Deferred tax is one of the most commonly misapplied areas of MFRS.
The recognition test turns on temporary differences between the carrying amount of an asset or liability and its tax base. Where that difference will reverse in a future period, a deferred tax balance arises.
In practice, the errors we see most often concern unused tax losses: a deferred tax asset is recognised only to the extent that future taxable profit is probable. Documenting that judgement is where many companies fall short.
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