An entity is undertaking a reorganization. Under the plan, part of the entity’s business will be demerged and will be transferred to a separate entity, Entity Z. This also will involve a transfer of part of the pension obligation to Entity Z. Because of this, Entity Z will have a deductible temporary difference at its year end of December 31, 20X4. It is anticipated that Entity Z will be loss making for the first four years of its existence, but thereafter it will become a profitable entity. The future forecasted profit is based on estimates of sales to intergroup companies. Should Entity Z recognize the deductible temporary difference as a deferred tax asset?
(a) The entity should recognize a deferred tax asset.
(b) Management should not recognize a deferred tax asset as future profitability is not certain.
(c) The entity should recognize a deferred tax asset if the authenticity of the budgeted profits can be verified.
(d) The entity should recognize a deferred tax asset if the intergroup profit in the budgeted profit is eliminated.