What are taxable and deductible temporary differences under IAS 12?

Under IAS 12, a temporary difference is the difference between the carrying amount of an asset or liability in the financial statements and its tax base; taxable temporary differences give rise to deferred tax liabilities (DTLs), while deductible temporary differences give rise to deferred tax assets (DTAs), subject to recoverability. - Definition of tax base (IAS 12.7–12.8): The tax base of an asset is the amount deductible for tax purposes against any future taxable economic benefits; the tax base of a liability is its carrying amount less any future tax-deductible amounts. Where the tax base is not immediately obvious, IAS 12.10 provides the guiding principle: consider the expected tax consequence of recovering or settling the item. - Taxable temporary differences → DTL (IAS 12.15): Arise when the carrying amount of an asset exceeds its tax base (e.g., accelerated tax depreciation), or when the carrying amount of a liability is less than its tax base. These will increase taxable profit in future periods when the asset is recovered or the liability settled. A DTL must be recognised for all taxable temporary differences unless the initial recognition exemption applies (IAS 12.15(b)). - Deductible temporary differences → DTA (IAS 12.24): Arise when the carrying amount of an asset is less than its tax base, or when the carrying amount of a liability exceeds its tax base (e.g., accrued warranty provisions not yet tax-deductible). DTAs are recognised only to the extent it is probable that sufficient future taxable profit will be available to utilise them (IAS 12.27).

How does IAS 12 apply to deferred tax on revaluation surpluses under IAS 16, specifically the interaction between the DTL and the revaluation reserve?

- Initial recognition exemption (IAS 12.15(b) and 12.24): No deferred tax is recognised on temporary differences arising from the initial recognition of an asset or liability in a transaction that is not a business combination and that affects neither accounting profit nor taxable profit at the time of the transaction. This is a critical scoping rule — it excludes, for example, deferred tax on a non-deductible goodwill impairment. - Measurement (IAS 12.47): DTLs and DTAs are measured at the tax rates expected to apply in the period when the liability is settled or the asset realised, using rates that are enacted or substantively enacted at the reporting date. No discounting is permitted (IAS 12.53). - Presentation (IAS 12.71–12.74): Deferred tax assets and liabilities must be presented separately from current tax; offset is permitted only when the entity has a legally enforceable right to offset current tax assets against current tax liabilities and they relate to taxes levied by the same authority on the same taxable entity. Scenario: A company purchases equipment for €500,000. For accounting purposes, it depreciates over 5 years (straight-line, €100,000/year). For tax purposes, accelerated depreciation allows a €200,000 deduction in Year 1. The corporate tax rate is 25%.

How should an entity account for deferred tax when a change in tax rate is substantively enacted after the reporting date but before financial statements are authorised for issue?

- Ignoring the probability test for DTAs: Recognising a DTA without robust evidence of sufficient future taxable profits violates IAS 12.27. Auditors scrutinise forecasts supporting DTA recognition closely, particularly for loss-making entities or those with a history of losses (IAS 12.35 — a history of losses is strong contrary evidence). - Misapplying the initial recognition exemption: Practitioners sometimes incorrectly apply IAS 12.15(b) to business combination assets, where deferred tax is always required (IAS 12.19). The exemption is narrow — it does not apply when the transaction affects either accounting profit or taxable profit. - IAS 12.5 — Definitions of temporary difference, deferred tax asset, deferred tax liability, and tax base. - IAS 12.15 — Mandatory recognition of DTLs for taxable temporary differences, including the initial recognition exemption. - IAS 12.24 and 12.27 — Recognition criteria for DTAs, including the probable future taxable profit condition. - IAS 12.35 — Rebuttal presumption: when a history of recent losses exists, a DTA is recognised only if there is convincing other evidence. - IAS 12.47 — Measurement using enacted or substantively enacted rates at reporting date. - IAS 12.81 — Extensive disclosure requirements, including the nature of deferred tax balances and unrecognised DTAs.

IAS 12 Temporary Differences Explained

IAS 12 Temporary Differences Explained — Core Rule

Under IAS 12, a temporary difference is the difference between the carrying amount of an asset or liability in the financial statements and its tax base; taxable temporary differences give rise to deferred tax liabilities (DTLs), while deductible temporary differences give rise to deferred tax assets (DTAs), subject to recoverability.

