IAS 12 Temporary DifferenceBasically, temporary differences are thus defined to include all differences between the tax and financial reporting bases of assets and liabilities, if those differences will result in taxable or deductible amounts in future years. Common timing differences included those relating to depreciation methods, deferred compensation plans, percentage-of-completion accounting for long-term construction contracts, and cash versus accrual accounting methods.
To recall. The preponderance of the typical reporting entity’s revenue and expense transactions are treated identically for tax and financial reporting purposes. Some transactions and events, however, will have different tax and accounting implications. In many of these cases, the difference relates to the period in which the income or expense will be recognized.


Under earlier iterations of IAS 12, the latter differences were referred to as timing differences and were said to originate in one period and to reverse in a later period. The latest revisions to IAS 12 introduced the concept of temporary differences, which is a somewhat more comprehensive concept than that of timing differences.


Temporary Difference Deemed Under Original IAS 12

Examples of temporary differences that were also deemed to be timing differences under the original IAS 12 are the following:

1. Revenue recognized for financial reporting purposes before being recognized for tax purposes. Examples include revenue accounted for by the installment method for tax purposes, but reflected in income currently; certain construction-related revenue recognized on a completed-contract method for tax purposes, but on a percentage-of-completion basis for financial reporting; earnings from investees recognized by the equity method for accounting purposes but taxed only when later distributed as dividends to the investor. These are taxable temporary differences, which give rise to deferred tax liabilities.

2. Revenue recognized for tax purposes prior to recognition in the financial statements. These include certain types of revenue received in advance, such as prepaid rental income and service contract revenue. Referred to as deductible temporary differences, these items give rise to deferred tax assets.

3. Expenses that are deductible for tax purposes prior to recognition in the financial statements. This results when accelerated depreciation methods or shorter useful lives are used for tax purposes, while straight-line depreciation or longer useful economic lives are used for financial reporting; and when there are certain pre-operating costs and certain capitalized interest costs that are deductible currently for tax purposes. These items are taxable temporary differences and give rise to deferred tax liabilities.

4. Expenses that are reported in the financial statements prior to becoming deductible for tax purposes. Certain estimated expenses, such as warranty costs, as well as such contingent losses as accruals of litigation expenses, are not tax deductible until the obligation becomes fixed. These are deductible temporary differences, and accordingly give rise to deferred tax assets.



Temporary Differences Deemed Under Revised IAS 12

There are other items that would not have been deemed timing differences under the original IAS 12, but which are temporary differences under revised IAS 12. These include the following:

1. Assets and liabilities acquired in transactions that are not business combinations which are not deductible or taxable in determining taxable profit. In some tax jurisdictions, the cost of certain assets are never deductible in computing taxable profit. Depending on jurisdiction, buildings, intangibles, or other assets may not be subject to depreciation or amortization. Thus, the asset in question has a differing accounting basis than tax basis, and this defines a temporary difference under revised IAS 12. Similarly, certain liabilities may not be recognized for tax purposes. While IAS 12 agrees that these represent temporary differences and that, under the principles of inter-period tax allocation using the liability method, this should result in the recognition of deferred tax liabilities or assets, the decision was made to not permit this. The reason given is that the new result would be to “gross up” the recorded amount of the asset or liability to offset the recorded deferred tax liability or benefit, and this would make the financial statements “less transparent.” It could also be argued that when an asset has, as one of its attributes, non-deductibility for tax purposes, the price paid for this asset would have been affected accordingly, so that any such “gross-up” would cause the asset to be reported at an amount in excess of fair value.

2. Assets and liabilities acquired in business combinations. When assets and liabilities are valued at fair value, as required under IFRS 3, but the tax basis is not adjusted (i.e., there is a carryforward basis for tax purposes), there will be differences between the tax and financial reporting bases of these assets and liabilities, which will constitute temporary differences. Deferred tax benefits and obligations need to be recognized for these differences.

3. Goodwill that cannot be amortized (deducted) for tax purposes. Prior to IFRS 3, goodwill was subject to amortization for financial reporting purposes but in some tax jurisdictions this could not be deducted, so there was a question regarding the deferred tax effects to be recognized. Goodwill or negative goodwill were residual amounts, and any attempt to compute the deferred tax effects thereof would have resulted in “grossing up” the financial statement balance of that very account (goodwill or negative goodwill, as the case may be). Although such a presentation could have been rationalized, it would have been of dubious usefulness to the users of the financial statements. For this reason, IAS 12 held that no deferred taxes were to be provided on the difference between the tax and book bases of nondeductible goodwill or nontaxable negative goodwill. Under the provisions of IFRS 3, goodwill is no longer subject to amortization, and negative goodwill is included in income upon consummating a business acquisition that is deemed to be a bargain purchase. There is less likely to be any issue of tax/book differences under the current requirements.



Temporary Differences Base of Assets or Liabilities

In addition to these familiar and well-understood timing differences, temporary differences include a number of other categories that also involve differences between the tax and financial reporting bases of assets or liabilities. These are:

1. Reductions in tax deductible asset bases arising in connection with tax credits. Under tax provisions in certain jurisdictions, credits are available for certain qualifying investments in plant assets. In some cases, taxpayers are permitted a choice of either full accelerated depreciation coupled with a reduced investment tax credit, or a full investment tax credit coupled with reduced depreciation allowances. If the taxpayer chose the latter option, the asset basis is reduced for tax depreciation, but would still be fully depreciable for financial reporting purposes. Accordingly, this election would be accounted for as a taxable timing difference, and give rise to a deferred tax liability.

2. Increases in the tax bases of assets resulting from the indexing of asset costs for the effects of inflation. Occasionally, proposed and sometimes enacted by taxing jurisdictions, such a tax law provision allows taxpaying entities to finance the replacement of depreciable assets through depreciation based on current costs, as computed by the application of indices to the historical costs of the assets being re-measured. This reevaluation of asset costs gives rise to deductible temporary differences that would be associated with deferred tax benefits.

3. Certain business combinations accounted for by the acquisition method. Under certain circumstances, the costs assignable to assets or liabilities acquired in purchase business combinations will differ from their tax bases. The usual scenario under which this arises is when the acquirer must continue to report the predecessor’s tax bases for tax purposes, although the price paid was more or less than book value. Such differences may be either taxable or deductible and, accordingly, may give rise to deferred tax liabilities or assets. These differences were treated as timing differences under the original IAS 12, and will now be recognized as temporary differences by revised IAS 12.

4. Assets which are revalued for financial reporting purposes although the tax bases are not affected. This is analogous to the matter discussed in the preceding paragraph. Under certain IFRS (such as IAS 16 and IAS 40), assets may be upwardly adjusted to current fair values although for tax purposes these adjustments are ignored until and unless the assets are disposed of. The discrepancies between the adjusted book carrying values and the tax bases are temporary differences under IAS 12, and deferred taxes are to be provided on these variations. This is required even if there is no intention to dispose of the assets in question, or if, under the salient tax laws, exchanges for other similar assets (or reinvestment of proceeds of sales in similar assets) would effect a postponement of the tax obligation.