## Learning Outcomes

By the end of this article, you will understand how deferred tax arises in complex situations involving share-based payment schemes and items recognised in other comprehensive income (OCI), including equity investments and revaluations. You will be able to apply IAS 12 rules for identifying taxable and deductible temporary differences, compute and present related deferred tax assets and liabilities, and explain which items generate deferred tax charges to profit or loss versus OCI.

## ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand how deferred tax applies in complex scenarios, especially those likely to be tested at Strategic Professional level. This article develops your skills in these syllabus areas:

- Evaluate and apply the recognition and measurement of deferred tax assets and liabilities, including those arising from temporary differences relating to share-based payments and revaluations
- Explain and apply the treatment of deferred tax on equity-settled and cash-settled share-based payment transactions
- Discuss and apply the rules for deferred tax on items recognised in other comprehensive income, such as revaluations and fair value movements in equity instruments
- Demonstrate presentation and disclosure of deferred tax in the financial statements

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. When are deferred tax assets recognised for equity-settled share-based payment transactions under IAS 12?
2. If an entity revalues land upwards through OCI, how is the resulting deferred tax presented in the financial statements?
3. True or false? A deferred tax asset for a share-based payment is limited to the portion relating to the remuneration expense that has accrued at the reporting date.
4. Briefly explain how the tax base for an investment in equity designated at fair value through OCI is determined.
5. A tax deduction for a share option scheme will exceed the cumulative remuneration expense. How is the related deferred tax split between profit or loss and equity?

## Introduction

Temporary differences between the carrying amounts of assets and liabilities and their tax bases often arise in more advanced areas of financial reporting. For ACCA SBR candidates, two areas frequently cause confusion: deferred tax on share-based payments (such as employee share option plans) and on items recorded in other comprehensive income (OCI), including revalued assets and fair value changes on designated equity investments. Recognising, measuring, and presenting deferred tax in these cases requires close attention to the details of IAS 12 Income Taxes.

Understanding these complex scenarios will enable you to provide a faithful representation of an entity's tax position to users and to tackle application-based SBR questions with confidence.

> **Test Tip:**
> When revising Share-based payments and OCI items, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### DEFERRED TAX ON SHARE-BASED PAYMENTS

Share-based payment schemes—such as share options or share appreciation rights—are increasingly common. For equity-settled arrangements, entities typically recognise an expense over the vesting period in accordance with IFRS 2. However, tax relief may only be available when options are exercised, and the taxable deduction is often based on the inherent value at exercise date (i.e., share price less exercise price), which can differ from the cumulative remuneration expense.

This can create temporary differences between the carrying amount (often nil for outstanding options) and the tax base (expected future deductions). IAS 12 requires recognition of a deferred tax asset for deductible temporary differences if it is probable that taxable profits will be available. The deferred tax asset builds up over the vesting period as the corresponding expense accrues.

> **Key Term: deductible temporary difference**
> A difference between an asset or liability's carrying amount and its tax base that will reduce taxable profits in the future, giving rise to a deferred tax asset.
> **Key Term: share-based payment**
> A transaction in which the entity receives goods or services as consideration for equity instruments or incurs a liability for cash payments based on its share price.

Where the estimated tax deduction exceeds the cumulative expense, the excess deferred tax is credited to equity (other components of equity), not profit or loss. This ensures the deferred tax aligns with the related transactions: profit or loss for the remuneration expense; equity for the excess tax deduction.

### Worked Example 1.1

An entity operates a four-year equity-settled share option scheme for key employees. At year-end, it has recognised a cumulative remuneration expense of £800,000. The company expects, based on current share price estimates, to receive a total tax deduction of £1,200,000 when options are exercised. The corporate income tax rate is 20%.

Questions:
a) What is the deferred tax asset at year-end?
b) How is this split between profit or loss and equity?

> **Answer:**
> a) The deferred tax asset at year-end equals the expected tax deduction accrued to date: £1,200,000 × 20% = £240,000, but only in proportion to the service rendered. Since only £800,000 expense has accrued, the asset recognised through profit or loss is £800,000 × 20% = £160,000; the remaining £80,000 relates to the excess deduction and is credited to equity.
> b) In the profit or loss: £160,000.
> In equity (other components): £80,000.
> **Exam Warning:**
> Do not credit the entire deferred tax asset to profit or loss if the expected tax deduction at exercise will exceed the cumulative recognised remuneration expense. Properly split the excess amount to equity.

