Lesson 4 of 7 · All lessons in this module
- Accounting profit, taxable income and the tax base
- Temporary versus permanent differencesVideo lesson
- Deferred tax balances and income tax expenseVideo lesson
- Realising deferred tax assets and tax rate changesVideo lesson
- Effective, statutory and cash tax ratesVideo lesson
- Tax disclosures and financial analysis
- Integrated cases: reading a tax note, cash tax versus effective tax
Lesson 4 of 7 · 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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