Unused tax losses and tax credits

Learning objectives

• Determine the amount of deferred tax asset that can be recognised on tax losses carried forward, taking into account taxable differences and carryforward periods.L2, L3
• Assess the 'convincing other evidence' of an entity with a history of recent losses.L3, L4
• Recognise the deferred tax asset on losses and its write-down.L2
• Explain the disclosures required for unrecognised losses and for an asset whose utilisation depends on future taxable profits.L3

Normative references

• IAS 12When an entity has a history of recent losses, it applies the guidance in paras. 35 and 36.
• IAS 12 §34A deferred tax asset is recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which they can be utilised.
• IAS 12 §35The criteria are the same as for deductible temporary differences; however, the existence of unused tax losses is strong evidence that future taxable profit may not be available: when an entity has a history of recent losses, the asset is recognised only to the extent that it has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available.
• IAS 12 §36In assessing the probability that taxable profit will be available against which the unused tax losses or credits can be utilised, the entity considers several criteria, including whether it has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts before the unused tax losses or credits expire.
• IAS 12 §81Disclosures required separately include in particular: the income tax relating to each component of other comprehensive income; an explanation of the relationship between tax expense (income) and accounting profit, in the form of a numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate(s), or between the average effective tax rate and the applicable tax rate, disclosing the basis on which the applicable rate is computed; an explanation of changes in the applicable tax rate(s) compared with the previous period; the amount of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised; the aggregate amount of temporary differences associated with investments for which no deferred tax liability is recognised; for each type of temporary difference and of unused tax losses and credits, the deferred tax assets and liabilities recognised and the deferred tax recognised in profit or loss; the income tax consequences of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a liability.
• IAS 12The entity discloses the amount of a deferred tax asset and the nature of the evidence supporting its recognition when its utilisation depends on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences, or when it has suffered a loss in the current or preceding period in the tax jurisdiction to which the asset relates.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

