IAS 12 Deferred Tax on OCI: Recognizing Tax Effects in Other Comprehensive Income

Deferred tax is not automatically a profit-or-loss (P&L) item. Under IAS 12.61A, current and deferred tax must be recognised outside profit or loss — in other comprehensive income (OCI) or directly in equity — whenever the tax relates to an item that is itself recognised in OCI or equity. The tax follows its item. A revaluation surplus sits in OCI, so the deferred tax on it sits in OCI; an actuarial loss on a defined benefit pension sits in OCI, so its deferred tax sits in OCI. This guide sets out the mechanics of IAS 12.61A, the five recurring triggers, two fully worked journals, the auditor red flags that catch this in practice, and a case study drawn only from BT Group's publicly filed figures. It is part of our IAS 12 deferred tax hub.

What does IAS 12.61A require for tax on OCI and equity items?

IAS 12.61A requires that current and deferred tax be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. The standard splits this into two limbs: tax on items recognised in other comprehensive income is itself recognised in OCI (IAS 12.61A(a)), and tax on items recognised directly in equity is itself recognised directly in equity (IAS 12.61A(b)). This is the "matching" or "backward tracing" principle, and it is one of the most frequently misstated areas of the standard.

The rule in one line: recognise the tax effect in the same statement — P&L, OCI, or equity — as the pre-tax transaction that gave rise to it. Never route deferred tax on a revaluation surplus, a hedge reserve, or a pension remeasurement through the P&L tax charge.

The wider architecture matters here. IAS 12.58 sets the default: current and deferred tax is recognised as income or expense in profit or loss, except to the extent it arises from a transaction recognised in OCI or equity (IAS 12.58(a)), or from a business combination (IAS 12.58(b)). IAS 12.61A then makes the exception operational. Because the tax cannot always be identified with a single line, IAS 12.63 permits a reasonable pro-rata allocation where a jurisdiction applies more than one rate or where the amount is otherwise not directly attributable. And IAS 12.68C creates a narrow but important carve-out: the tax benefit of share-based payments, where the deductible amount exceeds the cumulative remuneration expense, is split — the excess goes to equity, not P&L.

Disclosure is not optional. IAS 12.81(a) requires the aggregate current and deferred tax relating to items charged or credited directly to equity to be disclosed, and IAS 12.81(ab) requires the amount of income tax relating to each component of other comprehensive income to be disclosed. IAS 1.90 and IAS 1.91 then let the entity choose whether to present OCI components net of tax on the face of the statement, or gross with a single aggregate tax line — either way the tax on each component must be traceable in the notes. This is why every set of IFRS accounts carries a "tax on items that will / will not be reclassified" analysis inside the statement of comprehensive income or its notes.

Which items trigger deferred tax outside profit or loss?

Five recurring transactions push deferred tax out of the P&L and into OCI or equity: revaluation surpluses on property and intangibles, defined benefit pension remeasurements, cash flow hedge reserves, fair value movements on FVOCI financial assets, and — in limited cases — the foreign currency translation reserve. Each creates or reverses a temporary difference while the underlying gain or loss is parked outside profit or loss, so IAS 12.61A drags the tax to the same place.

Revaluation surplus (IAS 16 / IAS 38)

When an entity adopts the revaluation model, an upward revaluation is credited to a revaluation surplus in OCI under IAS 16.39 (property, plant and equipment) or IAS 38.85 (intangibles). Because the carrying amount rises but the tax base usually does not, a taxable temporary difference arises and a deferred tax liability is recognised. IAS 12.61A sends that deferred tax charge to OCI, against the same surplus. IAS 16.41–42 then govern the surplus as the asset is used or sold: as the revalued asset is depreciated, an entity may transfer the "excess depreciation" from revaluation surplus to retained earnings, and the deferred tax follows that movement within equity rather than hitting P&L.

Pension remeasurements (IAS 19)

Under IAS 19.120 and IAS 19.122, remeasurements of the net defined benefit liability or asset — actuarial gains and losses from changes in demographic and financial assumptions, plus the return on plan assets excluding amounts in net interest — are recognised in OCI and, per IAS 19.122, are never reclassified to profit or loss (though they may be transferred within equity). The deferred tax on those remeasurements is therefore also permanent OCI, recognised under IAS 12.61A. This is the single largest source of OCI deferred tax for most large UK and European defined benefit sponsors.

