CFA Level I · CFA Level I Exam · Analysis of Income Taxes
Under IFRS, a company reports a difference between the carrying amount of an asset and its tax base that will reverse in future periods and cause taxable income to differ from accounting profit. This difference is most likely classified as:
The difference is a temporary difference. It is a gap between an item's carrying amount and its tax base that reverses in future periods, so it creates a deferred tax asset or liability. Permanent differences never reverse and do not create deferred taxes.
- Aa temporary differenceCorrect
- Ba permanent difference
- Ca valuation allowance
Explanation
A temporary difference arises from a gap between carrying amount and tax base that reverses over time, creating deferred tax assets or liabilities. A permanent difference never reverses and creates no deferred tax. A valuation allowance is a US GAAP reduction of a deferred tax asset, not a type of difference.
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