Lesson 4 of 6 · 13 min

Realising deferred tax assets and tax rate changes

A deferred tax asset is only worth something if future taxable profits can absorb it, and every deferred tax balance must be remeasured when the tax rate changes.

In short

  • A DTA is recognised only to the extent future taxable profits are expected to absorb it.
  • IFRS: if realisation becomes doubtful, the DTA itself is reduced or reversed. US GAAP: a valuation allowance cuts it to the amount more likely than not to be realised.
  • Increasing the allowance raises tax expense and lowers net income; releasing it does the reverse. Neither changes cash taxes.
  • Management has wide discretion here, so allowance changes deserve scrutiny as a possible earnings lever and as a signal about expected profits.
  • A tax rate cut shrinks both DTAs and DTLs; the remeasurement runs through income tax expense.

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Realising deferred tax assets and tax rate changes · Analysis of Income Taxes