### DEFERRED TAX ON ITEMS IN OTHER COMPREHENSIVE INCOME (OCI)

Temporary differences also arise on items remeasured through OCI, such as asset revaluations (e.g., under IAS 16 or IAS 38) or certain fair value changes (such as investments in equity instruments at FVOCI). IAS 12 requires deferred tax on such differences to be recognised and presented in OCI, matching the corresponding transaction.

For revaluations of assets, the deferred tax liability or asset is calculated by comparing the carrying amount after revaluation to its tax base. The resulting deferred tax is shown in OCI, not profit or loss. If the asset’s carrying amount subsequently falls below the tax base (e.g., through an impairment after a previous increase), the reversal of the earlier deferred tax is also presented in OCI to align with IAS 12’s principle of matching.

For investments in equity designated at FVOCI, the deferred tax is calculated on the difference between carrying amount and tax base. Since fair value movements are recorded in OCI, any related deferred tax is also presented in OCI.

> **Key Term: tax base**
> The amount attributed to an asset or liability for tax purposes, used to determine taxable/deductible temporary differences.
> **Key Term: other comprehensive income**
> Items of income and expense that are not recognised in profit or loss as required or permitted by IFRS Standards.

### Worked Example 1.2

A company has a building initially recorded at £400,000, which it revalues to £700,000. The tax authorities do not allow revaluations—tax depreciation remains based on historical cost. The tax rate is 25%. How should the deferred tax be recognised and presented?

> **Answer:**
> The temporary difference is £700,000 (carrying value) – £400,000 (tax base) = £300,000 taxable temporary difference. The deferred tax liability is £300,000 × 25% = £75,000.
> The £75,000 charge is recognised in OCI, matching the £300,000 revaluation surplus.

### Worked Example 1.3

An entity designates an equity investment as FVOCI. The acquisition cost and tax base is £100,000. On the reporting date, fair value is £130,000. The tax base remains at £100,000. The corporate tax rate is 20%. How should deferred tax be presented?

> **Answer:**
> The temporary difference is £30,000. Deferred tax liability: £30,000 × 20% = £6,000. As the fair value movement is in OCI, so is the deferred tax charge.

### LINK BETWEEN DEFERRED TAX AND PRESENTATION IN THE FINANCIAL STATEMENTS

IAS 12 requires that deferred tax be recognised and presented in line with the transaction that gave rise to the difference:

![Deferred tax recognition for equity-settled share-based payments, including expected tax deductions, probability of taxable profits, and allocation between profit or loss and equity.](https://static.pastpaperhero.com/images/acca-sbr-deferred-tax-in-complex-areas-share-based-payments-and-oci-items_00.png)

_Deferred tax on equity-settled options is calculated from estimated exercise deductions and recognised subject to recoverability, with presentation split appropriately._

- If the associated movement goes to profit or loss, related deferred tax goes to profit or loss.
- If it goes to OCI or equity, the deferred tax follows.

This enhances the usefulness, comparability, and faithful representation of financial information. Disclosure should explain the allocation between profit or loss, OCI, and equity.

> **Key Term: deferred tax asset**
> An amount recognised in the statement of financial position representing future tax benefits from deductible temporary differences or unused tax losses.
> **Key Term: deferred tax liability**
> An amount recognised in the statement of financial position representing future tax payable on taxable temporary differences.

## Summary

Deferred tax on complex items—such as share-based payments and OCI items—arises when the timing and measurement of tax deductions differ from the accounting treatment. For share-based payments, deferred tax is based on the best estimate of the future tax deduction, accrued as the employee service is received; any excess over cumulative expense is credited to equity. For OCI items, deferred tax is recognised and presented in the same section (OCI) as the related gain or loss. All such allocations must be transparent, consistent, and clearly disclosed to users.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Recognise and measure deferred tax on share-based payment arrangements, including split between P&L and equity
- Explain and calculate deferred tax arising on asset revaluations and FVOCI investments, recognising presentation in OCI
- Apply IAS 12 requirements for allocating deferred tax between profit or loss, OCI, and equity
- Compute deferred tax assets and liabilities in complex real-world situations commonly tested in ACCA SBR

## Key Terms and Concepts

- deductible temporary difference
- share-based payment
- tax base
- other comprehensive income
- deferred tax asset
- deferred tax liability


Deferred tax in complex areas - Share-based payments and OCI items