Strategic Business Reporting (International) · Income taxes

Deferred Tax and Temporary Differences under IAS 12

Updated 11 October 2026 · Fact-checked

Deferred tax under IAS 12 uses the balance sheet liability method. You compare each asset's or liability's carrying amount with its tax base. The difference is a temporary difference. Multiply it by the enacted or substantively enacted tax rate. Taxable differences give a deferred tax liability. Deductible differences give a deferred tax asset, if recoverable.

Understand Deferred Tax and Temporary Differences

Accounting profit and taxable profit differ. Some items are taxed in a different period from the one in which they are reported. Deferred tax records the future tax effect of these timing gaps, so that the tax charge matches the profit reported.

IAS 12 uses the balance sheet liability method. You do not compare income and expenses. You look at each asset and liability in the statement of financial position. You compare its carrying amount with its tax base.

The tax base of an asset is the amount that will be deductible against taxable economic benefits when you recover the carrying amount. If the benefits are not taxable, the tax base equals the carrying amount. The tax base of a liability is its carrying amount less any amount that will be deductible for tax in future. For revenue received in advance, it is the carrying amount less any revenue that will not be taxable in future.

A taxable temporary difference arises when the carrying amount of an asset is above its tax base, or the carrying amount of a liability is below its tax base. It leads to a deferred tax liability. A deductible temporary difference is the opposite. It leads to a deferred tax asset, but only to the extent that it is probable that future taxable profit will be available to use it.

Common examples: accelerated tax depreciation gives a taxable difference. Provisions deductible only when paid give a deductible difference. A revaluation of property above cost, where tax does not follow the revaluation, gives a taxable difference. The deferred tax goes to other comprehensive income, as the revaluation did. Deferred tax is never discounted, and the tax rate used is the one enacted or substantively enacted by the reporting date and expected to apply when the difference reverses.

Key rules to remember

Temporary difference: Temporary difference = Carrying amount − Tax base (for an asset); For an asset, a positive result is a taxable difference (deferred tax liability) and a negative result is a deductible difference (deferred tax asset). For a liability, the signs reverse. Tax base − Carrying amount positive means a taxable difference (deferred tax liability). Carrying amount − Tax base positive means a deductible difference (deferred tax asset). Check the sign for each item.
Deferred tax balance: Deferred tax = Temporary difference × Tax rate; Use the enacted or substantively enacted rate expected to apply when the difference reverses. Do not discount.
Tax base of an asset: Tax base = Cost − Tax deductions already claimed (where the economic benefits are taxable); If the recovery of the asset is not taxable, the tax base equals the carrying amount.
Tax base of a liability: Tax base = Carrying amount − Amount deductible for tax in future periods; For revenue received in advance: carrying amount − revenue not taxable in future.
Movement in the year: Charge or credit = Closing deferred tax − Opening deferred tax; Post the movement to profit or loss, or to OCI or equity if the underlying item was recognised there.
Direction rule: Asset carrying amount > tax base → deferred tax liability; asset carrying amount < tax base → deferred tax asset; Reverse the test for liabilities: liability carrying amount < tax base → deferred tax liability; liability carrying amount > tax base → deferred tax asset.

How to solve Deferred Tax and Temporary Differences questions

Use this method for any deferred tax question. Work item by item and keep a simple table.

1List every asset and liability that could give a difference: non-current assets, receivables, provisions, accruals, revaluations, leases and similar items.
2Write the carrying amount of each item at the reporting date, following the relevant IFRS.
3Work out the tax base of each item using the tax rules given in the question.
4Calculate the temporary difference and label it taxable or deductible.
5Multiply by the tax rate that applies when the difference reverses. This gives the closing deferred tax liability or asset.
6For deferred tax assets, test recoverability: is future taxable profit probable? Say so in your answer.
7Compare closing with opening deferred tax. Take the movement to profit or loss, unless it relates to an item in OCI or equity.
8Show presentation: offset assets and liabilities only where the entity has a legal right to offset current tax and they relate to the same tax authority. Add a short note on judgement.

Quickest way: Table method in three columns

When to use it: Use it when the question gives several items and you have limited time. It works for most SBR deferred tax parts.

Draw columns: Item, Carrying amount, Tax base, Difference.
Fill in all rows first. Then work out the difference. For assets, use carrying amount − tax base: positive is taxable, negative is deductible. For liabilities, use tax base − carrying amount: positive is taxable; carrying amount − tax base positive is deductible.
Add up the net taxable (or deductible) differences and multiply by the rate once.
Subtract the opening balance. Put the movement in profit or loss, and show any OCI part separately.
Add one sentence on recoverability for any deferred tax asset.