Cash flow hedges and FVOCI (IFRS 9)

IFRS 9.6.5.11 puts the effective portion of a cash flow hedge gain or loss into a cash flow hedge reserve in OCI, and IFRS 9.4.1.2A / 5.7.10 route fair value movements on debt instruments measured at fair value through OCI (FVOCI) to OCI as well. Both create temporary differences whose deferred tax is recognised in OCI under IAS 12.61A. The complication is the reclassification mechanics: the cash flow hedge reserve is later recycled to P&L (or into the initial cost of a non-financial asset), and the FVOCI debt reserve recycles on derecognition — when the underlying gain moves to P&L, the associated tax moves with it, so the tax stays matched to its item throughout.

Foreign currency translation reserve (IAS 21)

Exchange differences on translating a foreign operation are recognised in OCI under IAS 21.32 and accumulate in a foreign currency translation reserve. Whether they carry deferred tax depends entirely on local law: IAS 12.39–.44 exempt temporary differences on investments in subsidiaries and branches where the parent controls the timing of reversal and reversal is not probable in the foreseeable future. In most groups no deferred tax is recognised on the translation reserve for that reason — but where an outside basis difference is expected to reverse (for example a planned disposal), any resulting deferred tax is recognised in OCI to match the reserve.

Worked example: deferred tax on a property revaluation surplus

A company holds an office building at historical cost of £5.0m with a tax base of £5.0m. It adopts the revaluation model and the building is independently valued at £8.0m, a £3.0m upward revaluation. The tax base is unchanged, so a £3.0m taxable temporary difference arises. The enacted tax rate is 25%.

The common error is to debit the P&L tax expense for the £750,000 while crediting the deferred tax liability. That overstates the tax charge in profit or loss, understates OCI, and distorts the effective tax rate reconciliation — precisely the mismatch IAS 12.61A exists to prevent. If the rate later changes (say to 23%), the remeasurement of this liability is also traced back to OCI, not P&L; see our dedicated guide on remeasuring deferred tax when rates change for the subsequent-tracing mechanics.

Worked example: deferred tax on a pension actuarial loss

A defined benefit scheme reports an actuarial loss of £2.0m for the year, driven by a fall in the discount rate. Under IAS 19.120 and IAS 19.122 the loss is a remeasurement recognised in OCI and will never be reclassified to P&L. Assume the loss increases the entity's deductible temporary difference (contributions are deductible when paid) and a deferred tax asset is recognised at 25%, and that recovery of the asset is supported by future taxable profits.

The recoverability judgement is critical. Recognising tax in OCI does not bypass the recognition test in IAS 12.24. If the entity has no probable future taxable profit against which the deduction can be used, the deferred tax asset on the actuarial loss is not recognised, and the £500,000 credit to OCI falls away with it. Note the wording: under IFRS nothing is recognised, rather than recognised and then allowed against, which is the ASC 740 route. See deferred tax asset recoverability under IAS 12 and ASC 740.

From SORIE to today's OCI: what changed?

SORIE — the "statement of recognised income and expense" — was a pre-2009 IAS 1 primary statement that collected items taken directly to equity, and it is where accountants first learned to park deferred tax "outside the income statement." It has since been replaced, not by a change in principle but by a change in presentation. The IAS 1 revision effective from 1 January 2009 abolished the SORIE and introduced the statement of comprehensive income (with its "other comprehensive income" section) alongside the statement of changes in equity.

The substance under IAS 12.61A is identical: tax follows its item outside profit or loss. What changed is where you look. Items that used to appear in the SORIE now appear either in the OCI section of the statement of comprehensive income (revaluation surplus, pension remeasurements, hedge and FVOCI reserves, translation differences) or, for genuine equity transactions such as the equity component of a compound instrument or certain share-based payment tax benefits, directly in the statement of changes in equity. The 2009 revision also introduced the split — now embedded in IAS 1.82A — between OCI items that will be reclassified to P&L (cash flow hedges, FVOCI debt, translation) and those that will not (revaluation surplus, pension remeasurements, FVOCI equity), each shown with its related tax. Older readers who still say "SORIE" are pointing at exactly this analysis.

Auditor red flags on deferred tax in OCI

Because the numbers are large, judgemental and easy to mis-route, deferred tax in OCI is a recurring audit exception. Three red flags recur, each tied to a specific ISA.

