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CFA Level I Exam · Analysis of Income Taxes

Tax Base vs Carrying Amount of Assets and Liabilities

Updated 7 October 2026

The carrying amount is the value of an asset or liability on the balance sheet. The tax base is its value under tax rules. The gap between them is a temporary difference. Find both amounts, compare them, then use the asset or liability type to decide whether a deferred tax asset or liability arises.

Understand Tax Base and Carrying Amount of Assets and Liabilities

Companies keep two sets of books. One follows IFRS and produces the balance sheet. The other follows tax law and decides how much tax is owed. The two sets often treat the same item differently, mainly in timing.

The carrying amount is what the item is worth on the IFRS balance sheet. The tax base is what the item is worth under tax rules. For an asset, the tax base is the amount that will be deductible against taxable economic benefits in future when you recover the asset's carrying amount. If those benefits will not be taxable, the tax base equals the carrying amount. For a liability, the tax base is the carrying amount minus any amount that will be deductible for tax in future periods.

A temporary difference is the gap between carrying amount and tax base. It will reverse over time and change future taxable income. That reversal creates deferred tax. This page covers only how to find the tax base and the difference. The deferred tax assets and liabilities page shows how to use the result.

Think of it as a question about the future. If the asset's carrying amount is higher than its tax base, the future taxable economic benefits exceed the future tax deductions. Future taxable income and tax will be higher. That points to a deferred tax liability. If the carrying amount is lower, future tax will be lower, which points to a deferred tax asset. For liabilities the direction flips.

Revenue received in advance and taxed when received does create a temporary difference. The tax base of this liability is its carrying amount less the revenue that will not be taxable in future. Because the cash was already taxed on receipt, all of the carrying amount is non-taxable in future, so the tax base is zero. The carrying amount is positive and the tax base is zero, so the carrying amount is above the tax base. For a liability, this is a deductible temporary difference and gives a deferred tax asset.

Some items give no temporary difference at all. These are permanent differences, such as fines that are never deductible or income that is tax-exempt. For these, the tax base equals the carrying amount, so no deferred tax is recorded.

Key formulas to remember

Temporary difference
Temporary difference = Carrying amount − Tax base
The formula is the same for assets and liabilities. What differs is the interpretation: whether the result points to a deferred tax asset or a deferred tax liability depends on whether the item is an asset or a liability.
Tax base of an asset
Tax base = Carrying amount − (future taxable economic benefits − future tax deductions)
Simple version: the amount that will be deductible against future taxable economic benefits. Often cost minus tax depreciation claimed so far. Future benefits that are not taxable are excluded from the taxable benefits, so if all future benefits are exempt, nothing is taxable, no deduction is claimed against them, and the tax base equals the carrying amount. Check: carrying amount 80, taxable benefits 80, deductions 70 gives 80 − (80 − 70) = 70.
Tax base of a liability
Tax base = Carrying amount − amounts deductible for tax in future periods
If nothing is deductible later, tax base equals carrying amount.
Tax base of revenue received in advance
Tax base = Carrying amount − revenue that will not be taxable in future periods
If the cash was already taxed when received, the revenue that will not be taxable in future equals the carrying amount, so the tax base is zero.
Direction of deferred tax (IFRS rule of thumb)
Asset: CA > TB gives DTL; CA < TB gives DTA. Liability: CA > TB gives DTA; CA < TB gives DTL.
This applies when the difference is temporary. Rate changes and valuation allowances are covered elsewhere.

How to solve Tax Base and Carrying Amount of Assets and Liabilities questions

Use this routine for any question that asks for a tax base, a temporary difference or the type of deferred tax.

  1. 1Identify whether the item is an asset or a liability.
  2. 2Find the carrying amount from the IFRS balance sheet, using cost less accounting depreciation or the stated liability.
  3. 3Find the tax base. For an asset, use cost less tax depreciation claimed, or the amount deductible in future. For a liability, use carrying amount less future tax-deductible amounts.
  4. 4Check special cases: items never taxed or never deductible have a tax base equal to the carrying amount.
  5. 5Compute carrying amount minus tax base and note whether it is positive or negative.
  6. 6Apply the direction rule to decide if the difference points to a deferred tax asset or liability.
  7. 7If asked for the amount, multiply the difference by the tax rate given.

Quickest way: Compare and flip for liabilities

When to use it: Use when the question only asks which option is larger, or whether a deferred tax asset or liability arises.

