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Hopefully this is the last tax-related question….
So, I understand the basic calculation below. But I don’t understanding a ridiculous situation of recognizing the DFA in 2011. I mean, we’re looking at the FS for the YE31.12.2011 (let’s say 20X1=2011).
Some accountant or CFO told us “oh, you know what? I saw in my coffee cup today that we will earn a profit in the amount of 50,000 in 2 years from now.” (or okay, let’s they actually supported this statement with a calculation).
My question is, how we can recognize a deferred tax asset in 2011? We don’t know what’s going to happen in 2 years,..Ok, we can accrue some income/expenses based on the contract terms or etc. but a profit?!! I don’t understand it.
Activity 6: Deorf Co
Deorf Co incurs $80,000 of tax losses in the year ended 31 December 20X1 which it can carry forward for two accounting periods before they expire. Deorf Co expects to make a loss in 20X2 and to return to profitability in 20X3, expecting to make a profit of $50,000 in that year. The company pays tax at 20%. What is the deferred tax balance in the statement of financial position at 31 December 20X1?
What is the deferred tax balance in the statement of financial position at 31 December 20X1?
Answer: ? Deferred tax asset $10,000
We can only recognise the deferred tax asset in the future if we are reasonably certain that we will be making profits in the future. The business knows from budgeting what is going to happen in the future and here they believe that they will again be profitable.