• Tax effect in the wrong statement (ISA 500). Deferred tax on a revaluation surplus or pension remeasurement is charged to the P&L tax line instead of OCI. This inflates the reported tax charge and corrupts the effective tax rate reconciliation. Under ISA 500 the auditor obtains sufficient appropriate evidence by agreeing the tax on each OCI component (IAS 12.81(ab) disclosure) back to the OCI movement it relates to, recalculating rate × pre-tax OCI, and confirming nothing leaked into the P&L charge. A reconciliation that only ties in aggregate — not component by component — is a signal to dig deeper.
• Unsupported estimate feeding the tax (ISA 540). The revaluation and the actuarial remeasurement are both accounting estimates, and their tax effect is only as reliable as the estimate underneath it. ISA 540 (Revised) requires the auditor to challenge the valuer's assumptions on the property and the actuary's discount rate, mortality and inflation assumptions, then test that the tax rate and temporary difference applied to the OCI movement are internally consistent with those assumptions. A deferred tax figure that does not move in step with a large swing in the pension deficit is a classic ISA 540 finding.
• Tax recognised on a non-deductible or unrecoverable item (ISA 540 / ISA 500). Two variants: deferred tax booked on an item that carries no tax base at all (goodwill impairment, most foreign translation differences — see IAS 12.15 and IAS 12.39), or a deferred tax asset on an actuarial loss recognised when the entity has no future taxable profits to support it. Both require the auditor to test recoverability and deductibility, not just arithmetic. Where the entity cannot support recognition of its deferred tax assets generally, the OCI tax credit on the actuarial loss should generally be nil as well. Note the IFRS wording: the asset is not recognised, rather than recognised and then allowed against, which is the ASC 740 mechanism.

Case study: BT Group pension remeasurement tax

Frequently asked questions

Is deferred tax always a profit or loss item?

No. IAS 12.58 makes P&L the default, but IAS 12.61A requires deferred tax to be recognised in OCI or directly in equity when it relates to an item recognised there. Revaluation surpluses, pension remeasurements, cash flow hedge reserves and FVOCI movements all carry their deferred tax outside profit or loss.

What is "backward tracing" under IAS 12?

Backward tracing is the requirement to recognise a change in deferred tax in the same statement as the transaction that originally created the temporary difference. Under IAS 12.61A, if the original item went to OCI, the later movement in its deferred tax — including remeasurement for a tax rate change — also goes to OCI, not P&L. IFRS retains backward tracing; US GAAP under ASC 740 generally does not.

Does the revaluation surplus get shown gross or net of deferred tax?

IAS 1.91 lets an entity present OCI components either net of tax or gross with a single aggregate tax line, but IAS 12.81(ab) requires the tax on each OCI component to be disclosed either way. The revaluation surplus in equity is commonly carried net of the related deferred tax liability.

Is there deferred tax on the foreign currency translation reserve?

Usually not. IAS 12.39–.44 exempt temporary differences on investments in foreign subsidiaries where the parent controls the timing of reversal and reversal is not probable in the foreseeable future, so most groups recognise no deferred tax on the translation reserve. Where a reversal (e.g. a planned disposal) is expected, the resulting deferred tax is recognised in OCI to match the reserve.

What happens to the deferred tax when a cash flow hedge reserve recycles to P&L?

The tax follows the item. While the effective portion of the hedge sits in the cash flow hedge reserve (IFRS 9.6.5.11) its deferred tax sits in OCI; when the reserve is reclassified into profit or loss (or into the cost of a non-financial asset), the associated tax is reclassified with it, keeping tax matched to the underlying gain or loss throughout.

How did the old SORIE relate to today's OCI?

The pre-2009 "statement of recognised income and expense" collected items taken directly to equity. The 2009 IAS 1 revision replaced it with the statement of comprehensive income (containing OCI) and the statement of changes in equity. The IAS 12.61A principle — tax follows its item outside profit or loss — did not change; only the presentation did.

Which auditing standard governs the tax on a pension remeasurement estimate?

ISA 540 (Revised) governs the audit of accounting estimates, including the actuarial remeasurement and its deferred tax effect, while ISA 500 governs obtaining sufficient appropriate audit evidence — for example agreeing the disclosed tax on each OCI component (IAS 12.81(ab)) to the underlying movement.

About the author

Usman Qureshi is a Chartered Certified Accountant (ACCA) working in audit and advisory. He writes the IFRS, FRS 102 and US GAAP guides published on this site. Membership is listed on the ACCA public register.