Questions and Answers on Deferred Tax


When should a deferred tax asset or liability be recognised?

A deferred tax asset or liability should be recognised as an asset or liability in the accounts if the transactions or events that give the entity an obligation to pay more tax in future or a right to pay less tax in future have occurred by the balance sheet date.

What instances give rise to a deferred tax asset?

Deferred tax should be recognised on “timing differences” between the recognition of gains and losses in the financial statements and their recognition in a tax computation. Examples of events which would give rise to this are as follows;
  1. Capital allowances.
  2. Unrelieved tax losses carried forward.
  3. Accrued expenses that are only allowable when paid.

What rate should be used?

Deferred tax should be measured using tax rates that have been enacted or substantially enacted by the reporting date and that are expected to apply when timing differences reverse. Therefore, the rate used to calculate deferred tax should be based on the rate expected to apply when the timing difference reverses. This might occur if, for example, a new rate has been announced in the budget and the asset is expected to reverse using this rate.

Should the asset or liability be disclosed separately on the face of the balance sheet?

Only if the asset or liability is so material that its absence may force users to misinterpret the accounts.

Are there circumstances where a timing difference should not be recognised?

Deferred tax assets should be recognised to the extent that they are probable and will be recovered against the reversal of deferred tax liabilities or other future taxable profits.

Interaction with FRS 102

Under FRS 102, there will be more instances where deferred tax must be accounted for. Deferred taxes cannot be discounted under FRS 102 (FRS 19 allowed a policy choice of discounting to present value).

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