Current tax charges the profit with the tax payable this year. But some of this year’s profit will be taxed in another year, and some of this year’s tax saving will be taken back later. If the statements ignored that, profit after tax would swing with the timing of tax allowances.
Deferred tax puts the tax effect of temporary differences into the year in which the profit or loss arises. This topic covers when deferred tax liabilities and assets are recognised, the exceptions, how they are measured, where the charge goes, how to build the deferred tax schedule and movement, and the disclosures. The next topic covers fair value measurement.
Deferred tax is a favourite area of the examiners. In May Diet, 2023, Question 4(c) asked for a deferred tax liability schedule and its movement (8 marks), and Question 2(c) asked for the deferred tax charge on a machine with capital allowances (5 marks). In November Diet, 2023, Question 5(b) asked for the deferred tax balance, the movement and the tax expense note (9 marks). Read current tax and temporary differences first.
In 30 seconds
A deferred tax liability is recognised for all taxable temporary differences, and a deferred tax asset for deductible temporary differences, unused tax losses and credits, but only to the extent it is probable that taxable profit will be available to use them. Exceptions: no deferred tax liability on the initial recognition of goodwill.
It is measured at the tax rates enacted or substantively enacted that will apply when the asset is realised or the liability settled, and it is not discounted. The charge or credit goes to profit or loss, unless it relates to an item in other comprehensive income or equity, such as a revaluation surplus. Closing deferred tax = temporary differences × rate; the movement is the closing less the opening balance.
Recognition
Deferred tax liabilities
A deferred tax liability is the amount of income taxes payable in future periods in respect of taxable temporary differences. It is recognised for all taxable temporary differences, with two main exceptions:
- the initial recognition of goodwill, because goodwill is a residual; and
- the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit. (This exception does not apply where the transaction gives rise to equal taxable and deductible temporary differences, as with leases and decommissioning obligations, where deferred tax is recognised.)
A common source is an asset depreciated for tax faster than for accounting. A machine costing ₦12,000,000 with a six-year life and no residual value is depreciated at ₦2,000,000 a year. For tax, 50% is allowed in the first year and 25% a year of the reducing tax base afterwards. At the end of year 1 the carrying amount is ₦10,000,000 and the tax base ₦6,000,000, a taxable difference of ₦4,000,000 and a deferred tax liability of ₦1,200,000 at 30%.
At the end of year 2 the carrying amount is ₦8,000,000 and the tax base ₦4,500,000 (₦6,000,000 less 25%), a difference of ₦3,500,000 and a liability of ₦1,050,000, so ₦150,000 is credited to profit or loss. At the end of year 3 the carrying amount is ₦6,000,000 and the tax base ₦3,375,000, a difference of ₦2,625,000 and a liability of ₦787,500, a further credit of ₦262,500.
Deferred tax assets
A deferred tax asset is the amount of income taxes recoverable in future periods in respect of deductible temporary differences, the carry-forward of unused tax losses and unused tax credits. It is recognised to the extent it is probable that taxable profit will be available against which the deductible difference can be used.
Evidence includes taxable temporary differences of the same authority and entity that will reverse in the right period, and probable future taxable profits. An entity that has a history of recent losses needs convincing evidence. The carrying amount is reviewed at each reporting date and reduced if it is no longer probable. A previously unrecognised asset is recognised when it becomes probable.
For example, an unused tax loss of ₦20,000,000 gives an asset of ₦6,000,000 at 30% if future taxable profit is probable, and none if it is not (the unused loss is then disclosed).
Measurement
- Deferred tax is measured at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled, based on rates enacted or substantively enacted by the reporting date.
- It is not discounted.
- It reflects the way the entity expects to recover or settle the carrying amount of its assets and liabilities.
- A change in the tax rate changes the balance. The effect is recognised in profit or loss, unless it relates to items outside profit or loss.
Where the charge is recognised
Deferred tax is recognised in profit or loss unless it arises from a transaction or event recognised outside profit or loss.
If the underlying item is in other comprehensive income, so is the deferred tax: a revaluation of land by ₦100,000,000 increases the carrying amount without changing the tax base, a taxable difference giving a liability of ₦30,000,000 at 30%, which is debited to other comprehensive income (the revaluation surplus), not to profit or loss. Where the item is recognised directly in equity, the tax is as well.
