Criteria for Recognition of deferred tax asset and deferred tax liability is set under IAS 12. Deferred tax liabilities must be recognized for all taxable temporary differences. A liability is recognized when, and only when, it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably (Framework, paragraph 91).
There is no need to explicitly consider the recognition criteria for a Deferred Tax Asset And Deferred Tax Liability, as Deferred Tax Liability is always probable that resources will flow from the entity to pay the tax associated with taxable temporary difference.
Deferred tax assets must be recognized for all deductible temporary differences and from the carry forward of tax losses but only to the extent that is it probable that future taxable profits will be available against which the temporary differences can be utilized.
An asset is recognized when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably (Framework, paragraph 89). The Framework, paragraph 85, states that the concept of probability refers to the degree of uncertainty that the future economic benefits associated the asset will flow to the entity. This probability must be assessed using the best evidence available when the financial statements are prepared.
The reversal of deductible temporary differences results in deductions against 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 recognizes deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilized (IAS 12, paragraph 27).
Recognition of deferred tax asset and deferred tax liability under IAS 12 provides guidelines to assess net tax liability.
