Deferred tax asset
AccountingA future tax saving the company has already earned, most often from losses it can set against later profits.
Also written: DTA, deferred tax assets
A deferred tax asset is the mirror image of a deferred tax liability: the company has paid or accrued tax earlier than its accounts recognise the related expense, or it has losses it can carry forward against future profit.
Accumulated losses are the most common source. A company that has lost money for years has built up relief it can use once it turns profitable, which reduces the cash tax it will pay for some period after profitability returns.
The asset is only worth something if there will be profits to use it against. That is the entire reason a valuation allowance exists: where realisation is not probable, the asset is written down, and reversing that allowance later can produce a very large and entirely non cash profit.
In a deal, the DTA is fragile. Change of control rules in many jurisdictions restrict or eliminate the ability to carry losses forward after an acquisition, so a buyer should not assume it inherits the benefit shown on the balance sheet.
Worked example
A company has 800 of accumulated tax losses in a 25% tax jurisdiction, so a gross deferred tax asset of 200.
It has lost money for three consecutive years, which is strong objective evidence against recognition, so a valuation allowance is taken against most of it and only 40 is carried.
If it returns to sustained profit and releases the allowance, the 160 write back lands in net income with no cash changing hands at all.