Final answer:
A net operating loss tax benefit is recognized on the Income Statement when it's probable that the company will generate future taxable income to utilize the loss. A deferred tax asset is recorded following accounting standards like IFRS or GAAP. The recognition requires management's judgment on future profitability.
Step-by-step explanation:
The tax benefit created by a net operating loss (NOL) is recognized in the Income Statement when it is realizable that such benefit will be utilized in future periods through a taxable income. In accordance with accounting standards, such as the International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), a company can recognize a deferred tax asset for the net operating loss when it's likely that the business will generate future taxable income against which the NOLs can be applied. It's essential for a company to assess the likelihood of having enough future taxable income to benefit from the NOL. This evaluation requires management to use judgment and consider all available evidence, both positive and negative.
When the company concludes that it is more likely than not that the NOL carryforward will not be used, no deferred tax asset should be recognized. If conditions change and it becomes probable that the company will be able to realize the tax benefits of the net operating loss, the deferred tax asset can be recognized in the period in which the change occurs. This reflects the principle of conservatism in accounting, where one should not overstate assets or revenues.