Under IAS 12, the tax base of an asset is the amount that will be deductible for tax purposes as the entity recovers the asset’s carrying amount, whether through use or sale. If the economic benefits from recovery will not be taxed, the tax base simply equals the carrying amount, and no temporary difference arises. That two-part rule, set out in paragraph 7 of the standard, is the starting point for every deferred tax calculation involving an asset.1IFRS Foundation. IAS 12 Income Taxes Deferred Tax – Tax Base of Assets and Liabilities
The tax base sits alongside the carrying amount but is measured independently of it. Accounting policy sets the carrying amount; tax law sets the tax base. Because the two rulebooks rarely agree on timing, the numbers usually diverge, and that gap is where deferred tax accounting begins.
The Paragraph 7 Rule in Practice
Paragraph 7 packs two rules into a single sentence. First, when an asset generates income that will eventually be taxed, its tax base equals whatever amount the tax authority will allow the entity to deduct against that future taxable income. Think of it as the remaining tax-deductible value still owed to the company. Second, if the economic benefits will never be taxed, the tax base equals the carrying amount.1IFRS Foundation. IAS 12 Income Taxes Deferred Tax – Tax Base of Assets and Liabilities
Both rules point at the same underlying question: how much of the asset’s value will pass through the tax system on the way out. If future recovery is taxable, the tax base is the deduction still available to shelter it. If future recovery is not taxable, there is nothing to shelter, so the tax base mirrors the carrying amount and no deferred tax entry follows.
Tax Base When Recovery Is Taxable
Most assets fall into this first category. Property, equipment, inventory, and receivables all produce revenue that gets taxed, so the tax base represents the deductions the tax authority still owes the entity as it consumes or sells the asset.
Depreciable Assets
Take equipment with a carrying amount of 100,000. If tax law has already allowed 40,000 of depreciation deductions, the remaining tax base is 60,000. That 60,000 is what remains available to deduct against the future revenue the equipment will generate.2IFRS Foundation. IAS 12 Income Taxes
The gap between accounting and tax depreciation is what drives most temporary differences on fixed assets. Tax codes often allow accelerated write-offs to encourage capital investment, so the tax base drops faster than the carrying amount in an asset’s early years. In later years the accounting depreciation catches up and the gap unwinds. Tracking that shifting balance is the routine work of deferred tax accounting.
Trade Receivables
Trade receivables are simpler. When a company records a receivable of 100 and the related revenue has already been included in taxable profit at the time of sale, the tax base of the receivable is also 100. Collecting the cash later does not trigger further tax because the income has already been taxed. Carrying amount matches tax base, so no temporary difference arises.
Accrued Interest Where Tax Follows Cash
Accrued interest can look counterintuitive. If a lender books interest receivable of, say, 100 but the tax code taxes that interest only when cash is received, the tax base of the receivable is zero. There is no future deduction to be had; the full amount will simply become taxable when collected. The gap between the carrying amount and the zero tax base is a taxable temporary difference, generating a deferred tax liability.
Tax Base When Recovery Is Not Taxable
Some assets produce income that is permanently exempt from tax. Interest on certain government bonds is the standard example. When the law exempts the income, no future deduction is needed to offset it, and paragraph 7’s second rule sets the tax base equal to the carrying amount.1IFRS Foundation. IAS 12 Income Taxes Deferred Tax – Tax Base of Assets and Liabilities
A bond receivable of 5,000 with legally non-taxable interest has a tax base of 5,000 throughout its life. Carrying amount equals tax base, temporary difference is zero, no deferred tax is recognized. The rule keeps tax-exempt items from cluttering the balance sheet with deferred tax entries that would never have any real tax consequence.
Assets Fully Deducted Upfront: A Tax Base of Zero
The opposite situation arises when tax law allows a full deduction at the time of expenditure but accounting rules require capitalization. Development costs that meet the recognition criteria under IAS 38 are the common example. A company may capitalize 50,000 of qualifying spending as an intangible asset while the tax authority permitted the entire 50,000 to be deducted in the year it was incurred.