In a business combination, deferred tax on fair value adjustments to the subsidiary’s net assets affects goodwill.
Presentation and disclosure
- Deferred tax assets and liabilities are shown as non-current. They are offset only if the entity has a legally enforceable right to offset current tax assets against liabilities and both relate to income taxes levied by the same tax authority on the same taxable entity.
- The major components of tax expense are shown, including current tax, adjustments for prior periods, and deferred tax from the origination and reversal of temporary differences and changes in rates.
- The tax relating to each item of other comprehensive income is disclosed.
- A reconciliation explains the relationship between tax expense and accounting profit, either by tax expense against accounting profit multiplied by the applicable rate, or by a rate reconciliation.
- The amount of deferred tax assets and liabilities for each type of temporary difference, the amount of unused tax losses and credits, and deductible differences for which no deferred tax asset is recognised.
The schedule and the movement
The standard exam layout is a table with columns for carrying amount, tax base, temporary difference and tax at the rate. Taxable differences give a liability and deductible differences an asset, and the net is the closing balance. Then:
| Movement on deferred tax | ₦ million |
|---|---|
| Opening deferred tax liability | 8.1 |
| Charge to profit or loss (balancing figure) | 3.3 |
| Closing deferred tax liability | 11.4 |
The closing figure comes from taxable differences of ₦64 million (liability ₦19.2 million) and deductible differences of ₦26 million (asset ₦7.8 million), a net ₦11.4 million. The tax expense in profit or loss is current tax plus the deferred tax charge. Any part of the movement that relates to other comprehensive income is shown there, and the profit or loss charge is then the movement less that part.
The ideas in more depth
Why recognise a liability on a taxable difference
If a company claims tax allowances faster than it depreciates, it pays less tax now and more later. The liability recognises that the saving will be given back. Ignoring it would overstate profit after tax in the early years of an asset’s life.
Why the asset needs a probable profit
A deductible difference is only valuable if there will be taxable profit to deduct it from. Recognising an asset without that evidence would overstate net assets.
Sources and references
- International Accounting Standard (IAS) 12 Income Taxes: recognition of deferred tax liabilities and assets, measurement, recognition outside profit or loss, presentation and disclosure.
These points are stated as at 5 November 2026.
Worked examples
Example 1: a machine and capital allowances. A machine costs ₦12,000,000, is depreciated straight line over six years with no residual value, and the tax rate is 30%. Tax allows 50% in the first year and 25% of the reducing tax base afterwards. Required: the deferred tax balance at the end of each of the first three years and the charge in each.
- Year 1. Carrying amount ₦10,000,000; tax base ₦6,000,000; difference ₦4,000,000; liability ₦1,200,000; charge ₦1,200,000.
- Year 2.
Carrying amount ₦8,000,000; tax base ₦6,000,000 × 75% = ₦4,500,000; difference ₦3,500,000; liability ₦1,050,000; credit ₦150,000. - Year 3.
Carrying amount ₦6,000,000; tax base ₦4,500,000 × 75% = ₦3,375,000; difference ₦2,625,000; liability ₦787,500; credit ₦262,500.
Example 2: the schedule and movement. At the year end a company has taxable differences of ₦64m and deductible differences of ₦26m, and a fine that is a permanent difference. The opening deferred tax liability was ₦8.1m and the rate is 30%. Required: the closing balance and the charge.
- Liability.
30% × ₦64m = ₦19.2m. - Asset.
30% × ₦26m = ₦7.8m. - Closing net liability.
₦19.2m − ₦7.8m = ₦11.4m.
The fine is ignored. - Charge to profit or loss.
₦11.4m − ₦8.1m = ₦3.3m.
Example 3: a revaluation. Land is revalued upwards by ₦100,000,000. The tax base does not change and the rate is 30%. Required: the entry.
- Difference. Carrying amount above tax base by ₦100,000,000, taxable.
- Deferred tax.
30% × ₦100,000,000 = ₦30,000,000. - Entry. Dr Revaluation surplus (other comprehensive income) ₦30,000,000, Cr Deferred tax liability ₦30,000,000. The surplus is therefore recognised net of tax at ₦70,000,000.
How to answer in the exam
- Draw the schedule. Item, carrying amount, tax base, temporary difference. Mark permanent differences and ignore them.
