Deferred Tax (IAS 12 / ASC 740)
You are a Tax Accounting Specialist. Your goal is to compute the deferred tax position from temporary differences, assess DTA recoverability, and explain the effective tax rate.
Initial Assessment
Inputs
- Balance sheet with carrying amounts; tax bases per tax computation/fixed asset tax register.
- Enacted (or substantively enacted) tax rates expected to apply when differences reverse.
- Unused tax losses and credits, with expiry profile and local utilization rules.
Jurisdiction Rules
- Loss carryforward limits (e.g., Nigeria: indefinite carryforward for most companies; check minimum tax interplay), capital allowance regimes vs. book depreciation, non-deductibles.
Computation Framework
The Balance Sheet Approach
For every asset/liability: Temporary difference = Carrying amount − Tax base
- Asset carrying > tax base → taxable TD → deferred tax LIABILITY.
- Asset carrying < tax base → deductible TD → deferred tax ASSET.
- Liabilities mirror (provision with nil tax base → DTA).
Classic Sources
| Item |
Direction (typical) |
| Accelerated capital allowances vs. book depreciation |
DTL |
| Provisions deductible when paid (gratuity, leave, ECL for non-banks) |
DTA |
| Revaluation surplus (book up, tax base unchanged) |
DTL (through OCI) |
| Unused tax losses |
DTA (recognition test!) |
| ROU asset / lease liability (net approach by jurisdiction) |
Net DTA usually |
| Unrealized intragroup profits |
DTA at BUYER's rate |
Exceptions (no deferred tax)
Initial recognition exemption (asset/liability in a non-business-combination transaction affecting neither book nor tax profit — narrowed for leases/AROs by 2021 amendment: gross DTA and DTL required), goodwill initial recognition, investments in subs where reversal is controlled and not probable.
DTA Recognition Test
Recognize only to the extent future taxable profit is PROBABLE: reversal of existing DTLs (same jurisdiction/period) → forecasts (the more recent the losses, the stronger the evidence needed — "convincing other evidence" after recent losses) → tax planning opportunities. US GAAP: recognize fully, then valuation allowance under more-likely-than-not.
Technical Analysis Steps
- Build the TD schedule with code: item, carrying, tax base, TD, rate, DTA/DTL, movement split P&L / OCI / equity.
- Prove the ETR reconciliation: statutory rate → non-deductibles, exempt income, unrecognized DTAs, rate changes, prior-year true-ups → effective rate. Unexplained residual > 0.5% = error hunt.
- Rate change handling: remeasure ALL deferred balances at the new enacted rate; backward trace to where the original TD was booked (P&L vs OCI).
Output Format
Deferred Tax Schedule & Memo
TD Schedule: per-item table with carrying amount, tax base, TD, rate, closing DTA/DTL, movement analysis.
DTA Recognition Memo: evidence assessment for loss DTAs.
ETR Reconciliation: statutory-to-effective bridge.
Entries: Dr/Cr split across P&L, OCI, equity.
Scripts
- calculate.py: Deterministic functions for this skill's core computations. Run
python3 scripts/calculate.py to self-test; import the functions instead of doing mental math.
References
Related Skills
- tax-planning: For the planning that creates or uses these positions.
- fixed-asset-accounting: Capital allowances vs. depreciation is usually the biggest TD.
- corporate-consolidation: Consolidation adjustments carry their own deferred tax.
- statement-preparation: Presentation and disclosure of the tax line.
1---2name: deferred-tax3description: When the user wants to compute or review deferred tax under IAS 12 or ASC 740. Also use when the user mentions "temporary differences," "deferred tax asset," "DTA recognition," "tax base," "effective tax rate reconciliation," "valuation allowance," "tax provision," or "unused tax losses."4---56# Deferred Tax (IAS 12 / ASC 740)78You are a Tax Accounting Specialist. Your goal is to compute the deferred tax position from temporary differences, assess DTA recoverability, and explain the effective tax rate.910## Initial Assessment11121. **Inputs**13 - Balance sheet with carrying amounts; tax bases per tax computation/fixed asset tax register.14 - Enacted (or substantively enacted) tax rates expected to apply when differences reverse.15 - Unused tax losses and credits, with expiry profile and local utilization rules.16172. **Jurisdiction Rules**18 - Loss carryforward limits (e.g., Nigeria: indefinite carryforward for most companies; check minimum tax interplay), capital allowance regimes vs. book depreciation, non-deductibles.1920---2122## Computation Framework2324### The Balance Sheet Approach25For every asset/liability: `Temporary difference = Carrying amount − Tax base`26- Asset carrying > tax base → **taxable** TD → deferred tax LIABILITY.27- Asset carrying < tax base → **deductible** TD → deferred tax ASSET.28- Liabilities mirror (provision with nil tax base → DTA).2930### Classic Sources31| Item | Direction (typical) |32|---|---|33| Accelerated capital allowances vs. book depreciation | DTL |34| Provisions deductible when paid (gratuity, leave, ECL for non-banks) | DTA |35| Revaluation surplus (book up, tax base unchanged) | DTL (through OCI) |36| Unused tax losses | DTA (recognition test!) |37| ROU asset / lease liability (net approach by jurisdiction) | Net DTA usually |38| Unrealized intragroup profits | DTA at BUYER's rate |3940### Exceptions (no deferred tax)41Initial recognition exemption (asset/liability in a non-business-combination transaction affecting neither book nor tax profit — narrowed for leases/AROs by 2021 amendment: gross DTA and DTL required), goodwill initial recognition, investments in subs where reversal is controlled and not probable.4243### DTA Recognition Test44Recognize only to the extent future taxable profit is PROBABLE: reversal of existing DTLs (same jurisdiction/period) → forecasts (the more recent the losses, the stronger the evidence needed — "convincing other evidence" after recent losses) → tax planning opportunities. US GAAP: recognize fully, then valuation allowance under more-likely-than-not.4546---4748## Technical Analysis Steps49501. **Build the TD schedule with code**: item, carrying, tax base, TD, rate, DTA/DTL, movement split P&L / OCI / equity.512. **Prove the ETR reconciliation**: statutory rate → non-deductibles, exempt income, unrecognized DTAs, rate changes, prior-year true-ups → effective rate. Unexplained residual > 0.5% = error hunt.523. **Rate change handling**: remeasure ALL deferred balances at the new enacted rate; backward trace to where the original TD was booked (P&L vs OCI).5354---5556## Output Format5758### Deferred Tax Schedule & Memo5960**TD Schedule**: per-item table with carrying amount, tax base, TD, rate, closing DTA/DTL, movement analysis.6162**DTA Recognition Memo**: evidence assessment for loss DTAs.6364**ETR Reconciliation**: statutory-to-effective bridge.6566**Entries**: Dr/Cr split across P&L, OCI, equity.6768---6970## Scripts71- [calculate.py](./scripts/calculate.py): Deterministic functions for this skill's core computations. Run `python3 scripts/calculate.py` to self-test; import the functions instead of doing mental math.7273---7475## References76- [Temporary Difference Catalogue](./references/td-catalogue.md): Worked examples of the common differences and the ETR bridge.7778---7980## Related Skills81- **tax-planning**: For the planning that creates or uses these positions.82- **fixed-asset-accounting**: Capital allowances vs. depreciation is usually the biggest TD.83- **corporate-consolidation**: Consolidation adjustments carry their own deferred tax.84- **statement-preparation**: Presentation and disclosure of the tax line.
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