ARTICLE: Recognition of deferred tax assets arising from the carry-forward of unused tax losses

European Securities and Markets Authority (ESMA) has issued a public statement on recognition of deferred tax assets (DTAs) arising from the carry-forward of unused tax losses regarding the application of International Accounting Standard 12 (IAS 12) that set rules for DTA recognition. Public statement addresses some uncertainties with two main aspects of DTA i.e. assessment of the probability of available future taxable profits and “convincing other evidence” of availability of sufficient future taxable profits for issuers with history of recent tax losses.

Assessment of probability of available future taxable profits

Because assessment of probability is not specifically defined in IAS 12, ESMA understands that available future taxable profits should be “more likely than not”, stated differently, probability of that profits are greater than 50 % when considering both positive and negative available evidence. Strong positive offsetting evidence for future profits is needed when issuer has losses from operations. Issuer should also be careful of one-time events in sense of probability of reoccurrence. If issuer has tax losses with short expiration period, it should be carefully reviewed, because time to generate taxable profit and use tax losses is limited. Also, tax losses with no expiry date are not evidence, that a company will be able to generate taxable profit to use them.

Doubts about “going concern” should result in scepticism for DTA recognition, but just “going concern” is not sufficient evidence for future taxable profits and consequently DTA recognition.

Examples of positive and negative evidence proposed by ESMA in its statement are listed below.

Examples of positive evidence

• Losses occurred due to identifiable one-time/non-recurring events; • A strong earnings history exclusive of the loss that created the unused tax loss carried forward (provided that the loss is not expected to recur); • New business opportunities, e.g. new patents; • Restructuring or disposal which clearly eliminates the loss sources; • Convincing tax planning strategies; • Firm sales backlog or new contracts (considering also past realisation of sales backlog); and • Business acquisitions generating sustainable profit margins which are sufficient to enable the issuer to utilise existing tax losses carried forward and which can be utilised for that purpose (e.g. in the same tax jurisdiction).

Examples of negative evidence

• A recent history of operating losses for tax purposes; • The taxable entity is a start-up business; • History of significant variances of actual outcomes against business plans; • Losses of major customers and/or of significant contracts; • Uncertainty regarding the issuer’s going concern; • History of restructuring without returning to profitability or emerging from a bankruptcy; • The taxable entity expects losses in early future years; • The taxable entity has a history of unused tax losses and/or credits expiring; and • The losses relate to the core activity of the issuer and thus may reoccur in the future.

Assessing whether convincing evidence supports the expectation of future taxable profits

For recognition of DTAs, objective verifiability of other convincing evidence is expected from ESMA (i.e. recent loss is negative evidence against future profits). There are various factors that affect reliability of profit forecasts, among others, industry and/or experience of issuer. For example, companies with long-term contracts in the real estate sector or concession agreements are in a beneficial position for proving future profitability in comparison to start-ups with no financial history, whose future profitability is very uncertain.

Estimation should consider only future events which could be controlled by issuer (i.e. tax laws and rates changes, business combination should not be applicable for estimation). Also, business plan assumptions should be reasonable and consistent with prior periods and industry trends.

Because time limit of profit forecasts is not defined in standards, ESMA expects caution when DTA planning period exceeds normal planning cycle. The fact that reliability of forecast decreases with time should be a supportive reason to give distant events lower weights. If company is undertaking tax planning, it can be supporting evidence for DTA recognition, but ESMA expects that expected costs of implementation of such strategy should be included in the planning.


In this article certain issues regarding the recognition of DTA have been gathered. Some helpful guidelines about when a DTA could be recognised have been listed. Despite comprehensive highlights on DTA recognition by ESMA presented in this article, quite a few questions are left unanswered. Especially probability determination and quality of other convincing evidence are left to issuer’s “subjective” evaluation. But however, article and the whole statement can be a helpful collection of information that would be much harder to extract from IAS 12.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.