Deductible Temporary Differences
A deferred tax asset should be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, unless the deferred tax asset arises from:
negative goodwill which is treated as deferred income; or
the initial recognition of an asset or liability in a transaction which:
is not a business combination; and
at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow from the enterprise of resources embodying economic benefits. When resources flow from the enterprise, part or all of their amounts may be deductible in determining taxable profit of a period later than the period in which the liability is recognised. In such cases, a temporary difference exists between the carrying amount of the liability and its tax base. Accordingly, a deferred tax asset arises in respect of the income taxes that will be recoverable in the future periods when that part of the liability is allowed as a deduction in determining taxable profit. Similarly, if the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods. This includes a general provision for doubtful debts which is setoff against the gross carrying amount of trade receivables on presentation in the balance sheet, but there is no equivalent deduction to the tax base of the trade receivables.
An enterprise recognises a liability of RM100 for accrued product warranty costs. For tax purposes, the product warranty costs will not be deductible until the enterprise pays claims. The tax rate is 25%.
The tax base of the liability is nil (carrying amount of RM100, less the amount that will be deductible for tax purposes in respect of that liability in future periods). In settling the liability for its carrying amount, the enterprise will reduce its future taxable profit by an amount of RM100 and, consequently, reduce its future tax payments by RM25 (RM100 at 25%). The difference between the carrying amount of RM100 and the tax base of nil is a deductible temporary difference of RM100. Therefore, the enterprise recognises a deferred tax asset of RM25 (RM100 at 25%), provided that it is probable that the enterprise will earn sufficient taxable profit in future periods to benefit from a reduction in tax payments.
The following are examples of deductible differences which result in deferred tax assets:
retirement benefit costs may be deducted in determining accounting profit as service is provided by the employee, but deducted in determining taxable profit either when contributions are paid to an approved fund by the enterprise or when retirement benefits are paid by the enterprise. A temporary difference exists between the carrying amount of the liability and its tax base; the tax base of the liability is usually nil. Such a deductible temporary difference results in a deferred tax asset as economic benefits will flow to the enterprise in the form of a deduction from taxable profits when contributions or retirement benefits are paid;
research costs are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period. The difference between the tax base of the research costs, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset;
in a business combination that is an acquisition, the cost of the acquisition is allocated to the assets and liabilities recognised, by reference to their fair values at the date of the exchange transaction. When a liability is recognised on the acquisition but the related costs are not deducted in determining taxable profits until a later period, a deductible temporary difference arises which results in a deferred tax asset. A deferred tax asset also arises where the fair value of an identifiable asset acquired is less than its tax base. In both cases, the resulting deferred tax asset affects goodwill (see paragraph 64); and
certain assets may be carried at fair value, or may be revalued, without an equivalent adjustment being made for tax purposes (see paragraph 19). A deductible temporary difference arises if the tax base of the asset exceeds its carrying amount.
The reversal of deductible temporary differences results in deductions in determining taxable profits of future periods. However, economic benefits in the form of reductions in tax payments will flow to the enterprise only if it earns sufficient taxable profits against which the deductions can be offset. Therefore, an enterprise recognises deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised.
It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse:
in the same period as the expected reversal of the deductible temporary difference; or
in periods into which a tax loss arising from the deferred tax asset can be carried forward.
In such circumstances, the deferred tax asset is recognised in the period in which the deductible temporary differences arise. For example, when the reporting enterprise operates only in Malaysia and is subject only to the Malaysian income tax laws, a deferred tax asset is recognised on a tax loss or any other deductible temporary differences (such as a general provision for warranty expense) if there exists sufficient taxable temporary differences. This is because the deferred tax liability recognised on the taxable temporary differences will only crystallise when there is sufficient taxable profit in the future periods, and this will in itself provide assurance that the deferred tax asset will be realised.
When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that:
it is probable that the enterprise will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried forward). In evaluating whether it will have sufficient taxable profit in future periods, an enterprise ignores taxable amounts arising from deductible temporary differences that are expected to originate in future periods, because the deferred tax asset arising from these deductible temporary differences will itself require future taxable profit in order to be utilised; or
tax planning opportunities are available to the enterprise that will create taxable profit in appropriate periods.
Tax planning opportunities are actions that the enterprise would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carry forward. For example, taxable profit may be created or increased by:
electing to have interest income taxed on either a received or receivable basis;
deferring the claim for certain deductions from taxable profit;
selling, and perhaps leasing back, assets that have appreciated but for which the tax base has not been adjusted to reflect such appreciation; and
selling an asset that generates non-taxable income (such as a government bond) in order to purchase another investment that generates taxable income.
Where tax planning opportunities advance taxable profit from a later period to an earlier period, the utilisation of a tax loss or tax credit carry forward still depends on the existence of future taxable profit from sources other than future originating temporary differences.
When an enterprise has a history of recent losses, the enterprise considers the guidance in paragraphs 38 and 39.
This Standard does not permit the recognition of a deferred tax asset arising from deductible temporary differences associated with negative goodwill which is treated as deferred income because negative goodwill is a residual and the recognition of the deferred tax asset would increase the carrying amount of negative goodwill.
Initial Recognition of an Asset or Liability
One case when a deferred tax asset arises on initial recognition of an asset is when a non-taxable government grant related to an asset is deducted in arriving at the carrying amount of the asset but, for tax purposes, is not deducted from the asset's depreciable amount (in other words its tax base); the carrying amount of the asset is less than its tax base and this gives rise to a deductible temporary difference. Government grants may also be set up as deferred income in which case the difference between the deferred income and its tax base of nil is a deductible temporary difference. Whichever method of presentation an enterprise adopts, the enterprise does not recognise the resulting deferred tax asset, for the reason given in paragraph 23. This non-recognition principle has traditionally been applied to permanent differences, which may include other items, such as a provision for an expense which is permanently disallowed for income tax purposes.
Another case when a deferred tax asset arises on initial recognition of an asset is when it qualifies for re-investment or other allowances in excess of its normal capital allowances. In such a case, the carrying amount of the asset is less than its tax base on initial recognition, and this gives rise to a deductible temporary difference. However, for the reason given in paragraph 23, the enterprise does not recognise the resulting deferred tax asset on initial recognition of the asset and subsequently.