Tax in profit and cash paid differ
IAS 12 addresses income taxes and defines temporary differences through the difference between an asset or liability’s tax base and carrying amount. Source: **curr-stat-ias12**, About. This is not a universal theory of every tax or levy. The examples use a fictional rate solely for arithmetic and do not assert current law in any country.
Equipment with different write-off speeds
Suppose equipment has carrying amount 800 and tax base 600. The temporary difference is 800 − 600 = 200. At a conditional 20% rate, the deferred tax liability in this simplified model is 40. We assume recognition requirements and exceptions have already been checked; the example does not establish them for a real transaction.
The model means recovery of carrying amount is linked to future tax consequences that are not the current payment. If the difference later falls to 100 at the same rate, the conditional liability becomes 20. The 20 decrease must be explained by movement in the difference, not called a budget refund.
A deferred asset requires future capacity
The IAS 12 overview provides for deferred tax assets subject to conditions, including unused tax losses and credits. Source: **curr-stat-ias12**, About, deferred tax asset. A loss does not automatically create an unconditional cash claim against the state. Future taxable profit, timing and applicable limitations matter.
Look for forecast profit, expiry and usage restrictions supporting recognition. A large asset relative to equity makes these assumptions important, but size alone does not prove error. Study disclosures and compare expectations with actual performance; caution does not replace detailed recognition analysis.
Temporary and permanent differences
Not every difference between accounting profit and tax base reverses later. Mechanically multiplying every difference by the tax rate is therefore wrong. Separate differences associated with future reversal from other causes, then reconcile effective tax burden with current and deferred components when disclosed.
Do not mistake a tax benefit in profit for cash received. Also do not attribute a change in net income only to operations when a material part came from revising a tax asset. Show these causes separately for period comparison without presenting the analytical adjustment as mandatory.
Reading the note
Build a roll-forward showing opening balance, recognition, use, reassessment and closing balance, with changes split by disclosed categories. Check perimeter, rates and events that do not follow from ordinary operations. Do not transfer a conclusion across companies in different tax jurisdictions.
This material does not calculate real tax obligations or give tax advice. See [income statement](/guides/income-statement/), [balance sheet](/guides/balance-sheet/) and [tax records](/guides/tax-records-basics/) for context. Its purpose is to understand why result, liability and payment can move differently.
An unrecognised asset is not a created asset with a reserve
An accumulated tax loss is not itself an unconditional asset. IAS 12 links recognition of unused-loss benefits to probable future taxable profit and requires usage restrictions to be considered. Recent losses require persuasive evidence of realisation, not a promise of growth: **ca-ias12-text**, 34–36. Do not describe all systems as “recognise the whole asset first, then create a reserve”; that mixes accounting systems and can hide an unrecognised amount.
In a separate model, a carryforward loss is 80 and a conditional 20% rate gives potential benefit 16. After checking timing, income compatibility and supportable forecasts, conditions are met for only 50 of the loss. Recognised asset is 10; unrecognised potential effect is 6. This does not mean the balance sheet must contain asset 16 plus a separate liability 6, and no cash refund of 10 follows.
If expected usable loss falls from 50 to 30 at the next date, recognised asset becomes 6 and the 4 reduction affects the tax component of profit under the model’s assumption that no events are outside profit. If evidence later supports another 20, the asset may increase by 4 after checking conditions. Reassessment is addressed in **ca-ias12-text**, 37 and 56. All numbers and tax assumptions are fictional; the example sets no country’s carryforward period and does not explain any company’s specific year.