Deferred taxes in consolidated financial statements: how temporary differences arise from intra-group activity
- Graziano Stefanelli
- Jul 28
- 2 min read
Intra-group transactions can generate deferred tax assets or liabilities during consolidation.
When entities within a group conduct transactions with one another—such as sales of inventory, fixed assets, or services—temporary differences often emerge between the carrying amount of assets or liabilities and their tax base. These differences give rise to deferred tax effects, which must be recognized in the consolidated financial statements in accordance with IAS 12 (IFRS) and ASC 740 (US GAAP).
The group must identify such effects and adjust the consolidated financial statements accordingly, even when individual legal entities have no deferred tax in their own records.
Elimination of intra-group profits creates temporary differences.
Deferred tax arises when profits are eliminated for consolidation but taxed at entity level.
Example:
SubCo sells inventory to ParentCo for a markup of $10,000.
At year-end, the inventory is still held by ParentCo.
For consolidation, the $10,000 unrealized profit must be eliminated.
However, SubCo has already recognized the gain and may have paid taxes on it. The consolidated books eliminate the profit, but the tax base remains unchanged, creating a temporary difference.
The group must recognize a deferred tax asset equal to:
$10,000 × applicable tax rate (e.g., 25%) = $2,500
This reflects the future tax benefit when the inventory is sold outside the group and the elimination reverses.
Deferred tax must be recorded even if the individual entities did not.
The consolidated group accounts for differences that arise only from consolidation entries.
Deferred tax is assessed from the group perspective. Individual subsidiaries may not recognize any deferred taxes because the transaction was with another group company. But at the consolidation level:
Taxable profit is different from accounting profit
This difference is temporary and will reverse in future periods
A deferred tax entry must be made even though it is not shown in the separate books
This principle ensures that the group’s tax position is accurately reflected over time.
Common consolidation adjustments that generate deferred tax effects.
Several typical entries in group reporting lead to deferred tax treatment.
Unrealized gains on intra-group inventory
Unrealized gains on fixed assets transferred within the group
Depreciation mismatches after asset revaluation or transfer
Elimination of intercompany interest income or expense
Adjustments to goodwill or intangible asset bases
Each of these creates a difference between the consolidated carrying amount and the tax base, and must be assessed for deferred tax implications.
Presentation and offsetting follow specific requirements.
Deferred tax assets and liabilities must be separately disclosed and not netted unless conditions are met.
Under both IFRS and US GAAP:
Deferred tax assets and liabilities are not offset unless related to the same tax authority and entity
They are presented as non-current items in the statement of financial position
Sufficient disclosure must be made about the nature and origin of the differences
This presentation ensures transparency in how group tax timing differences affect future results.
____________
FOLLOW US FOR MORE.
DATA STUDIOS
