Written by Eirik Kalkvik Stenberg
Understanding Deferred Tax Assets in Corporate Financial Reporting
In simple terms, deferred tax assets (DTA), or future tax reductions, represent an accruing asset reflecting the estimated future tax deduction that companies can anticipate related to their employee equity compensation plans. It plays a crucial role in financial reporting, particularly in the realm of equity compensation plans governed by International Financial Reporting Standards (IFRS).
As part of Optio’s financial reporting service, you will receive fully compliant reports in line with IFRS IAS 12. To learn more, book a meeting with your Key Account Manager or contact sales here.
DTA Recognition Under IFRS IAS 12 Regulations
DTA are regulated by IAS 12 (68A-C) within the framework of IFRS. While the tax deduction associated with equity compensation plans typically materializes only upon the exercise of options from a tax perspective, under IFRS, this deduction is recognized as an accruing asset earned as employees earn their options.
When to Incorporate Deferred Tax Assets in Equity Plans
This depends on mainly two factors, first whether your tax jurisdiction permits a tax deduction for equity compensations, and second which reporting standard you follow.
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Flowchart describing whether and how you should consider future tax reductions depending on your circumstances.
Accounting Profit vs. Taxable Profit
To better understand deferred tax assets it’s useful to understand the difference between accounting profit and taxable profit.
Tax authorities may not permit the tax deduction before the equity compensation agreement has materialized, at the point when the employee exercises their option. Hence, the tax deduction becomes a taxable profit (tax loss) only at the point of settlement.
Meanwhile, accounting profit refers to earnings in line with accounting standards (such as IFRS), and one of the purposes of such a standard is to be transparent about a company’s state based on current and future obligations and potential benefits. The future tax deduction is estimated and recognized as accounting profits until it is realized.
Deferred tax assets are the temporary difference between the accounting- and taxable profits caused by the difference in the timing of the recognition of the future tax deduction related to share-based payment awards of the future tax deduction related to the equity compensation.
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Recognition: P&L and Equity in Financial Statements
The deferred tax assets should be recognised as an income or expense and should be included in the profit and loss for the period as a plan accrues. However, the deduction basis cannot exceed the amount recognized as IFRS 2 expense, and any excess should be recognized directly in equity.
It can be challenging to correctly consider the IFRS 2 expenses when splitting deferred tax assets into these two entries. If this is an issue, at Optio we got you covered! With Optio’s financial reporting service, we already have your IFRS 2 figures, which our report will automatically pick up and use to provide you with the correct figures.
Conclusion
In conclusion, recognizing deferred tax assets should be applied to companies complying with the International Financial Reporting Standards (IFRS) or similar accounting standards. This can reduce the tax liability for the company and have a direct effect on the company's Profit & Loss statement. Proper recognition is typically handled by accounting departments or tax divisions. For first-time adopters, we recommend first discussing the transition with the company's auditors to ensure correct compliance with the IFRS standards. Optio now offers automatically generated DTA reports as part of our financial reporting services and you, of course, also have the possibility of running these reports self-serviced.
If you want to learn more, please contact us at support@optioincentives.com or directly with your Key Account Manager.
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