How IAS 12 Temporary Differences Explained Works

Definition of tax base (IAS 12.7–12.8): The tax base of an asset is the amount deductible for tax purposes against any future taxable economic benefits; the tax base of a liability is its carrying amount less any future tax-deductible amounts. Where the tax base is not immediately obvious, IAS 12.10 provides the guiding principle: consider the expected tax consequence of recovering or settling the item.

Taxable temporary differences → DTL (IAS 12.15): Arise when the carrying amount of an asset exceeds its tax base (e.g., accelerated tax depreciation), or when the carrying amount of a liability is less than its tax base. These will increase taxable profit in future periods when the asset is recovered or the liability settled. A DTL must be recognised for all taxable temporary differences unless the initial recognition exemption applies (IAS 12.15(b)).

Deductible temporary differences → DTA (IAS 12.24): Arise when the carrying amount of an asset is less than its tax base, or when the carrying amount of a liability exceeds its tax base (e.g., accrued warranty provisions not yet tax-deductible). DTAs are recognised only to the extent it is probable that sufficient future taxable profit will be available to utilise them (IAS 12.27).

Initial recognition exemption (IAS 12.15(b) and 12.24): No deferred tax is recognised on temporary differences arising from the initial recognition of an asset or liability in a transaction that is not a business combination and that affects neither accounting profit nor taxable profit at the time of the transaction. This is a critical scoping rule — it excludes, for example, deferred tax on a non-deductible goodwill impairment.

Measurement (IAS 12.47): DTLs and DTAs are measured at the tax rates expected to apply in the period when the liability is settled or the asset realised, using rates that are enacted or substantively enacted at the reporting date. No discounting is permitted (IAS 12.53).

Presentation (IAS 12.71–12.74): Deferred tax assets and liabilities must be presented separately from current tax; offset is permitted only when the entity has a legally enforceable right to offset current tax assets against current tax liabilities and they relate to taxes levied by the same authority on the same taxable entity.

IAS 12 Temporary Differences Explained — Practical Example

Scenario: A company purchases equipment for €500,000. For accounting purposes, it depreciates over 5 years (straight-line, €100,000/year). For tax purposes, accelerated depreciation allows a €200,000 deduction in Year 1. The corporate tax rate is 25%.

End of Year 1

Carrying amount (IFRS): €500,000 − €100,000 = €400,000
Tax base: €500,000 − €200,000 = €300,000
Taxable temporary difference: €400,000 − €300,000 = €100,000
DTL: €100,000 × 25% = €25,000

Journal entry — Year 1 (recognition of DTL)

Account	Dr (€)	Cr (€)
Income tax expense	25,000
Deferred tax liability		25,000

As the temporary difference reverses in Years 2–5 (accounting depreciation exceeds tax depreciation), the DTL unwinds — debit Deferred Tax Liability, credit Income Tax Expense, €6,250 per year.

IAS 12 Temporary Differences Explained — Common Pitfalls

Conflating timing differences with temporary differences: Temporary differences (IAS 12) are balance-sheet driven (carrying amount vs. tax base), not just income-statement timing items. Items that never reverse — such as non-deductible fines — create a permanent difference, not a temporary one, and generate no deferred tax.

Ignoring the probability test for DTAs: Recognising a DTA without robust evidence of sufficient future taxable profits violates IAS 12.27. Auditors scrutinise forecasts supporting DTA recognition closely, particularly for loss-making entities or those with a history of losses (IAS 12.35 — a history of losses is strong contrary evidence).

Misapplying the initial recognition exemption: Practitioners sometimes incorrectly apply IAS 12.15(b) to business combination assets, where deferred tax is always required (IAS 12.19). The exemption is narrow — it does not apply when the transaction affects either accounting profit or taxable profit.

IAS 12 Temporary Differences Explained — Key Paragraphs

IAS 12.5 — Definitions of temporary difference, deferred tax asset, deferred tax liability, and tax base.
IAS 12.15 — Mandatory recognition of DTLs for taxable temporary differences, including the initial recognition exemption.
IAS 12.24 and 12.27 — Recognition criteria for DTAs, including the probable future taxable profit condition.
IAS 12.35 — Rebuttal presumption: when a history of recent losses exists, a DTA is recognised only if there is convincing other evidence.
IAS 12.47 — Measurement using enacted or substantively enacted rates at reporting date.
IAS 12.81 — Extensive disclosure requirements, including the nature of deferred tax balances and unrecognised DTAs.