Deferred tax under IAS 12; temporary differences and future tax consequences?

• A. Deferred tax assets and liabilities arise from temporary differences between accounting carrying amounts and tax bases, recognized at enacted tax rates; include carryforwards and credits.
• B. They are not recognized
• C. They come from permanent differences
• D. They only relate to investments

Answer: (A)

Deferred tax under IAS 12 arises from timing differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. When the carrying amount differs from its tax base, a temporary difference exists, and its tax effect will reverse in future periods. These tax effects are recorded as deferred tax assets or liabilities in the balance sheet, using the enacted tax rates expected to apply when the difference reverses. This category also includes tax losses carried forward and unused tax credits, which can reduce future tax payments if it is probable that there will be sufficient taxable profits to utilize them.

Permanent differences do not create deferred tax because they affect either accounting profit or taxable profit in a way that does not reverse over time. Deferred tax is not limited to investments; it applies to a wide range of temporary differences across many assets and liabilities.