How to Calculate and Document Deferred Tax Under IAS 12

Tax base and temporary differences: the IAS 12.5 foundation

IAS 12 builds everything on one comparison. For every asset and liability on the balance sheet, you compare the carrying amount to the tax base. The difference is a temporary difference. Temporary differences are either taxable (they’ll result in future taxable amounts when the asset is recovered or the liability settled) or deductible (they’ll result in future deductible amounts).

IAS 12.5 defines the tax base of an asset as the amount deductible for tax purposes against taxable economic benefits that will flow to the entity when it recovers the carrying amount. If economic benefits won’t be taxable, the tax base equals the carrying amount. For a liability, the tax base is the carrying amount minus any amount deductible for tax in future periods.

That definition is dense. In practice, the question is simpler: if you sold this asset tomorrow for its carrying amount, what amount would be deductible against the proceeds for tax? The difference between the carrying amount and that deductible amount is your temporary difference.

Consider property, plant and equipment. An entity carries a machine at €400K (cost €600K less accumulated depreciation of €200K). For tax purposes, the entity has claimed €300K of capital allowances. The tax base is €600K minus €300K = €300K. Carrying amount (€400K) exceeds tax base (€300K). That’s a taxable temporary difference of €100K. When the entity recovers that €400K (through use or sale), €100K of it will be taxable with no corresponding tax deduction.

Now consider a provision. The entity holds a warranty provision of €150K. For tax purposes, warranty costs are deductible only when paid, not when provided. The tax base of the liability is €150K minus €150K (the amount that will be deductible when paid) = nil. Carrying amount of the liability (€150K) exceeds its tax base (nil) by €150K. That’s a deductible temporary difference. When the entity settles the warranty claims, it gets a tax deduction it hasn’t yet used.

IAS 12.15 requires recognition of a deferred tax liability for all taxable temporary differences. No probability threshold. No materiality filter at the recognition stage. If a taxable temporary difference exists, you recognise the deferred tax liability. The exceptions are narrow: goodwill where the initial recognition doesn’t affect accounting or taxable profit (IAS 12.15(a)), and assets or liabilities in a transaction that is not a business combination and affects neither accounting nor taxable profit at the time of the transaction (IAS 12.15(b)).

The second exception (IAS 12.15(b)) causes more trouble than it should. It was originally designed for situations like a non-deductible asset acquired outside a business combination. But the 2023 amendments to IAS 12 (Deferred Tax related to Assets and Liabilities arising from a Single Transaction) removed this exception for transactions that give rise to equal taxable and deductible temporary differences. The primary target: lease liabilities and right-of-use assets under IFRS 16. If your client adopted IFRS 16, they should be recognising deferred tax on the temporary differences from both the right-of-use asset and the lease liability separately, not netting them to nil.

When to recognise a deferred tax asset (and when you can’t)

IAS 12.24 sets the recognition threshold for deferred tax assets: probable future taxable profit. Judgment enters here, and audit files frequently fail at exactly this point.

“Probable” under IFRS means more likely than not (generally interpreted as greater than 50%). The entity must demonstrate that sufficient taxable profit will exist in the periods when the deductible temporary differences reverse or when tax loss carry-forwards can be used. IAS 12.28 lists the sources of future taxable profit an entity can rely on, and understanding these sources is the difference between a defensible file and a deficient one.

The four sources under IAS 12.28 are: future reversal of existing taxable temporary differences, future taxable profit exclusive of reversing temporary differences, tax planning opportunities, and taxable profit in prior carry-back periods (where the tax jurisdiction permits carry-back). The entity can only count a source if it’s within the period over which the deductible difference or loss can be used.

Here’s where non-Big 4 files go wrong most often. The client provides a five-year forecast showing taxable profit in every year. The auditor documents “management’s forecast supports recoverability.” That’s insufficient. IAS 12.29 requires assessment of each category from IAS 12.28 separately. If the deferred tax asset is based on future taxable profits (the second source), the auditor needs to evaluate the reliability of the forecast. How accurate have the client’s prior forecasts been? Is the entity in a loss-making trend that the forecast assumes will reverse? What assumptions drive the return to profitability, and are they within management’s control?

IAS 12.35 adds another requirement. At each reporting date, the entity reassesses unrecognised deferred tax assets. Changed circumstances might make it probable that future taxable profit will allow the asset to be recovered. Conversely, IAS 12.56 requires the entity to reduce the carrying amount of a recognised deferred tax asset when it’s no longer probable that sufficient taxable profit will be available. This creates a year-on-year obligation: the deferred tax asset balance is not “set and forget.” The file must show that recoverability was re-evaluated at this reporting date, not just at initial recognition.