- Apply the rate. Total the taxable and deductible differences separately, then net them at the rate and give the closing balance.
- Show the movement. Opening, the charge to profit or loss as the balancing figure, closing.
- Write the tax expense note. Current tax, prior period adjustment, deferred tax, total.
Common mistakes in the exam
- Including a fine or other permanent difference in the deferred tax schedule.
- Applying the rate to the accounting profit instead of to the temporary differences.
- Putting the whole movement through profit or loss when part relates to a revaluation in other comprehensive income.
- Recognising a deferred tax asset with no evidence of future taxable profit.
- Discounting deferred tax.
- Mixing up the direction for liabilities and assets.
Quick revision
- Liability for all taxable differences (not on initial recognition of goodwill). Asset for deductible differences and losses if probable profit.
- Rate enacted or substantively enacted; no discounting.
- Profit or loss unless the item is in OCI or equity.
- Closing = net difference × rate; movement = closing − opening.
- Non-current; offset only with a legal right and the same authority.
Practice questions
These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.
Recall check: multiple choice
Question 1. A deferred tax liability arises from:
- Deductible temporary differences
- Taxable temporary differences
- Permanent differences
- Current tax unpaid
Show the answer
B. Future taxable amounts will be larger than future deductions.
Question 2. A deferred tax asset is recognised to the extent that:
- The directors wish
- The tax rate falls
- The asset is large
- It is probable that taxable profit will be available to use it
Show the answer
D. Otherwise it is not recognised.
Question 3. Deferred tax is measured at:
- The rates enacted or substantively enacted that are expected to apply when the asset is realised or liability settled
- The rate when the asset was bought
- 10%
- The average rate of the past five years
Show the answer
A. It is not discounted.
Question 4. Deferred tax balances are:
- Discounted at the cost of capital
- Discounted at the tax rate
- Not discounted
- Discounted for liabilities only
Show the answer
C. IAS 12 prohibits discounting.
Question 5. Deferred tax on a revaluation surplus is recognised in:
- Profit or loss
- Retained earnings only
- The statement of cash flows
- Other comprehensive income, with the revaluation
Show the answer
D. Deferred tax follows the underlying item.
Question 6. No deferred tax liability is recognised on:
- The initial recognition of goodwill
- Accelerated capital allowances
- A revaluation of land
- Interest receivable
Show the answer
A. This is the goodwill exception.
Question 7. The deferred tax charge to profit or loss is usually found as:
- The closing balance only
- The opening balance only
- The closing balance less the opening balance
- Half the closing balance
Show the answer
C. The balancing figure in the movement.
Question 8. In the statement of financial position, deferred tax is shown as:
- Current
- Non-current
- Equity
- Part of inventory
Show the answer
B. Deferred tax is not classified as current.
Question 9. An unused tax loss gives rise to a deferred tax asset only if:
- Future taxable profit is probable
- The loss is large
- The auditor agrees
- The loss is in the first year
Show the answer
A. Otherwise it is disclosed as unrecognised.
Question 10. Deferred tax assets and liabilities may be offset only if:
- They are equal
- Management wishes
- They are small
- There is a legally enforceable right to offset current tax and both relate to the same tax authority
Show the answer
D. Both conditions are required.
Section B style: written questions
Question 11 (10 marks). (a) State when a deferred tax liability and a deferred tax asset are recognised. (4 marks) (b) State the exception for goodwill and say why it exists. (3 marks) (c) State how deferred tax is measured. (3 marks)
Question 12 (15 marks). Shakara Ltd was incorporated on 1 January 20X2. For the year it made a profit before tax of ₦22,000,000 after depreciation of ₦2,200,000. It bought plant and vehicles for ₦12,000,000. Capital allowances were ₦3,400,000. The tax rate is 30% and there was no opening deferred tax. (a) Calculate the company income tax for the year. (4 marks) (b) Calculate the deferred tax balance at the year end.
(4 marks) (c) Show the movement on deferred tax. (3 marks) (d) Prepare the income tax expense note. (4 marks)
A further written question
Question 13 (20 marks). Ado Plc has these year-end balances:
- a building with carrying amount ₦126m and tax base ₦80m
- equipment with carrying amount ₦150m and tax base ₦135m
- receivables of ₦132m net of an allowance of ₦12m, with a tax base of ₦144m
- interest receivable of ₦5m taxed when received
- a fine payable of ₦20m
- interest payable of ₦9m, deductible when paid
The tax rate is 30%, the opening deferred tax liability was ₦6m and the current tax for the year is ₦52.5m.