The tax benefit has already been consumed, so no future deduction remains. The tax base of the capitalized asset is zero. Every unit of future income the asset produces will be fully taxable with nothing to offset it. The carrying amount of 50,000 against a tax base of zero creates a taxable temporary difference of 50,000, and a deferred tax liability follows.2IFRS Foundation. IAS 12 Income Taxes
Items With a Tax Base but No Balance Sheet Recognition
Paragraph 9 of IAS 12 addresses a situation that catches practitioners out: items that carry a tax base even though they are not recognized as assets. Research costs are the standard case. Under IAS 38, research expenditure is expensed as incurred and never appears on the balance sheet.3IFRS. IAS 38 Intangible Assets Some tax jurisdictions defer the deduction to a later period. In that case, the tax base is the amount the tax authority will allow as a future deduction, while the carrying amount is zero.
The result is a deductible temporary difference, and a deferred tax asset may be recognized if it is probable that sufficient taxable profit will be available to use the deduction.2IFRS Foundation. IAS 12 Income Taxes
From Tax Base to Deferred Tax
Every temporary difference on an asset comes from the same arithmetic: carrying amount minus tax base. If the carrying amount exceeds the tax base, the difference is taxable, meaning future recovery will increase taxable profit. A deferred tax liability follows. If the tax base exceeds the carrying amount, the difference is deductible, and a deferred tax asset may be recognized.2IFRS Foundation. IAS 12 Income Taxes
IAS 12 requires a deferred tax liability for all taxable temporary differences, with narrow exceptions for goodwill on initial recognition and for transactions that affect neither accounting nor taxable profit. Deferred tax assets face a stricter test: they can only be recognized to the extent it is probable that future taxable profit will be available to use the deduction. That probability assessment is where judgment enters the calculation.
Manner of Recovery: Use Versus Sale
The tax base is not always a single fixed number. It can vary with whether the entity expects to recover the carrying amount through use or through sale, because tax jurisdictions frequently apply different rates or allowances to each. Paragraph 51 requires deferred tax to reflect the tax consequences that follow from the manner in which the entity actually expects to recover the asset.4IFRS Foundation. IAS 12 Income Taxes – Multiple Tax Consequences of Recovering an Asset
Investment property carried at fair value under IAS 40 gets specific treatment. Paragraph 51C establishes a rebuttable presumption that the carrying amount will be recovered entirely through sale, unless the property is depreciable and held in a business model that consumes its benefits over time.5IFRS Foundation. International Accounting Standard 12 Income Taxes Where capital gains rates differ from ordinary income rates, the presumption can shift the deferred tax balance materially.
Impairment and Revaluation
Impairment reduces the carrying amount but usually leaves the tax base untouched, because most tax codes ignore accounting impairment losses and continue the tax depreciation schedule unchanged. An asset that previously had a carrying amount above its tax base can flip after impairment, so the tax base now exceeds the carrying amount and a deductible temporary difference emerges.
Revaluations under IAS 16 push in the other direction. Revaluing an asset upward raises the carrying amount while the tax base stays where the tax code left it. The widened gap increases the taxable temporary difference and the deferred tax liability. IAS 12 requires the deferred tax on a revaluation to be recognized in other comprehensive income, matching the treatment of the revaluation gain itself.
The Initial Recognition Exception
Not every gap between carrying amount and tax base produces deferred tax. IAS 12 prohibits recognition of a deferred tax asset or liability arising on the initial recognition of an asset in a transaction that is not a business combination and that affects neither accounting profit nor taxable profit at the time it occurs.2IFRS Foundation. IAS 12 Income Taxes
A typical case is an asset purchased where part of the cost is not deductible for tax purposes. A temporary difference exists at day one, but recognizing deferred tax would require an adjustment to the asset’s carrying amount and misrepresent its cost. The exception prevents that circular result. Once the asset is in use and further temporary differences develop through depreciation or other changes, deferred tax is recognized on those movements from that point forward.