Common mistakes in Deferred Tax and Temporary Differences

Comparing accounting depreciation with tax depreciation instead of carrying amount with tax base.
Students learned the older income statement approach, where timing differences were based on income and expenses.
Fix: Always compare closing balances. Carrying amount minus tax base gives the difference. Do not work from the depreciation charge.
Getting the direction wrong for liabilities, such as a provision.
The asset rule is memorised and applied to everything.
Fix: For a liability, carrying amount − tax base positive is a deductible difference, giving a deferred tax asset. Tax base − carrying amount positive is a taxable difference, giving a deferred tax liability. Test each item separately.
Recognising a deferred tax asset without checking recoverability.
Students treat deductible differences as automatically creating an asset.
Fix: Say whether future taxable profit is probable. If it is not, do not recognise the asset or recognise only part.
Posting deferred tax on a property revaluation to profit or loss.
Students assume all tax goes through the income statement.
Fix: Follow the item. Revaluation surplus goes to OCI, so the related deferred tax also goes to OCI.
Using the current tax rate when a different rate has been enacted for the future.
The rate in the question is not read carefully.
Fix: Use the rate enacted or substantively enacted by the reporting date that will apply when the difference reverses.
Discounting the deferred tax balance.
Students carry over discounting from provisions.
Fix: IAS 12 prohibits discounting deferred tax. Show the undiscounted figure.

Worked examples

Example 1

Ravi Co bought equipment on 1 April 20X1 for $500,000. It depreciates it straight line over 5 years with no residual value. Tax allows 25% reducing balance on the same cost. The tax rate is 20%. Calculate the deferred tax at 31 March 20X3 (two full years of use).

Show the solution

Carrying amount: $500,000 − (2 × $100,000) = $300,000.
Tax base: $500,000 × 75% × 75% = $281,250.
Carrying amount ($300,000) exceeds tax base ($281,250), so this is a taxable temporary difference of $18,750.
Deferred tax liability = $18,750 × 20% = $3,750.
Check at 31 March 20X2: carrying amount $400,000; tax base $375,000; difference $25,000. Liability $5,000. So the movement in year 2 is a credit of $1,250 to profit or loss.

Answer: Deferred tax liability of $3,750 at 31 March 20X3. This is a $1,250 reduction in the year, so a credit to profit or loss.

Example 2

Meera Co revalues land from its cost of $2,000,000 to a fair value of $2,600,000 at 31 December 20X4. Tax is not affected by the revaluation and the land has a tax base of $2,000,000. The tax rate is 25%. Meera also has a provision of $400,000 at that date for warranty costs. Tax relief is given only when the costs are paid. Assume future taxable profits are probable. What deferred tax should be shown for each item and where is it recorded?

Show the solution

Land: carrying amount $2,600,000; tax base $2,000,000. Taxable difference $600,000.
Deferred tax liability on land = $600,000 × 25% = $150,000. It arises from the revaluation, so the charge goes to OCI and reduces the revaluation surplus.
Provision: carrying amount $400,000. Tax base = $400,000 − $400,000 deductible in future = $0.
Deductible difference = $400,000 − $0 = $400,000.
Deferred tax asset = $400,000 × 25% = $100,000. It is recognised because future taxable profit is probable. The credit goes to profit or loss, where the provision expense was recorded.
Net position, if offset is allowed: liability $150,000 − asset $100,000 = net liability $50,000. Offset applies only if same tax authority and legal right exist.

Answer: Deferred tax liability of $150,000 on land (charged to OCI) and deferred tax asset of $100,000 on the provision (credited to profit or loss). Net liability is $50,000 if offset criteria are met.

Exam tips

Show a clear table of carrying amount, tax base and difference. Markers award marks for each line, even if one figure is wrong.
Always state where the movement is recorded: profit or loss, OCI or equity. Many students lose marks here.
When you recognise a deferred tax asset, add a sentence on whether future taxable profit is probable. This earns professional judgement marks.
Read the tax rate and tax rules in the scenario with care. Tax depreciation, enacted rate changes and revaluation treatment are often tested.
In discussion parts, explain why deferred tax is needed in terms of the Conceptual Framework: it recognises future tax consequences of past transactions.

Practice questions from Income taxes

Deferred Tax and Temporary Differences in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Deferred Tax and Temporary Differences: frequently asked questions

What is the difference between taxable and deductible temporary differences?

A taxable temporary difference will increase taxable profit in future when the asset is recovered or the liability settled. It gives a deferred tax liability. A deductible temporary difference will reduce future taxable profit and gives a deferred tax asset, if recovery is probable.

How do I find the tax base of an asset?

Start with the cost and deduct the tax allowances already claimed. This gives the amount that will still be deductible in future against taxable benefits. If the benefits from the asset are not taxable, the tax base equals its carrying amount.

Is deferred tax charged on a property revaluation?

Yes, where the revaluation raises the carrying amount above the tax base and tax is not changed by the revaluation. The deferred tax liability is recognised in OCI, against the revaluation surplus, because the revaluation itself was in OCI.

Should deferred tax be discounted?

No. IAS 12 prohibits discounting because it would require detailed scheduling of reversals, which is impracticable or highly impracticable, and would reduce comparability between entities.