In this topic 6 sections
A loss is not an automatic tax refund
A tax loss is determined under the case's tax rules, not by taking accounting loss and multiplying by the tax rate. A carry-back, where legally available, recovers tax relating to a prior period and can create a current tax asset. A carry-forward may reduce future taxable profit and can create a DTA, but only to the extent future utilisation is probable.
Check expiry dates, entity and jurisdiction restrictions, eligible categories of profit and available planning opportunities. Do not assume that every loss lasts indefinitely or can be transferred within a group. The tax law in the case is an input to the accounting analysis.
Use the loss-recovery workbook for the original multi-year schedule below and a contrasting unrecognised-loss example.
Build the evidence before recognising the benefit
A history of recent losses is strong negative evidence. Suitable taxable temporary differences may still support recognition; otherwise convincing evidence of future taxable profit is needed. Consider whether the loss arose from an identifiable event unlikely to recur, the reliability of forecasts and whether profit will arise before the loss expires.
Arden Design incurs a tax loss of $42,000. There is no carry-back and a 30% rate applies. Supported future taxable profit is only $26,000 before expiry, with no additional suitable taxable differences or planning opportunities. Recognise a DTA of $7,800. The remaining $16,000 of losses carries a potential $4,800 benefit that is not recognised.
The recognition entry is Dr DTA $7,800; Cr tax income (P/L) $7,800. There is no current tax receivable in this example. Record the amount and basis of the unrecognised loss separately so it is available for later review.
Recovery: separate recognised and unrecognised losses
In the next year Arden has $19,000 of taxable profit before loss utilisation. Under the guide's analytical convention, allocate recovery first to the $16,000 of losses for which no DTA was previously recognised, then to $3,000 of recognised losses. This bookkeeping allocation is not a universal tax-law ordering rule; actual legal restrictions still govern which losses can be used.
No current tax is payable: the whole $19,000 profit is sheltered. Reverse $900 of the recognised DTA, leaving $6,900 related to $23,000 of remaining losses, because revised evidence at Year 2 year-end now supports at least $23,000 of further taxable profit before expiry. The tax expense for the period is $900: nominal tax of $5,700 is reduced by $4,800 from previously unrecognised losses now used.
In Year 3, taxable profit before loss utilisation is $31,000 and all $23,000 remaining losses are used. Taxable profit after losses is $8,000; current tax payable is $2,400. Reverse the remaining $6,900 DTA through tax expense. Total tax expense is $9,300, equal to 30% of the $31,000 pre-loss profit when there are no other differences.
| Period | Losses used | Current tax payable | Closing recognised DTA | P/L tax expense / (income) |
|---|---|---|---|---|
| Loss year | 0 | 0 | 7,800 | (7,800) |
| Recovery Year 2 | 19,000 | 0 | 6,900 | 900 |
| Recovery Year 3 | 23,000 | 2,400 | 0 | 9,300 |
The Year 2 recognition assessment uses new evidence; it does not simply reuse the loss year's original $26,000 forecast after $19,000 of profit has already arisen. It does not force an asset to remain recognised simply because it was recorded last year.
Later recognition and reduced support
For a separate entity, a $25,000 loss was initially unsupported, so no DTA was recognised. Later, convincing new evidence supports $18,000 of future utilisation. At 30%, recognise $5,400 then, rather than backdating an asset into the loss year. Explain the change in evidence and the applicable tax-expense disclosure.
Conversely, if a recognised $7,800 DTA is now supported by only $17,000 of usable losses, reduce it to $5,100. Dr tax expense $2,700; Cr DTA $2,700, assuming a profit-or-loss allocation. This is a recoverability adjustment, not a tax payment. If evidence later improves, reassess the unrecognised benefit.
Unused tax credits also require recoverability assessment, but a credit is normally a tax amount rather than a deduction from taxable profit. Do not multiply a $3,000 tax credit by 30% again. Its use, expiry and recognition depend on its specific rules.
Check loss journals against cash and balances
When a previously recognised loss DTA is used, reducing current tax payable is only one side of the story: reverse the DTA that has been consumed. Otherwise the same benefit remains on the balance sheet after it has already reduced tax.
When an unrecognised prior loss is used, there is no opening DTA to credit for that part. Show the effect on the current tax charge and explain the benefit in the reconciliation. Do not manufacture an asset and reverse it just to force a journal template to balance.
For a carry-back illustration, assume a permitted loss recovery of $10,500 is recoverable from tax paid for the preceding period. Recognise Dr current tax asset $10,500; Cr tax income $10,500, subject to the legal entitlement. This example has an actual prior-period recovery; Arden's carry-forward does not.
Sources and further reading
Concept sources: CPA Australia, Financial Reporting study guide, sixth edition (October 2022), Module 4, sections 4.5–4.6, printed pages 186–192. The distinction between recognised and unrecognised losses and the guide's initial credit label are explained above. All entities and amounts are original.
Concept sources: AASB 112, June 2021 compilation, corresponding IAS 12 paragraphs 5, 13–14, 34–37, 56, 80(e)–(g), 81(e) and 82. Paragraphs 80(e)–(f) concern benefits of previously unrecognised prior-period losses; they do not prescribe the initial current-year loss journal's account label.