Accounting for Deferred Income Taxes, 2nd Edition

Chapter 2Temporary Differences

Learning objectives

• Identify and measure temporary differences.
• Recognize how to schedule temporary differences to future tax periods when necessary and understand the reversal patterns for these differences.

Differences in tax accounting and financial accounting

Income taxes currently payable for a given year usually include the tax consequences of most events that are recognized in the financial statements for that year. Because financial accounting uses generally accepted accounting principles (GAAP) and tax accounting uses tax law, there may be, in some cases, differences between tax and financial accounting in the measurement of assets, liabilities, equity, gains, losses, expenses, and revenues. These differences are due to the following:

• The amount of taxable income and pre-tax financial income for a year
  • There are also some cases when financial income and taxable income differ that do not have future tax consequences.
• The tax basis of assets or liabilities and their reported amounts in financial statements
  • Certain basis differences may not result in taxable or deductible amounts in future years and may not be temporary differences for which a deferred tax liability (DTL) or deferred tax asset (DTA) is recognized.

Assumptions about temporary differences

An assumption inherent in a company’s statement of financial position prepared ...