7 Common Mistakes in Deferred Tax and Correct Accounting

Deferred tax under TMS 12 / IAS 12 is one of the most error-prone areas in financial reporting. The formula looks simple, but correct accounting requires careful professional judgment.

In this article, we cover 7 common mistakes and the correct accounting treatment for each one.

What Is Deferred Tax and Why It Matters

Differences between accounting profit and taxable profit are either permanent or temporary. Only temporary differences that reverse in future periods create deferred tax effects.

• • Permanent differences do not reverse and do not create deferred tax.
• • Temporary differences reverse and create DTA or DTL.

1) Mixing Temporary and Permanent Differences

Mistake: Treating every difference as deferred tax.

Correct: First test whether the difference reverses in future periods.

2) Recognizing DTA Without Recoverability

Mistake: Booking DTA without profit support.

Correct: Perform recoverability assessment under TMS 12 and update each reporting period.

3) Using the Wrong Tax Rate

Mistake: Applying current-period rate blindly.

Correct: Use enacted/ substantively enacted rates expected at reversal date.

4) Offsetting DTA and DTL Incorrectly

Mistake: Netting balances without conditions.

Correct: Offset only when legal right and same tax authority criteria are both met.

5) Ignoring Equity-Related Effects

Mistake: Recording equity-origin items in P/L.

Correct: Recognize deferred tax in the same section as the underlying transaction.

6) Misapplying Goodwill Exception

Mistake: Wrong deferred tax logic in business combinations.

Correct: Apply goodwill initial recognition exception and separately measure identifiable differences.

7) Unrealistic Assumptions on Loss Carryforwards

Mistake: Recording high DTA without robust evidence.

Correct: Base recognition on realistic forecasts, planning opportunities, and legal limits.

Period-End Control Checklist

• • Is the difference temporary or permanent?
• • Is there sufficient probable taxable profit for DTA recognition?
• • Is the tax rate aligned with the reversal period?
• • Are offsetting conditions legally and operationally met?
• • Are equity-related deferred tax effects recognized in equity?
• • Were loss carryforward limits and recoverability tested?

Conclusion

Deferred tax may look formulaic, but correct treatment depends on judgment. Focusing on whether a difference will actually reverse improves reporting quality and reliability.