How Deferred Tax Assets and Liabilities Are Recognized under IAS 12 and ASC 740
- Graziano Stefanelli
- 8 hours ago
- 5 min read

Deferred tax accounting ensures that income taxes are recognized in the same period as the related income and expenses for financial reporting. Temporary differences between accounting carrying amounts and tax bases give rise to deferred tax assets (DTAs) or deferred tax liabilities (DTLs). Under IFRS (IAS 12 – Income Taxes) and US GAAP (ASC 740 – Income Taxes), both frameworks aim to reflect the future tax consequences of current transactions, yet differ in presentation, offsetting, and recognition thresholds for deferred tax assets.
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How temporary differences arise.
Temporary differences occur whenever an asset or liability’s carrying amount in financial statements differs from its tax base. These differences reverse over time as the asset is recovered or the liability is settled.
Common examples include:
Depreciation: accounting vs tax depreciation rates.
Provisions: deductible when paid for tax purposes but accrued under accounting rules.
Revenue recognition: deferred revenue taxable when invoiced but recognized later in accounting.
Business combinations: fair value adjustments and goodwill.
Leases: different right-of-use asset and lease liability bases.
Permanent differences (e.g., non-deductible expenses, tax-exempt income) do not give rise to deferred taxes.
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Recognition and measurement under IFRS (IAS 12).
1) Basic principle.Recognize DTL for all taxable temporary differences and DTA for all deductible temporary differences, to the extent it is probable that taxable profit will be available to utilize the deductible differences.
2) Initial recognition exceptions. No deferred tax is recognized on:
Initial recognition of goodwill, and
Initial recognition of an asset/liability in a transaction that is not a business combination and affects neither accounting nor taxable profit at that time.
3) Measurement.Measure deferred taxes using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. Re-measure if tax laws or rates change before the reporting date.
4) Deferred tax assets (DTA).Recognize DTA only when probable future taxable profits will be available. Assess recoverability using forecasts, tax planning opportunities, and carryforward periods.
5) Offset.DTAs and DTLs are offset only when the entity has a legally enforceable right to set off current tax assets and liabilities and the deferred taxes relate to the same tax authority and taxable entity.
Example (IFRS – accelerated depreciation): Carrying amount of machine: 800,000Tax base: 600,000Tax rate: 30%
Temporary difference = 200,000 → DTL = 60,000
Journal entry:
Debit: Income Tax Expense (Deferred) 60,000
Credit: Deferred Tax Liability 60,000
Example (IFRS – warranty provision): Accounting provision: 200,000Tax deduction when paid. Temporary difference = 200,000 → DTA = 60,000
Journal entry:
Debit: Deferred Tax Asset 60,000
Credit: Income Tax Expense (Deferred) 60,000
6) Presentation. Deferred tax is non-current. Report DTA/DTL net of offset where permitted.
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Recognition and measurement under US GAAP (ASC 740).
1) Basic principle.Recognize deferred tax liabilities and assets for the future tax effects of all temporary differences, carryforwards, and credits, using enacted tax rates expected to apply.
2) Valuation allowance (VA).If it is more likely than not (>50%) that some or all of a DTA will not be realized, establish a valuation allowance to reduce the DTA to its expected realizable amount.
Journal entry:
Debit: Income Tax Expense (Deferred) 80,000
Credit: Valuation Allowance on DTA 80,000
The VA is reassessed each period and adjusted through income tax expense.
3) Initial recognition exceptions. US GAAP also excludes recognition of deferred tax on goodwill in a business combination to the extent it is non-deductible for tax purposes.
4) Measurement. Use enacted (not proposed) tax rates. Future changes are recognized when enacted into law.
5) Uncertain tax positions (ASC 740-10). Recognize a tax benefit only if it is more likely than not that it will be sustained upon examination. Measure the recognized benefit as the largest amount of tax benefit that is more than 50% likely to be realized.
Journal entry (uncertain position):
Debit: Income Tax Expense 50,000
Credit: Liability for Unrecognized Tax Benefits 50,000
6) Offset and classification. All deferred taxes are classified as non-current regardless of expected reversal date. DTAs and DTLs are offset by tax jurisdiction.
