Questions:
As Per IAS 12, when can a deferred tax asset be recognized?

The directors of Swirl wish to recognize a material deferred tax asset in relation to $250 million of unused trading losses that have accumulated as of 31 December 2022. Swirl has budgeted profits for $80 million for the year ended 31 December 2023. The directors have forecast that profits will grow by 20% each year for the next four years. The market is currently depressed and sales orders are at a lower level for the first quarter of 2023 than they were for the same period in any of the previous five years. Swirl operates under a tax jurisdiction which allows for trading losses to be only carried forward for a maximum of two years.

Explain whether a deferred tax asset can be recognized in the financial statements of Swirl in the year ended 31 December 2022.

Reference answers:
IAS 12 Income Taxes says that a deferred tax asset shall be recognized for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized.

Deferred tax asset can not be recognized in the financial statements of Swirl in the year ended 31 December 2022.

Because swirl operates under a tax jurisdiction that only allows losses to be carried forward for two years. The maximum total losses that can be utilized are therefore equal to total unused losses for 2021 and 2022. Losses incurred before 2021 can no longer be carried forward so no deferred tax asset should be recognized in respect of them.

The directors of Swirl should base their forecast of future profitability on reasonable and supportable assumptions. There appears to be evidence that this is not the case. Swirl has a recent history of trading losses and there is little evidence that there will be an improvement in trading results within the next couple of years.
The market is depressed and sales orders for the first quarter of 2023 are below levels in any of the previous five years. It is also likely that Swirl will incur various costs in relation to the restructuring which would increase losses into 2023 and possibly 2024. Only directly attributable expenses such as redundancies should be included within a provision and expensed in 2022 which would increase the current year's loss. Ongoing expenses may be incurred such as retraining and relocating costs but these should only be expensed from 2023. The forecast profitability for 2023 and subsequent growth rate therefore appear to be unrealistically optimistic.

The existence of unused tax losses is strong evidence that future taxable profit may not be available. Therefore, when an entity has a history of recent losses, the entity recognizes a deferred tax asset arising from unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilized by the entity.