For tax losses specifically, IAS 12.34 imposes an additional hurdle. The existence of unused tax losses is strong evidence that future taxable profit may not be available. To recognise a deferred tax asset for losses, the entity needs convincing evidence that sufficient taxable profit will exist. The standard doesn’t define “convincing,” but the bar is clearly higher than ordinary “probable.” If the entity has a history of losses, your file needs to explain what has changed to make future profits more likely than not. Vague references to “improved market conditions” won’t survive a quality review.

The IFRS 16 interaction

Since the 2023 amendments to IAS 12, entities recognising IFRS 16 leases must account for deferred tax on the right-of-use asset and lease liability as separate temporary differences. In the early years of a lease, the lease liability (carrying amount) typically exceeds the right-of-use asset (carrying amount), producing a net deductible temporary difference. This generates a deferred tax asset that needs recoverability assessment under IAS 12.24 if the two amounts don’t offset evenly over the lease term.

Measuring deferred tax: rates and the IAS 12.47 rule

IAS 12.47 requires measurement of deferred tax at the tax rates expected to apply in the period when the asset is realised or the liability is settled, based on rates enacted or substantively enacted at the reporting date. Two questions emerge from this paragraph, and both generate audit findings.

First: what rate do you use when rates are changing? If the current corporate tax rate is 25.8% (the Dutch rate for taxable profit above €200K in 2024) but the government has enacted a rate reduction to 24.5% effective 2026, the entity measures its deferred tax at the rate expected to apply when each temporary difference reverses. A machine with a remaining useful life of eight years will generate reversals over those eight years. The rate applicable to each year’s reversal applies to that year’s portion.

In practice, most non-Big 4 clients use a single blended rate for the entire deferred tax balance. IAS 12.47 doesn’t prohibit this if the rate is a reasonable weighted average. But if temporary differences reverse in periods with materially different rates, using a single rate produces a measurement error. Document the rates used, the reversal period assumptions, and why the rate (or rates) applied are appropriate for the expected reversal pattern.

Second: when is a rate “substantively enacted”? IAS 12.47 allows use of rates that are “substantively enacted” at the balance sheet date, not only those formally enacted. In the Netherlands, a tax rate is substantively enacted when the Belastingplan passes the Tweede Kamer (the lower house). The Eerste Kamer vote is generally considered a formality. In the UK, the Finance Bill’s passage through the House of Commons is the trigger. Get this wrong and you’re measuring deferred tax at a rate that IAS 12 doesn’t permit at the reporting date.

Offset rules under IAS 12.74

IAS 12.74 allows (and in some cases requires) offsetting deferred tax assets against deferred tax liabilities. The conditions: the entity has a legally enforceable right to set off current tax assets against current tax liabilities, and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on the same taxable entity (or different entities that intend to settle on a net basis).

In a Dutch context where a fiscal unity (fiscale eenheid) exists, the entities within the unity file a single tax return. Deferred tax assets of one entity within the unity can be offset against deferred tax liabilities of another, provided the fiscal unity arrangement is expected to continue. If the entity is considering restructuring the fiscal unity, document whether the offset is still appropriate. The Financial Ratio Calculator can help assess whether subsidiary-level profitability supports the continued fiscal unity assumption.

Presentation and disclosure requirements that auditors miss

IAS 12.79 through IAS 12.88 set out the disclosure requirements. Two of them generate inspection findings with particular frequency.

IAS 12.81(c) requires a numerical reconciliation between the tax expense (or income) and the product of accounting profit multiplied by the applicable tax rate. This is the effective tax rate reconciliation. Every item in the reconciliation must be individually identified. “Other differences” as a reconciling item is a deficiency if it exceeds a trivial amount. If the entity has permanent differences (non-deductible expenses, exempt income, rate changes affecting deferred tax), each one belongs as a separate line. An effective tax rate reconciliation with four named items and a €200K “other” line item doesn’t satisfy IAS 12.81(c).

IAS 12.81(e) requires disclosure of the amount and expiry date of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised. This gets missed on files where the client has old tax losses that have been written off. The losses may be unrecognised, but they still require disclosure. If the jurisdiction has a carry-forward time limit (the Netherlands has an indefinite carry-forward but some EU jurisdictions do not), the expiry date belongs in the note.

