Find the tax rate enacted or substantively enacted at the reporting date. Multiply each item by it to get the potential DTA.
3Check for a history of recent losses. If there is one, apply paragraph 35: you need taxable temporary differences or convincing other evidence.
4Apply the paragraph 36 criteria: taxable temporary differences of the same authority and entity, probable profits before expiry, one-off causes of loss, and tax planning.
5Recognise the DTA only to the extent probable. Show the unrecognised part separately with the reason.
6Pass the journal entry: Dr Deferred Tax Asset, Cr Deferred Tax Income (Statement of Profit and Loss), unless the item relates to something recognised outside profit or loss.
7In later years, reassess unrecognised DTA (paragraph 37) and review recognised DTA. Write down any part that is no longer probable.
8State the disclosure: the DTA amount and the nature of evidence where there is a loss history.

Quickest way: Three-line DTA check

When to use it: Use this for MCQs and for short parts of case-based questions where time is tight.

Ask: is there a loss history? If yes, you need convincing evidence or taxable temporary differences.
Compute: item × tax rate. Cap it at the amount supported by taxable temporary differences plus probable profit.
Reassess: a later improvement in profit prospects allows recognition of the unrecognised part (paragraph 37).

Common mistakes in Deferred Tax Assets and Unused Tax Losses

Recognising DTA on all unused losses because they will be carried forward anyway.
Students treat carryforward as automatic recovery.
Fix: Recovery needs future taxable profit. Apply the probability test in paragraphs 34 to 36 before recognising anything.
Using the phrases "virtual certainty" or "reasonable certainty" in an Ind AS 12 answer.
These phrases come from the older AS 22 and are still common in coaching notes.
Fix: Write that recognition requires it to be probable that future taxable profit will be available. Where there is a loss history, convincing other evidence is needed.
Ignoring taxable temporary differences when supporting a DTA.
Students look only at forecast profit.
Fix: Existing taxable temporary differences of the same authority and entity that reverse before expiry support a DTA. Always check them first.
Never revisiting an unrecognised DTA.
Students treat non-recognition as final.
Fix: Paragraph 37 requires reassessment at the end of each reporting period. Recognise it once it becomes probable.
Counting profit from reversal of deductible differences as support for tax losses.
Students count all future profit as one pool.
Fix: Where tax planning advances profit, use of losses still needs future profit from sources other than future originating temporary differences (paragraph 30).
Applying the wrong tax rate to the DTA.
Students use the current-year rate or an assumed future rate.
Fix: Use the rate enacted or substantively enacted at the reporting date, unless the question gives a rate.

Worked examples

Example 1

Sundaram Textiles Ltd has a deductible temporary difference of ₹40,00,000 on provision for warranties. It also has unused tax losses of ₹1,00,00,000. The tax rate is 25%. The company has made losses for the last three years because of a plant fire, which is unlikely to recur. It has taxable temporary differences of ₹30,00,000 (same authority, reversing before the losses expire). The board has a signed order book showing taxable profit of ₹50,00,000 in the coming years, which management considers convincing evidence. Compute the DTA to be recognised.

Show the solution

Potential DTA on deductible difference = ₹40,00,000 × 25% = ₹10,00,000.
Potential DTA on unused losses = ₹1,00,00,000 × 25% = ₹25,00,000.
There is a history of recent losses, so paragraph 35 applies. Support must come from taxable temporary differences or convincing other evidence.
Taxable temporary differences give ₹30,00,000 of taxable amounts. The signed order book gives a further ₹50,00,000 of probable taxable profit. Total support = ₹80,00,000.
Total deductions to be absorbed: ₹40,00,000 (deductible difference) + ₹1,00,00,000 (losses) = ₹1,40,00,000. Only ₹80,00,000 is supported.
Recognisable DTA = ₹80,00,000 × 25% = ₹20,00,000.
Unrecognised DTA = ₹35,00,000 − ₹20,00,000 = ₹15,00,000, with the reason disclosed.
Disclose the ₹20,00,000 DTA and the nature of the evidence (paragraph 82). The fire is an identifiable cause unlikely to recur (paragraph 36(c)).

Answer: Recognise a DTA of ₹20,00,000. The remaining ₹15,00,000 is unrecognised, and the evidence supporting recognition must be disclosed.

Example 2

Continuing the previous case, in the next year Sundaram Textiles earns taxable profit and receives new export orders. Management now judges it probable that taxable profit of ₹1,40,00,000 in total will be available against all the deductions. The tax rate is still 25%. What should the company do about the unrecognised DTA?

Show the solution

Paragraph 37 requires reassessment of unrecognised DTA at the end of each reporting period.
An improvement in trading conditions is the example the paragraph gives of a reason to recognise a previously unrecognised asset.
Total supported amount is now ₹1,40,00,000, which equals total deductions to be absorbed (assuming none was used in the year).
DTA now recognisable = ₹1,40,00,000 × 25% = ₹35,00,000.
Additional DTA to recognise = ₹35,00,000 − ₹20,00,000 = ₹15,00,000.
Entry: Dr Deferred Tax Asset ₹15,00,000; Cr Deferred Tax Income (Statement of Profit and Loss) ₹15,00,000.

Answer: Recognise the additional DTA of ₹15,00,000 as deferred tax income, because it has become probable that future taxable profit will allow recovery.

Exam tips

In theory answers, quote the test as "probable that future taxable profit will be available" and mention the stronger evidence needed after a history of losses.
In numerical questions, show the potential DTA, the supported amount and the unrecognised amount as three separate lines. Marks follow the working.
In MCQs on virtual or reasonable certainty, the Ind AS 12 answer is probable. Watch for options that mix up the standards.
Always state the disclosure when losses exist: the DTA amount and the nature of the evidence.
If a question mentions MAT credit or other tax credits, treat them as unused tax credits under paragraphs 34 to 36 and apply the same probability test. Check the data given in the question for any further treatment.

Practice questions from Income Taxes (Ind AS 12)

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.

Deferred Tax Assets and Unused Tax Losses: frequently asked questions

What is the recognition criterion for a deferred tax asset under Ind AS 12?

Recognise it to the extent that it is probable that future taxable profit will be available against which the deductible temporary difference, unused tax loss or unused tax credit can be used. Paragraphs 24 and 34 set this out for the two groups. The same criteria apply to both.

Is it virtual certainty or reasonable certainty in Ind AS 12?

Neither. Ind AS 12 uses the probability test. Where an entity has a history of recent losses, paragraph 35 requires convincing other evidence, or sufficient taxable temporary differences, before a DTA is recognised on unused losses. The older AS 22 used the certainty wording.

Do unused tax credits get the same treatment as unused tax losses?

Yes. Paragraphs 34 to 36 deal with unused tax losses and unused tax credits together. The probability of future taxable profit before expiry decides recognition.

When must an unrecognised deferred tax asset be reassessed?

At the end of each reporting period, as paragraph 37 requires. If it has become probable that future taxable profit will allow recovery, recognise the asset to that extent. An improvement in trading conditions is one example.

Can tax planning support a deferred tax asset?

Yes, tax planning opportunities are one of the criteria in paragraph 36. They only advance taxable profit from a later period to an earlier one. Use of a loss still depends on future taxable profit from sources other than future originating temporary differences (paragraph 30).