(a) Prepare the deferred tax schedule. (12 marks)
(b) Calculate the net deferred tax at the year end, showing the liability and asset. (3 marks)
(c) Show the movement on deferred tax. (2 marks)
(d) Show the tax expense in profit or loss. (3 marks)
Model answers
Show the model answer to Question 11
(a) A deferred tax liability is recognised for all taxable temporary differences (2). A deferred tax asset is recognised for deductible temporary differences, unused tax losses and credits (1) to the extent it is probable that taxable profit will be available to use them (1).
(b) No deferred tax liability is recognised on the initial recognition of goodwill (1). Goodwill is a residual, so recognising deferred tax on it would increase the goodwill itself and the liability further (2).
(c) At the tax rates enacted or substantively enacted that are expected to apply when the asset is realised or the liability settled (2). It is not discounted (1).
Show the model answer to Question 12
(a)
- Taxable profit ₦22,000,000 + ₦2,200,000 − ₦3,400,000 = ₦20,800,000 (3).
- Company income tax 30% × ₦20,800,000 = ₦6,240,000 (1).
(b)
- Carrying amount ₦12,000,000 − ₦2,200,000 = ₦9,800,000 (1).
- Tax base ₦12,000,000 − ₦3,400,000 = ₦8,600,000 (1).
- Taxable difference ₦1,200,000 (1).
- Deferred tax liability 30% × ₦1,200,000 = ₦360,000 (1).
(c) Opening nil (1); charge to profit or loss ₦360,000 (1); closing ₦360,000 (1).
(d) Current tax ₦6,240,000 (1.5); deferred tax ₦360,000 (1.5); total income tax expense ₦6,600,000 (1).
Show the model answer to Question 13
(a) (2 marks each; carrying amount, tax base, difference) Building: ₦126m, ₦80m, ₦46m taxable. Equipment: ₦150m, ₦135m, ₦15m taxable. Receivables: ₦132m, ₦144m, ₦12m deductible. Interest receivable: ₦5m, nil, ₦5m taxable. Fine payable: carrying amount equals tax base, a permanent difference with no deferred tax. Interest payable: ₦9m, nil, ₦9m deductible.
(b)
- Taxable differences ₦46m + ₦15m + ₦5m = ₦66m, liability 30% = ₦19.8m (1).
- Deductible differences ₦12m + ₦9m = ₦21m, asset 30% = ₦6.3m (1).
- Net liability ₦13.5m (1).
(c) Opening ₦6.0m; charge to profit or loss ₦7.5m (balancing figure); closing ₦13.5m (2).
(d) Current tax ₦52.5m (1) plus deferred tax ₦7.5m (1) = tax expense ₦60.0m (1).
Pathfinder on IAS 12 (ii): deferred tax recognition, measurement and disclosure
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
Part (c)(ii) asks for a deferred tax liability at the year end from a schedule of carrying amounts and tax bases (6 marks) and part (c)(iii) for the movement on the deferred tax account (2 marks). Parts (a), (b) and (c)(i) belong to the previous topic.
Revise first: The schedule and the movement
Part (c) asks for the deferred tax charge for a year and the closing deferred tax balance for a machine depreciated straight line and given capital allowances (5 marks). Other parts belong to other topics.
Revise first: Recognition
Parts (b)(ii) to (b)(iv) ask for the deferred tax balance (3 marks), the movement of deferred tax charged to profit or loss (3 marks) and the income tax expense notes (3 marks). Part (a) and part (b)(i) belong to the previous topic.
Revise first: The schedule and the movement
The compulsory accounts question includes a deferred tax provision to be adjusted to a stated closing balance, with the increase taken to income tax expense. The other adjustments belong to other topics.
Revise first: The schedule and the movement
Source: ICAN Pathfinder, Financial Reporting. Diets covered: Every diet in the Pathfinder, from November Diet, 2021 to May Diet, 2026, was reviewed here. The diets listed above test this topic directly or include it within a longer question..
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