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Comparative table: IFRS vs US GAAP.
Aspect | IFRS (IAS 12) | US GAAP (ASC 740) |
Recognition threshold for DTA | “Probable” (more likely than not in practice ≈ >50%) | “More likely than not” (explicit >50%) |
Valuation allowance | Not used; reduce DTA directly if not probable | Explicit valuation allowance account |
Tax rate used | Enacted or substantively enacted | Enacted only |
Initial recognition exemption | For certain asset/liability origins | No equivalent for non-business combinations |
Offset criteria | Legal right and same tax authority/entity | Same tax jurisdiction and taxpayer |
Classification | Current/non-current based on underlying item | All non-current |
Reassessment of recoverability | Each reporting date | Each reporting date |
Disclosure emphasis | Deferred tax by type of difference, unrecognized DTA | DTA/DTL detail, VA changes, effective tax rate reconciliation |
Uncertain tax positions | Addressed under IAS 12 + IAS 37 (general provisions) | Explicit ASC 740-10 model |
Despite similar objectives, GAAP’s valuation allowance model is more prescriptive, while IFRS relies on a probability-based reduction.
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Presentation and disclosures.
IFRS (IAS 12) disclosure highlights:
Breakdown of deferred taxes by category (depreciation, provisions, tax losses).
Movements in DTAs/DTLs during the period.
Reconciliation of the effective tax rate to the statutory rate.
Details of unused tax losses and expiry dates.
US GAAP (ASC 740) disclosures:
Components of DTAs and DTLs.
Valuation allowance and changes during the year.
Effective tax rate reconciliation.
Description of unrecognized tax benefits and related interest/penalties.
Indefinite reinvestment assertions for foreign earnings (if applicable).
Example presentation (IFRS):
Deferred Tax Components | Temporary Difference (USD) | Tax Rate | DTA / (DTL) |
Accelerated Depreciation | (300,000) | 30% | (90,000) |
Warranty Provision | 200,000 | 30% | 60,000 |
Tax Loss Carryforward | 500,000 | 30% | 150,000 |
Net Deferred Tax Asset | 120,000 |
Journal entry (IFRS — tax rate change):If tax rate decreases from 30% to 28%, remeasure DTA/DTL.
Debit: Deferred Tax Liability 4,000
Credit: Income Tax Expense (Deferred) 4,000
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Journal entries for common scenarios.
1) Deferred tax liability — accelerated depreciation:
Debit: Income Tax Expense (Deferred) xx
Credit: Deferred Tax Liability xx
2) Deferred tax asset — accrued expense deductible later:
Debit: Deferred Tax Asset xx
Credit: Income Tax Expense (Deferred) xx
3) Valuation allowance (US GAAP only):
Debit: Income Tax Expense (Deferred) xx
Credit: Valuation Allowance xx
4) Utilization of DTA when deduction realized:
Debit: Income Tax Payable xx
Credit: Deferred Tax Asset xx
5) Remeasurement due to tax-rate change:
Debit/Credit: Deferred Tax Asset/Liability xx
Credit/Debit: Income Tax Expense (Deferred) xx
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Impact on financial performance and ratios.
Deferred tax accounting affects net income, equity, and effective tax rate (ETR).
DTL growth signals temporary differences that increase future tax payments (e.g., accelerated depreciation).
DTA growth indicates future deductions or losses available for recovery.
Large valuation allowances reduce reported assets and indicate uncertainty over profitability.
ETR reconciliation reveals the impact of tax incentives, credits, and foreign rate differences.
Analysts track deferred tax movements to evaluate earnings quality, sustainability of tax benefits, and cash-tax alignment.
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Operational considerations.
Accurate deferred tax computation requires integration between financial reporting, tax compliance, and forecasting teams. Entities must:
Reconcile all temporary differences at period-end.
Maintain schedules of tax bases by asset and liability.
Track tax-loss carryforwards, expiry dates, and utilization forecasts.
Update tax rates promptly after legislative changes.
Document judgments supporting DTA recoverability and uncertain tax positions.
Robust control over deferred tax ensures transparency of future cash obligations and alignment between statutory and effective tax reporting.
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