Deferred Tax Explained: Why Every Nigerian Company Reporting Under IFRS Needs to Get It Right

Ask most business owners in Port Harcourt or Lagos what “deferred tax” means, and you will get a shrug. Ask their accountant, and you will often get a definition without an explanation of why it matters. That gap is expensive. Deferred tax is not an academic exercise for auditors — it is a direct consequence of one of the oldest and most important principles in accounting: the matching concept. Get it wrong, and your financial statements misstate profit, mislead investors, and can trigger avoidable friction with the Nigeria Revenue Service (NRS).

This article explains what deferred tax is, why it exists, why it matters even more under the Nigeria Tax Act (NTA) 2025, and why companies — large and small — should take it seriously.

What Is Deferred Tax?

Deferred tax arises because accounting profit (computed under IFRS) and taxable profit (computed under Nigerian tax law) are rarely the same number. The two frameworks recognise income, expenses, assets, and liabilities differently, and those differences create either:

• Deferred tax liabilities (DTL) — tax you will pay in the future because you have effectively deferred it today, or

• Deferred tax assets (DTA) — tax relief you will benefit from in the future because you have, in effect, overpaid or under-relieved tax today.

Under IAS 12 Income Taxes, these differences are called temporary differences — differences between the carrying amount of an asset or liability in the financial statements and its tax base (its value for tax purposes). The most common sources in Nigerian practice include:

• Property, plant and equipment — where accounting depreciation and NRS capital allowances run at different rates and on different bases

• Provisions (for leave pay, litigation, warranties) — recognised as an expense under IFRS immediately, but only tax-deductible when actually paid

• Unrelieved tax losses and capital allowances carried forward

• Revenue recognised under IFRS 15 before it is taxable, or vice versa

• Fair value gains on investment property or financial instruments that are not yet realised for tax purposes

The Real Reason It Exists: The Matching Concept

The matching concept requires that expenses (including tax) be recognised in the same period as the income to which they relate — not simply when cash changes hands. This is the bedrock of accrual accounting.

If a company only recorded the tax it is legally required to pay in a given year (its current tax), the tax expense in the income statement would swing erratically — understated in years when capital allowances outpace depreciation, overstated in years when they reverse. Profit before tax and profit after tax would tell two different stories, and neither would reflect the true economic cost of tax attributable to that year’s earnings.

Deferred tax accounting corrects this. By recognising the future tax consequences of today’s transactions in the period the transaction occurs, it ensures that total tax expense (current tax + deferred tax) is matched against the accounting profit that gave rise to it. This is precisely why IAS 12 exists — it is the matching concept applied specifically to taxation.

A Simple Illustration

Suppose a company buys equipment for ₦100 million. Under IFRS, it depreciates the asset at 10% per year (₦10 million a year). Under NRS capital allowance rules, it may claim accelerated relief — say 25% in year one (₦25 million). In year one, taxable profit is ₦15 million lower than accounting profit purely because of this timing difference, so current tax is lower than the tax the accounting profit would otherwise suggest.

Without deferred tax, the income statement would show a deceptively low tax charge in year one — flattering current profit. Deferred tax accounting requires the company to recognise a deferred tax liability of 30% × ₦15 million = ₦4.5 million, representing the extra tax that will fall due in later years once capital allowances slow down and accounting depreciation catches up. The total tax charge for the year (current tax plus this deferred tax movement) then correctly reflects the tax cost of that year’s accounting profit — the matching concept in action.

The double entry (year 1):

This entry sits alongside — not instead of — the entry for current tax payable. Its effect on the P&L is to increase the total tax charge by ₦4.5 million above what current tax alone would show, pulling reported profit after tax back down to what it would have been had accounting depreciation, rather than capital allowance, been used for tax. That is the matching concept operating directly through the double entry.

Balance sheet treatment: The ₦4.5 million is presented as a non-current liability, typically as a single line “Deferred tax liability,” separate from current tax payable. It is not a cash amount due now — it represents tax that will become payable in later years as the timing difference reverses (i.e. once capital allowances taper below accounting depreciation on the same asset). Where a company also carries deferred tax assets in the same tax jurisdiction and has a legal right of set-off, IAS 12 permits presenting a single net deferred tax balance rather than a liability and an asset separately.

In later years, as the temporary difference unwinds, the entry reverses. For example, suppose in year 2 the capital allowance claimed drops to ₦8 million while accounting depreciation stays at ₦10 million — a ₦2 million reversal of the timing difference, and a deferred tax credit of 30% × ₦2 million = ₦600,000:

This reduces the tax charge in year 2 — the mirror image of year one — and the deferred tax liability balance falls from ₦4,500,000 to ₦3,900,000. The same pattern continues each year until the liability is fully unwound, so that, over the life of the asset, total tax expense recognised in the P&L equals total tax actually paid; only the timing within each year’s profit figure is corrected.

