Deferred tax on temporary differences

Deferred tax gets misstated in almost every early-stage hospitality group because start-up losses, IFRS 16 right-of-use assets, and provisions create temporary differences that are easy to spot but easy to mismeasure; overstating a deferred tax asset on unproven new-outlet losses inflates net assets and can mislead lenders and shareholders on true distributable profit.

Do accounting and tax depreciation rates differ for PP&E, leasehold improvements, or right-of-use assets, creating temporary differences that need a deferred tax entry? Are provisions not yet deductible for tax (onerous leases, ECL, EOSB) or accelerated tax depreciation creating deferred tax assets/liabilities that have actually been recognized? Is it probable that sufficient future taxable profit will be available to utilize tax losses or unused tax credits generated by new-outlet start-up losses, and has that assessment been documented (including interaction with zakat where applicable)?

1. Compare the tax base and accounting carrying amount of every material asset/liability (PP&E, ROU assets/lease liabilities, provisions, ECL allowances, unused tax losses) to identify taxable and deductible temporary differences.
2. Classify each difference: taxable temporary difference -> recognize a deferred tax liability in full (subject to limited exceptions); deductible temporary difference or unused tax loss -> recognize a deferred tax asset only to the extent recognition criteria in step 3 are met.
3. For deductible differences/tax losses, assess whether it is probable that sufficient future taxable profit will be available, using a credible budget/forecast (typically 3-5 years), before recognizing any deferred tax asset; document the forecast and key assumptions (occupancy/covers ramp-up, pricing).
4. Determine whether the entity is subject to income tax, Zakat, or a mixed regime based on GCC/foreign ownership percentages; apply IAS 12 deferred tax only to the income-tax-attributable portion, and treat the Zakat-attributable portion under local Zakat rules, not as an IAS 12 deferred tax balance (stay general here as local practice nuances vary).
5. Reassess unrecognized deferred tax assets at each reporting date; recognize previously unrecognized amounts once profitability becomes probable, and derecognize/reduce recognized DTAs if expectations deteriorate.
6. Present deferred tax assets and liabilities by category and offset only where a legally enforceable right of set-off exists within the same taxable entity/authority.

Measure deferred tax assets and liabilities at the tax rate(s) expected to apply in the period the asset is realized or liability settled, based on tax rates/laws enacted or substantively enacted at the reporting date (in KSA, the applicable income tax rate for the foreign/mixed-ownership portion). Deferred tax is not discounted. Reassess the recoverability of deferred tax assets at each reporting date (not just initial recognition) and remeasure using updated forecasts and any change in enacted rates; deferred tax on items recognized in OCI or equity (e.g., some IFRS 16 transition adjustments) is itself recognized in OCI or equity, not P&L.

Disclose: deferred tax assets/liabilities by major category of temporary difference; amount and expiry (if any) of unrecognized deductible temporary differences/tax losses; a reconciliation of tax expense to accounting profit at the applicable statutory rate; the split/basis for Zakat versus income tax treatment where ownership is mixed; movement in net deferred tax balance during the period; deferred tax related to items recognized in OCI presented separately from P&L-related deferred tax.

1. Recognizing a deferred tax asset on new-outlet start-up losses based on optimistic budgets rather than a credible, evidenced forecast.
2. Applying IAS 12 deferred tax mechanics to the Zakat-attributable portion of a mixed-ownership entity instead of accounting for Zakat as a separate provision under local rules.
3. Forgetting the deferred tax effect of IFRS 16 right-of-use assets and lease liabilities (these create their own temporary differences even though they often net to a small amount).
4. Not reassessing previously unrecognized deferred tax assets each period as new outlets become profitable.
5. Discounting deferred tax balances, which IAS 12 does not permit.