28 questions

• A deferred tax asset is recognised for the carryforward of unused tax losses to the extent that it is probable that future taxable profit will be available against which they can be used.L2
• The existence of unused tax losses is strong evidence that future taxable profit may not be available.L2
• An entity that has incurred tax losses in each of the last three years may recognise a deferred tax asset on those losses solely on the basis of a budget forecasting a return to profit.L2
• Only tax losses carried forward can give rise to a deferred tax asset; unused tax credits are excluded.L2
• An entity has a history of recent losses. To what extent does it recognise a deferred tax asset on its losses carried forward?L2
• When assessing the asset on time-limited losses, which taxable temporary differences does the entity take into account?L2
• Saulvane has {unused_losses} of tax losses carried forward. According to the forecasts used (case assumptions, judged probable), its taxable profit before these losses expire will reach {probable_profit}. Tax rate: {tax_rate}%. Compute the usable losses and the deferred tax asset.L2
• Tavernique has {unused_losses} of tax losses carried forward. Its forecasts, documented and judged probable (case assumptions), show {probable_profit} of taxable profit within the carry-forward period. Expected tax rate: {tax_rate}%. Which deferred tax asset is recognised?L2
• At 31 December 20X5, Valmorance has {usable_losses} of tax losses carried forward, fully usable according to forecasts judged probable (case assumption). Tax rate: {tax_rate}%. Record the entry recognising the deferred tax asset.L2
• Wardane has {unused_losses} of tax losses carried forward, of which only {usable_losses} will probably be used against future profits (case assumptions). Tax rate: {tax_rate}%. Record the deferred tax entry at the reporting date.L2
• Yverdal carries a deferred tax asset of {carrying_dta} on its tax losses carried forward. At the reporting date, the loss of a major customer reduces the losses that are probably usable to {usable_losses} (case assumption). Tax rate: {tax_rate}%. Record the closing entry.L2
• Arvidonne recognises an asset for only part of its tax losses carried forward. What information must its notes give on the losses not recognised?L3
• In which case must the entity disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition?L3
• After three loss-making years, Bellirane wants to recognise an asset for its losses carried forward. Which elements can support the asset?L3
• Cadranne incurred a tax loss in 20X5 and recognises a deferred tax asset on part of its losses. Which information must its notes contain?L3
• Which elements determine the amount of usable losses carried forward used for the deferred tax asset?L3
• Dunevaux has {unused_losses} of losses carried forward, which will expire at the end of 20X8 (tax data). Its taxable differences with the same authority and entity will reverse by {ttd_before} before that date and by {ttd_after} afterwards. It also expects {probable_profit} of probable taxable profit before expiry (case assumption). Tax rate: {tax_rate}%. Compute the usable losses and the deferred tax asset.L3
• The subsidiary Escarvelle has {unused_losses} of losses, which may be carried forward for five years under its tax law (data). Within that period, {ttd_before} of taxable differences (same authority, same entity) will reverse; {ttd_after} will reverse later. Probable taxable profit within the period is {probable_profit}. Tax rate: {tax_rate}%. Compute the usable losses and the asset.L3
• Fontagne has an unused research tax credit of {unused_credit}, which can be offset against tax payable in subsequent years before it expires (tax data). Its probable taxable profit before that date is {probable_profit} (case assumption). Tax rate: {tax_rate}%. Compute the deferred tax asset and the credit not recognised.L3
• Garvenne has recorded tax losses over the last three years; it has {unused_losses} of losses carried forward. Its taxable differences with the same authority and entity, which will reverse before expiry, amount to {ttd_before}. Its budget forecasts a strong recovery, but management concludes, after a documented analysis (judgement in the case), that it is not convincing evidence. Tax rate: {tax_rate}%. Compute the asset and the losses to be disclosed with no asset.L3
• Hautbrise has four years of tax losses (1,400,000 carried forward with no time limit, data). It has no taxable differences. A new strategic plan, not yet under way, forecasts profits from 20X7; no contract or structural change supports it. Management wishes to recognise 350,000 (25% rate). What do you conclude?L3
• Isquerelle has 500,000 of losses carried forward: 200,000 expire at the end of 20X6, the balance at the end of 20X9 (tax data). Its probable taxable profit is nil in 20X6 and will reach 400,000 over 20X7-20X9 (case assumptions). It has no taxable differences. Tax rate: 25%. Which deferred tax asset is recognised?L3
• Jouvenelle incurred a tax loss in 20X5; it recognises an asset for 300,000 of its 1,100,000 of losses carried forward, based on future profits exceeding the reversals of taxable differences. Its tax note shows only the amount of the deferred tax asset. What is missing at a minimum?L3
• Kervalan is emerging from three loss-making years and has 1,200,000 of losses carried forward (five-year period, data). Documented evidence: 200,000 of taxable differences reversing within the period; signed firm contracts that will generate 500,000 of taxable profit within the period; an uncontracted budget adding 700,000. Management and the auditor judge the contracts convincing, but not the budget (judgement in the case). Tax rate: 25%. Which asset is recognised?L4
• The subsidiary Lantorre lost money in 20X4 and 20X5; it has 2,000,000 of losses that may be carried forward for four years (data). It has 400,000 of taxable differences, of which 250,000 will reverse within the period. In December 20X5 it signed a three-year supply agreement with a distributor and launched a cost-reduction plan that is not yet complete. Tax rate: 25%. Write the position paper on the deferred tax asset and the disclosures.L4
• Mirabeline incurred a tax loss in 20X5. At 31 December 20X5, it has 600,000 of losses carried forward, of which 200,000 expire at the end of 20X6 with no taxable profit expected by then, and an unused tax credit of 60,000. Its documented forecasts (case assumptions, judged convincing) make probable taxable profit of 560,000 over 20X7-20X9. Under its tax law (data), losses are offset against profit before the credit, which is itself offset against tax payable. Tax rate: 25%. Write the note: amounts recognised and disclosures.L4
• For the year-end, Tolvarde lists four tax effects: (1) deferred tax on a building revaluation in OCI; (2) deferred tax on the equity component of a convertible loan issued during the year; (3) deferred tax on an error correction adjusting opening retained earnings; (4) the decrease, over the year, in the liability arising from item (2). Write the memo allocating each effect (profit or loss, OCI or equity).L4
• Xaviole proposes a dividend after the reporting date, before the financial statements are authorised for issue; it is not recognised as a liability. Under the legislation in the case, the dividend will give rise to additional tax. What does Xaviole do?L2