Why This Matters More Under NTA 2025

The Nigeria Tax Act 2025, effective 1 January 2026, has reshaped several of the very items that drive temporary differences:

• Companies Income Tax remains at 30% for large companies (turnover above ₦100 million or assets above ₦250 million), which is the rate that should generally be used to measure deferred tax balances for such entities under the “enacted or substantively enacted” rate requirement in IAS 12.

• The small company exemption threshold affects whether a company recognises deferred tax at all, or measures it at a 0% effective rate, once it qualifies as small — but the threshold itself needs care. As enacted, Section 202 of the NTA defines a “small company” (CIT exemption) as one with turnover of ₦50 million or less, while Section 147 of the NTAA sets a separate ₦100 million threshold for “small business” VAT exemption — a drafting inconsistency that has been publicly acknowledged. In practice, however, NRS’s Rev360 system has been configured to apply the ₦100 million figure for CIT purposes: companies with turnover below ₦100 million are not computed for CIT on the platform. Companies and their advisers should track NRS’s operative administrative position, not just the statutory text, when assessing exemption status and the resulting deferred tax treatment.

• The new 4% Development Levy on assessable profits (replacing the old Tertiary Education Tax, NASENI Levy, IT Levy and Police Trust Fund levy) is itself a tax on profit and needs to be factored into the effective tax rate reconciliation that typically accompanies deferred tax disclosures.

• Changes to capital allowance rules and the treatment of losses under the consolidated Act may shift the tax base of assets — meaning companies must re-assess their temporary differences rather than simply rolling forward last year’s schedule.

A deferred tax balance calculated on outdated assumptions will misstate both the statement of financial position and the tax expense in the income statement. This is not a footnote issue — under IFRS, it is a measurement issue.

Why Companies Should Adopt Proper Deferred Tax Accounting

1. It gives a true picture of profitability.

Two companies with identical cash tax payments this year can have very different underlying tax positions once future obligations are considered. Deferred tax exposes that difference.

2. It protects against unpleasant surprises.

A company that ignores deferred tax liabilities may look healthier on paper than it is. When those liabilities crystallise — for example, when accelerated capital allowances run out — the tax charge can spike sharply, catching management and investors off guard.

3. It supports better decision-making.

Lenders, investors, and boards rely on the effective tax rate and deferred tax note to understand the sustainability of reported earnings. Properly computed deferred tax improves the credibility of financial statements used to raise capital or attract investors — increasingly relevant for oil and gas, real estate, and energy sector players operating in Rivers State and the wider Niger Delta.

4. It is not optional under IFRS.

For any entity preparing IFRS-compliant financial statements — a requirement for most medium and large Nigerian companies, and often a precondition for bank facilities, NGX listing, or foreign partnership — deferred tax is mandatory, not discretionary. Auditors will not sign off on financial statements that omit it where temporary differences exist.

5. It aids audit readiness and forensic defensibility.

In our forensic and audit engagements, unexplained or absent deferred tax balances are one of the first red flags reviewed. A well-supported deferred tax schedule, reconciled to the tax computation and capital allowance schedule, is a mark of a well-run finance function — and it materially reduces friction during NRS audits.

A Practical Note on Recognition

Not every temporary difference automatically becomes a deferred tax balance. IAS 12 requires judgement, particularly for deferred tax assets:

• A deferred tax asset (e.g. from unrelieved losses) is only recognised to the extent it is probable that future taxable profit will be available against which it can be utilised.

• Certain differences — such as initial recognition of goodwill, or of an asset/liability in a transaction that is not a business combination and affects neither accounting nor taxable profit at the time — are specifically excluded from deferred tax recognition.

This is where experienced judgement, not just a mechanical calculation, adds real value.

The Bottom Line

Deferred tax is the accounting profession’s answer to a simple but important question: if tax rules and accounting rules disagree on timing, how do we make sure this year’s financial statements tell the truth about this year’s performance? The matching concept demands that tax expense follow the income it relates to — and deferred tax is how that promise is kept.

With the Nigeria Tax Act 2025 now in force, companies that have not revisited their deferred tax computations — capital allowance bases, the Development Levy, the revised small company threshold — are working with numbers that may already be out of date. This is precisely where an experienced IFRS practitioner adds value: not just computing the number, but making sure the number is still correct under the current law.

Joe Adinma & Co. (Chartered Accountants) provides IFRS financial reporting, Federal tax compliance (CIT, VAT, WHT under the Nigeria Tax Act 2025), forensic accounting, and audit and assurance services to clients in oil and gas, energy, real estate, and professional services. Based in Port Harcourt, Rivers State.