A deferred tax asset (DTA) under IAS 12 arises when a company's taxable profit is higher than its accounting profit, creating a timing difference that will generate a tax benefit in future periods. The DTA represents the future tax saving that will occur when the timing difference reverses — for example, when an expense recognized for accounting purposes in future years becomes tax-deductible. Common sources of DTAs include: tax loss carry-forwards, accelerated tax depreciation creating future deductibility, provisions recognized for accounting but not yet tax-deductible, and employee benefit obligations.

Under IAS 12, a DTA is recognized only if it is "probable" (more likely than not) that sufficient future taxable profits will be available against which the DTA can be utilized. This probability criterion makes the recognition of tax loss carry-forward DTAs particularly judgmental — a company that has been loss-making for multiple years and projects profitability may be challenged by auditors on the reliability of the future profit projections. Overstatement of DTA recognition is a common quality-of-earnings concern in financial due diligence.

In a business valuation context, DTAs must be carefully analyzed: DTAs recognized on loss carry-forwards add to the value of the business (they reduce future tax cash payments), but only if the underlying loss can actually be used. In an acquisition context, the availability of the target's tax loss carry-forwards may be restricted (in France, losses are limited to 50% of current year profits plus €1 million; in Switzerland, losses can be carried forward for 7 years but expire on ownership changes under certain conditions).

At Hectelion, we analyze DTA recognition and recoverability in our due diligences and integrate loss carry-forward analysis into our business valuations.