Every entity at the end of the accounting period will make financial record in order to determine the profit or loss during the period. Any income of the entity must be subject to the tax even though they are having profit or suffering loss. The accounting treatment for income taxes is determined by Australian Accounting Standards Board (AASB) 112 which adopts the tax effect method that incorporates both current and future tax consequences of “transactions and other events of the current period that are recognised in an entity’s financial statements and the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position”. Through this essay, the author wants to explain how unused tax losses create deferred tax assets, discuss whether these deferred tax assets satisfy definition and recognition criteria for assets according to the AASB Framework for the Preparation and Presentation of Financial Statements and would the answer change if the asset definition in the IASB / FASB proposed Conceptual Framework was applied.

As the author is more focus on tax loss, therefore future tax consequences is only focus deferred tax asset. Future tax consequences incurred because there is differences between the carrying amount and the tax base which is known as a temporary differences. The future tax consequences of a temporary difference that decrease taxable income relative to accounting profit which is called as a deductible temporary difference (DTD), will be recognised as deferred tax asset (Spiceland, Sepe & Nelson, 2010). However, only 30% of DTD will increase the amount of deferred tax asset.

When the company in an undesirable condition, it may suffer tax loss. Tax loss is incurred because allowable deduction is greater than assessable income. According to Division 36 of the Income Tax Assessment Act, tax losses maybe carried forward and offset against future taxable income leading to the creation of deferred tax assets under the tax effect method. As every entity wants to pay less tax, therefore tax loss will be carried forward in order to reduce the future taxable income when the carrying amount of tax loss is recuperated. In the future period, the amount that actually paid is the income tax in the current period minus the tax loss from previous period so the tax that have to be paid might be lower which means it makes the entity more favourable. Since the entity pay less tax, thus it creates deferred tax asset. (Leo, Hogget & Sweeting, 2012)
For instance, assume Company LA has assessable income $10,000 and allowable deduction $15,000. In other words, the company is having $5000 loss. As it is loss which means the taxable income is negative, the company does not have to pay taxes on that year. Furthermore, assume Company LA generates more money in the next year and records $25,000 of taxable income and pays a corporate tax rate of 20%. Supposedly, the entity would need to pay $5000 ($25,000 x 20%) in taxes. However, because of the tax loss that carryforward from the previous year, therefore Company LA only owes $4000 (($25,000 - $5,000) x 20%) in taxes. $5,000 of tax loss is recognised as deferred tax asset as it is already proven that it decreaces the tax to be paid.
Based on paragraph 5 of AASB 112, deferred tax asset can be defined as the amount of income taxes that able to be recovered in the future periods regarding the deductible temporary differences which lead to a result in amounts that deductable by the tax in the future when the liability is settled or the carrying amount of the asset is recovered (Deloitte, 2013), the unused tax losses and unused tax credits that are carried forward.
Under the The AASB Framework for the Preparation and Presentation of Financial Statements (AASB Framework), it is stated that asset is “a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”. AASB 112 paragraph 14 revealed “When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured.” Therefore the author wants to explain why deferred tax asset that is due to tax loss can be also recognised as an asset.
Firstly, deferred tax asset is a result of past event as it is generated by tax loss that happen in the past. Secondly, deferred tax asset can be controlled by the entity because can determine its accounting rate, for example is the depreciation rate; and it is up to the decision of the entity as there is no expiration date (time limit) of the validation of deferred tax asset. Thirdly, there is a future economic benefit flows to the entity from deferred tax asset, it can be proved that the entity will pay less amount of tax in the future (Read and Bartsch, 1992).

In addition, there are some recognition criteria of an asset that must be met based on AASB paragraph 89 such as “it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.” As deferred tax asset from unused tax loss only can be carryforward when the entity is probable to make profit in the future (NewsWire, 2012), so it is probable that the future economic benefit will flow to the entity as the entity will pay less tax in the future which makes the entity more lucrative (Starkey, 2012). Therefore it meets the first recognition criteria of the asset. Furthermore, deferred tax asset can be reliably measured as there are reliable and accurate data that can be used to determine the deferrred tax asset. For example, the determination of taxable income of the entity that provides information about the details which lead to taxable income (tax loss).

Whereas, the definition of asset based on the IASB / FASB proposed Conceptual Framework is “a present economic resource to which the entity has a right or other acces that others do not have.” Firstly, “Present means that on the date of the financial statements both the economic resource exists and the entity has the right or other access that others do not have” (Financial Accounting Standard Boards, 2010). Deferred tax asset is recognised and recorded by the entity immediately in the event of tax loss. In addition, only the entity that suffered tax loss has right to use the benefit. Secondly, “An economic resource is something that is scarce and capable of producing cash inflows or reducing cash outflows, directly or indirectly, alone or together with other economic resources” (Financial Accounting Standard Boards, 2010). As deferred tax asset is able to reduced the amount of tax paid which means decrease the cash outflow of the entity, therefore deferred tax asset is an economic resource. Thirdly, “A right or other access that others do not have enables the entity to use the economic resource and its use by others can be precluded or limited.” The entity only has right or acces to use its deferred tax asset which means that the other entity cannot use it as they do not has any right.

In conclusion, unused tax loss can creates deferred tax asset. Deferred tax asset satisfy all the definition, characteristic and recognition criteria of an asset that based on AASB Framework for the Preparation and Presentation of Financial Statements (AASB Framework). Eventhough, the definition of an asset in IASB / FASB proposed Conceptual Framework was applied, deferred tax asset still meet the definition of an asset. Therefore, deferred tax asset can be recognise as an asset in both framework, either AASB Framework for the Preparation and Presentation of Financial Statements (AASB Framework) or IASB / FASB.

References List
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Australian Accounting Standards Board. (2010). AASB 112. Melbourne: Author.
Deloitte (2013). IAS 12 - Income Taxes. [ONLINE] Available at: http://www.iasplus.com/en/standards/standard11. [Last Accessed 4 April 2013].
Financial Accounting Standard Boards. (2010). Conceptual Framework-Elements and Recognition. Retrieved from http://www.fasb.org/project/cf_phase-b.shtml
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Read, W. J. & Bartsch, R. A. J. (1992). Accounting for Deferred Taxes Under FASB 109. Journal of Accountancy, 174 (6), 36-41.