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IFRS and deferred taxes – key accounting aspects Updated!

IFRS does not only address current tax effects and current tax, but also future income tax consequences, taking into account the so-called deferred tax, which is to be recognised in the IFRS financial statements under IAS 12.

Deferred tax results on the one hand from differences between tax regulations and Hungarian accounting rules and on the other hand from temporary differences between applicable international and Hungarian rules.  On this basis, deferred taxes should be assessed and accounted for as follows:

 Tax balance sheet | Accounting balance sheet | IFRS

together form the full scope of IFRS deferred tax 

Temporary differences vs. permanent differences under IAS 12

To determine deferred tax, we need to consider the tax base adjustments and their future tax effects, which are called temporary differences by IAS 12. 

Temporary differences have future tax consequences; therefore they are regarded as deferred tax base. 

What are these? For example, tax base modifications related to loss carry-forwards, depreciation, impairment, provisioning or creation of provision for developments.

Unlike temporary differences, permanent differences do not have any future tax effect, therefore they do not give rise to deferred tax.  An example of a permanent difference is the tax penalty.  

Only temporary differences have deferred tax effects.  More specifically, the deferred tax effect may be a deferred tax asset or a deferred tax liability.  

Temporary differences will either increase or decrease the tax base in the future.  Accordingly, the standard makes a distinction between deductible temporary differences and taxable temporary differences.


Recognition of deferred tax

Under IAS 12 a deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: 

  • the initial recognition of goodwill; or 
  • the initial recognition of an asset or liability in a transaction which is not a business combination; and at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

However, the recognition of deferred tax assets is subject to certain criteria under the standard. Accordingly, an entity recognises deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised. 

IAS 12 does not allow the capitalisation (recognition in the balance sheet) of a deferred tax asset until it is probable that it will be deductible from future taxable profit. Without this criterion fulfilled, it may not be recognised as an asset. The standard stipulates recognition criteria of assets, namely the flow of future economic benefits to the entity associated with the item and the cost of the item can be measured reliably.

If the entity does not meet the criteria for the recognition of a deferred tax asset, the deferred tax asset cannot be recognised. However, a deferred tax asset not previously recognised may be recognised subsequently as part of the current period accounts, thereby adjusting the period accounting.

When presenting deferred tax in the balance sheet, it is important to note that the amounts of current tax assets and liabilities and deferred tax assets and liabilities should be presented separately.  What exactly does this mean?  Neither current tax assets and liabilities nor deferred tax assets can be aggregated with any other balance sheet item, nor can current and deferred taxes be aggregated.


Deferred tax assets are recognised under non-current assets, while deferred tax liabilities are recognised under non-current liabilities.

Deferred tax assets and liabilities are not discounted.

Deferred tax is calculated using the tax rate that is expected to apply when the asset is realised or the liability is settled and the temporary differences are reversed.

As a main rule, deferred tax shall be recognised as income or an expense and included in profit or loss for the period.

Please note, however, that there may be transactions that are recognised directly in equity. For example, such cases include recognition in equity due to a change in accounting policy or in case of fair value measurement, and opening differences are recognised against equity on first-time adoption of IFRSs.

In accounting against profit or loss, the amounts of current and deferred tax should normally be presented in an aggregated manner in the income statement, unlike in the balance sheet, where they cannot be aggregated. The amount of the tax expense may even take on the value of tax income (negative tax expense),depending on the balance of deferred taxes, and changes in the current year.

How is subsequent measurement carried out after the initial recognition of deferred tax?

The carrying amount of a deferred tax asset shall be reviewed at each balance sheet date. 

An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow that deferred tax asset to be utilised.  Any such reduction should be subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available.

If it is known before the balance sheet date that the tax rate will change for the following year, the deferred tax must be recalculated at the new rate.

What are the disclosure obligations pertaining to deferred tax?

The information required to be disclosed in the notes to the financial statements are the following, separately disclosing:

  • amount of current tax expense within tax expenses,
  • amount of deferred tax expense within tax expenses,
  • proof that a deferred tax asset can be capitalised if the company is loss-making
  • change in deferred tax due to tax rate change, 
  • changes in applicable tax rates, 
  • write off of deferred tax asset, reversal, reasons,
  • amount of deferred tax generated in previous periods, not yet disclosed,
  • details of deferred tax base,
  • current and deferred taxes recognised against equity,
  • tax effects resulting from changes in accounting policy,
  • deferred taxes related to activities ceased,
  • tax effects of dividend approved in the period between the balance sheet date and reporting date,
  • tax law changes announced and effective after the balance sheet date.

Does deferred tax appear in the financial statements according to the Accounting Act? Update!

From January 1, 2024, based on the entrepreneur's decision, it is possible to report the deferred tax asset and liability in the annual financial statements prepared according to the Accounting Act (Act on Accounting). In the first business year of applying deferred tax, the opening book value of the deferred tax asset and deferred tax liability must be recognized against retained earnings. To ensure that the increase in retained earnings resulting from the book value of the deferred tax asset does not affect the amount of free retained earnings and thus, among other things, cannot form the basis for dividends, a reserve must be created from the retained earnings.

The deferred tax asset and deferred tax liability are included in the balance sheet and income statement of the annual report according to the Accounting Act as follows:

In the balance sheet, the deferred tax asset should be listed among the invested assets, while the deferred tax liability should be presented among the long-term liabilities.

The current year's change in the stock of deferred tax assets and liabilities should be reported in the income statement after the tax obligation line - except for the case mentioned above concerning the first business year of applying deferred tax.

Going forward, taxable income should be determined taking into account both the payable tax and deferred tax.

Significant items of deferred tax assets and liabilities should be presented by legal basis in the supplementary notes to the financial statements.

As can be seen, the accounting of deferred taxes is complex, requiring consideration of multiple aspects. Therefore, we recommend consulting an expert for answers to your questions regarding deferred taxes.


If interested, please read our latest blog post on IFRS – income taxes and deferred taxes. 

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