Deferred taxes in business valuation: when do they matter?
Under IAS 12, deferred tax assets and liabilities generally arise from temporary differences between the carrying amount of an asset or liability and its tax base, as well as from unused tax losses and credits, subject to the standard’s recognition requirements.
This means that the question is not simply whether deferred taxes appear as an accounting item. The relevant question for valuation is whether the underlying tax effects influence future economic benefits or obligations.
Causes of deferred taxes
Deferred taxes generally arise because assets and liabilities are recognised or measured differently for accounting and tax purposes.
Temporary differences
A classic example is a difference between the carrying amount of an asset in the commercial or IFRS balance sheet and its tax base.
Such differences can arise from different depreciation methods, valuation rules or accounting options. If the difference reverses in future periods, the resulting tax effect can create a deferred tax liability or asset.
IAS 12 defines temporary differences by comparing the carrying amount of an asset or liability with its tax base.
Tax loss carryforwards
Deferred tax assets can also arise from unused tax losses or tax credits. Their economic relevance depends on whether the company is expected to generate sufficient future taxable profits against which those losses can be used.
Consequently, a deferred tax asset associated with loss carryforwards should not automatically be treated as having the same economic value as a current tax receivable.
Deferred taxes vs. current tax receivables and liabilities
Deferred taxes should be distinguished from ordinary tax receivables and tax liabilities.
Current tax receivables and liabilities arise from taxes that are already due or recoverable from the tax authorities. For example, a corporation tax prepayment may differ from the final tax liability for the relevant period.
Deferred taxes, by contrast, represent future tax consequences resulting from temporary differences or, subject to the applicable recognition requirements, unused tax losses and credits (IFRS, 2026).
From a valuation perspective, this distinction is important because current tax balances can have characteristics similar to working-capital items, whereas deferred taxes relate to future tax effects.
When do deferred taxes matter in business valuation?
Deferred taxes deserve particular attention when:
- Accounting and tax carrying amounts differ materially, creating significant temporary differences.
- Tax loss carryforwards exist and the company is expected to generate sufficient taxable profits to use them.
- The valuation involves assets with different tax and accounting depreciation or measurement rules.
- The tax treatment of a transaction differs from its accounting treatment.
- The effective tax burden in the forecast differs materially from the statutory tax rate.
- The valuation involves a change in ownership or transaction structure that could affect the usability of tax attributes.
- Deferred tax liabilities or assets are material relative to enterprise or equity value.
- A DCF valuation is based on forecast tax payments, making the distinction between accounting tax expense and actual future cash taxes particularly relevant.
The presence of a deferred tax balance therefore does not, by itself, determine whether an adjustment to enterprise or equity value is appropriate. The underlying cause and expected reversal of the tax effect must be analysed.
Deferred taxes in a DCF valuation
The treatment of taxes in a DCF valuation generally requires a distinction between the tax effects included directly in forecast cash flows and those represented through accounting deferred-tax balances.
A simplified DCF framework may include:
- Corporate income taxes: forecast using the applicable tax rates.
- Tax shield: reflected through the cost of capital where appropriate.
- Tax loss carryforwards: considered separately where they affect future cash taxes.
- Current tax receivables and liabilities: potentially treated as working-capital or other balance-sheet adjustments.
- Deferred tax assets and liabilities: considered according to their underlying economic tax effects rather than simply their accounting presentation.
This is why the statement “deferred taxes are non-cash, so they can be ignored” is too broad.
The deferred tax expense itself may not represent a current cash flow. However, the future tax consequences represented by the deferred tax balance can affect cash flows and therefore company value.
Example 1: temporary differences
Assume a company has an asset with:
- a carrying amount of €10 million for accounting purposes; and
- a tax base of €7 million.
The €3 million difference represents a taxable temporary difference. At an illustrative tax rate of 30%, the associated deferred tax liability would be €0.9 million.
The accounting entry itself does not create an immediate €0.9 million cash payment. The economic relevance arises because the difference between the accounting carrying amount and tax base can result in additional tax payments when the asset is recovered.
This is the fundamental distinction a valuer must make: the accounting recognition of deferred tax is not itself the cash flow, but it can represent a future tax cash consequence.
Example 2: tax loss carryforwards
Consider a company with €5 million of unused tax losses.
At a hypothetical 30% tax rate, these losses could theoretically correspond to €1.5 million of future tax savings.
However, the company does not automatically have an asset worth €1.5 million.
The economic value depends on whether sufficient taxable profits are expected in future periods and whether the losses can legally be used. This is why deferred tax assets from tax loss carryforwards require a particularly careful assessment.
No one-size-fits-all treatment
There is no universal rule for incorporating deferred taxes into a business valuation.
The appropriate treatment depends on:
- Why the deferred tax arose.
- When the underlying difference is expected to reverse.
- Whether the reversal creates an actual future tax payment or saving.
- Whether the effect is already reflected in the forecast cash flows.
- Whether the tax attribute can actually be utilised.
- Which valuation method and valuation standard are being applied.
The same accounting balance can therefore have very different valuation implications depending on its underlying cause.
Deferred taxes and valuation practice
The issue is particularly relevant when reconciling accounting information with the assumptions used in a valuation model.
Under an income approach such as the DCF method, the focus is ultimately on future economic cash flows. Accounting deferred-tax expense is therefore not automatically a separate cash-flow item.
At the same time, simply removing all deferred-tax effects can produce an inconsistent valuation if the associated future tax payments or tax savings are already embedded in the company’s expected cash flows.
The key principle is therefore consistency: deferred taxes should neither be mechanically added to or deducted from company value nor ignored solely because they are non-cash accounting items.
Wrap it up!
Deferred taxes can be relevant to business valuation even though their accounting recognition does not normally represent an immediate cash flow. Their importance depends on the underlying temporary differences, tax loss carryforwards and the future tax consequences expected to arise from them.
For valuers, the critical step is to identify what caused the deferred tax and whether its future reversal affects the cash flows or effective tax burden used in the valuation.
A robust valuation should therefore distinguish between current taxes, deferred taxes and tax attributes such as loss carryforwards. The treatment should then be aligned with the chosen valuation method and applied consistently throughout the model.
For IFRS valuations, IAS 12 provides the accounting framework for recognising and measuring deferred tax arising from temporary differences and unused tax losses or credits.
Reference
- IAS 12 Income Taxes. Standard 2026 Issued. https://www.ifrs.org/issued-standards/list-of-standards/ias-12-income-taxes/
- IFRIC Update June 2019. https://www.ifrs.org/news-and-events/updates/ifric/2019/ifric-update-june-2019/
Updated at 19 August 2026