Classification on the balance sheet

IAS 12.74 governs offsetting, but the presentation point that catches auditors is IAS 1’s requirement to present deferred tax as non-current. All deferred tax assets and liabilities are non-current, regardless of when the underlying temporary difference is expected to reverse. An entity that classifies part of its deferred tax asset as current (because the related temporary difference reverses within 12 months) has a classification error.

Worked example: Jansen Vastgoed B.V.

Scenario: Jansen Vastgoed B.V. is a Dutch property investment company with €45M in revenue. Year-end is 31 December 2024. The applicable tax rate is 25.8% for profit above €200K. A rate reduction to 24.5% is substantively enacted, effective 1 January 2027. The entity has four items giving rise to deferred tax.

Item 1: Investment property revaluation

Jansen carries investment properties at fair value under IAS 40. Carrying amount: €32M. Tax base (original cost less tax depreciation): €24M. Taxable temporary difference: €8M.

Expected reversal: Jansen expects to sell €4M of the temporary difference within 2025–2026 (at 25.8%) and the remaining €4M after 2027 (at 24.5%).

Item 2: Tax losses carried forward

Jansen has €1.5M of unused tax losses from 2022 (a loss year due to a one-off impairment). The Netherlands permits indefinite carry-forward (subject to the €1M plus 50% of taxable profit exceeding €1M limitation per year).

Management’s forecast projects taxable profit of €3.2M for 2025. Actual results: 2023 taxable profit was €2.8M, 2024 taxable profit is €3.0M. The loss trend reversed in 2023.

Item 3: Warranty provision

Carrying amount of warranty provision: €220K. Tax base: nil (deductible when paid). Deductible temporary difference: €220K.

Item 4: IFRS 16 lease (office lease, 6 years remaining)

Right-of-use asset carrying amount: €890K. Lease liability carrying amount: €940K. Tax base of both: nil (operating lease for tax; no tax deduction on the ROU asset, no tax base on the lease liability).

Summary of deferred tax position

Net deferred tax liability presented on the balance sheet: €1,555.3K (offset permitted under IAS 12.74 as all items relate to the same taxation authority and same fiscal entity).

Your documentation checklist

1. Build a temporary difference schedule that lists every balance sheet line item, its carrying amount, its tax base, the resulting temporary difference, and whether it’s taxable or deductible (this schedule is the backbone of the IAS 12 working paper; without it, the deferred tax balance has no audit trail)
2. For each deferred tax asset, document the specific source of future taxable profit under IAS 12.28 that supports recoverability. Cross-reference to management’s forecast and note the forecast’s historical accuracy
3. Verify the tax rate used against the enacted or substantively enacted rate at the balance sheet date (IAS 12.47). If a rate change has been announced but not yet substantively enacted, use the current rate and document the status of the legislation
4. Check the effective tax rate reconciliation for completeness under IAS 12.81(c). Every reconciling item above a trivial amount needs its own line. Flag any “other” balance exceeding 2% of the theoretical tax charge
5. Confirm that all deferred tax is classified as non-current on the balance sheet, regardless of the expected reversal period of the underlying temporary difference
6. For entities with IFRS 16 leases, verify that deferred tax on the ROU asset and lease liability is calculated separately, not netted at the temporary difference level (2023 IAS 12 amendments)

Common mistakes regulators flag

• Insufficient evidence for DTA recoverability: The FRC’s 2022–23 thematic review of deferred tax found that 29% of reviewed files had insufficient evidence supporting the recoverability of deferred tax assets. The most common gap: reliance on management’s forecast without any challenge of the underlying assumptions or comparison to historical accuracy.
• Incorrect tax rate applied: The AFM has flagged files where the deferred tax rate used does not match the rate substantively enacted at the balance sheet date. This occurs when a rate change is announced in the autumn Belastingplan but the audit file uses the prior-year rate without documenting whether the new rate was substantively enacted by 31 December.

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Further reading and source references

• IAS 12, Income Taxes: the source standard governing deferred tax recognition, measurement, presentation, and disclosure.
• IFRS 16, Leases: the standard generating right-of-use asset and lease liability temporary differences affected by the 2023 IAS 12 amendments.
• IAS 40, Investment Property: relevant to the fair value measurement that creates taxable temporary differences on investment properties.
• IAS 37, Provisions, Contingent Liabilities and Contingent Assets: warranty provisions and restructuring provisions are among the most common sources of deductible temporary differences.