  1. For an asset, ask: will I owe more tax later? If carrying amount is above tax base, yes, so a deferred tax liability.
  2. For a liability, reverse it: carrying amount above tax base means a deferred tax asset.
  3. Eliminate any option whose direction contradicts this.
  4. Then check the arithmetic on the remaining two options.

Common mistakes in Tax Base and Carrying Amount of Assets and Liabilities

  • Treating the tax base as the same as the carrying amount for depreciable assets

    Students forget that tax depreciation can differ from accounting depreciation.

    Fix: Always compute each depreciation schedule separately before comparing.

  • Reversing the direction for liabilities

    The asset rule is memorised and applied automatically.

    Fix: For liabilities, flip it: carrying amount above tax base gives a deferred tax asset.

  • Giving revenue received in advance a tax base equal to its carrying amount when it was already taxed

    Students overlook the timing of tax recognition.

    Fix: If the cash was taxed on receipt, no future taxable amount remains, so the tax base is zero.

  • Treating permanent differences as temporary

    Non-deductible fines or tax-exempt income look like differences in the figures.

    Fix: A permanent difference never reverses. The tax base equals the carrying amount, so no deferred tax is recorded.

  • Applying the tax rate to the carrying amount instead of the difference

    Rushing at the last step.

    Fix: Deferred tax equals the temporary difference times the tax rate, never the full balance.

Worked examples

Example 1

A company buys equipment for €100,000. For IFRS it records depreciation of €20,000 in year 1. For tax it claims depreciation of €30,000 in year 1. The tax rate is 25%. At the end of year 1, what are the tax base, the temporary difference and the resulting deferred tax? Options: A) DTL of €2,500; B) DTA of €2,500; C) DTL of €5,000.

Show the solution
  1. Carrying amount = 100,000 − 20,000 = 80,000.
  2. Tax base = 100,000 − 30,000 = 70,000.
  3. Carrying amount is above tax base by 10,000, and this is an asset.
  4. Higher carrying amount on an asset means more taxable income in future, so a deferred tax liability.
  5. DTL = 10,000 × 25% = 2,500.

Answer: A) Deferred tax liability of €2,500. Tax base is €70,000 and the temporary difference is €10,000.

Example 2

A firm records a warranty provision of $50,000 as a liability. Warranty costs are deductible for tax only when paid, in a future period. The tax rate is 30%. What is the tax base of the liability and the deferred tax? Options: A) Tax base $50,000, no deferred tax; B) Tax base zero, DTA of $15,000; C) Tax base zero, DTL of $15,000.

Show the solution
  1. Carrying amount of the liability = 50,000.
  2. Amount deductible in future = 50,000.
  3. Tax base = 50,000 − 50,000 = 0.
  4. Carrying amount (50,000) is above tax base (0) for a liability, so a deductible temporary difference of 50,000 and a deferred tax asset.
  5. DTA = 50,000 × 30% = 15,000.

Answer: B) Tax base is zero and a deferred tax asset of $15,000 arises.

Exam tips

  • Write carrying amount and tax base on two lines before computing. It stops direction errors.
  • With three options, work out the direction first. That usually eliminates two choices before any arithmetic.
  • Read carefully whether a question asks for the tax base, the temporary difference or the deferred tax amount. Each gives a different number.
  • Look for wording such as never deductible or tax-exempt. These signal a permanent difference and no deferred tax. Revenue already taxed on receipt is different: it gives a zero tax base and a deferred tax asset.
  • Questions are IFRS-based unless they say US GAAP, so use the IFRS approach.

Practice questions from Analysis of Income Taxes

Tax Base and Carrying Amount of Assets and Liabilities: frequently asked questions

What is the difference between tax base and carrying amount?

Carrying amount is the figure on the IFRS balance sheet. Tax base is the figure under tax law. Their difference is the temporary difference, which drives deferred tax.

How do you find the tax base of an asset?

Take the amount that will be deductible against future taxable income as you recover the asset. For a depreciable asset this is usually cost less tax depreciation claimed to date.

How do you find the tax base of a liability?

Start with the carrying amount and subtract any amount that will be deductible for tax in future. If nothing is deductible later, the tax base equals the carrying amount.

Does every difference between carrying amount and tax base create deferred tax?

No. Only temporary differences that reverse create deferred tax. Permanent differences, such as non-deductible fines, never reverse and give no deferred tax.