Deferred Tax Assets
The key matters of attention in reviewing the treatment of tax loss carry-forwards
What is it?
A tax loss carry-forward, also known as a net operating loss carry forward, is a provision that allows a company to carry forward its tax losses from one tax year to offset future taxable income in subsequent tax years.
What are the key issues?
Determining the realizability of the carry-forwards and assessing the likelihood and timing of future taxable income
One of the key matters is determining whether the tax loss carry-forwards are real and can be utilized to offset future taxable income. This involves evaluating the company's history of generating taxable income and its future prospects for generating taxable income. It is important to assess the likelihood of future taxable income and the timing of when the tax loss carry-forwards can be utilized, as this will impact the value of the carry-forwards.
Assessing the impact of changes in tax laws on the utilization of the carry-forwards
Changes in tax laws can also impact the utilization of tax loss carry-forwards. It is important to assess the potential impact of changes in tax laws on the utilization of the carry-forwards and to consider whether the company has any strategies in place to mitigate the impact of these changes.
Evaluating the impact of the carry-forwards on the company's effective tax rate
The utilization of tax loss carry-forwards can reduce a company's effective tax rate, which can have a positive impact on its financial statements. However, if the company has a high effective tax rate to begin with, the impact of the utilization of the carry-forwards may be less significant.
Cash flow discounting
The future cash flows used for impairment purposes are required to be discounted. Discounting is not permitted under IAS 12, although the risk/uncertainty inherent in future events should be reflected in the expected future taxable profits.
Reviewing the company's accounting policies for the recognition and measurement of tax loss carry-forwards.
It is important to review the company's accounting policies related to the recognition and measurement of tax loss carry-forwards. This involves reviewing the company's financial statements and evaluating the accounting treatment of the tax loss carry-forwards to ensure that they are being properly recognized and measured in accordance with Generally Accepted Accounting Principles (GAAP).