CFA Level I · CFA Level I Exam · Analysis of Income Taxes
An analyst reviews a company with a deferred tax asset arising from unused tax losses. Management's forecasts show continued losses for several years. Under IFRS, the most appropriate treatment is to:
Under IFRS, a deferred tax asset is recognized only to the extent future taxable profit is probable. With continued forecast losses, the company should reduce or not recognize the asset, since its realization is doubtful.
- Arecognize the asset in full because the losses are carried forward legally
- Breduce or not recognize the asset to the extent future taxable profit is not probableCorrect
- Cconvert the asset to a deferred tax liability until profits return
Explanation
IFRS permits recognition of a deferred tax asset only to the extent it is probable that future taxable profit will be available to use it. Continued forecast losses make this unlikely, so the asset is reduced or not recognized. Full recognition ignores the probability test, and reclassification to a liability has no basis.
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