Temporary Difference
AdvancedA temporary difference is a difference between the value of an asset or liability in the accounts and its value for tax purposes that will reverse in future, creating either taxable or deductible amounts.
Many items are recognised in the accounts and for tax at different times. The difference between an item's carrying amount and its tax base is temporary if it will eventually even out.
For example, a machine bought for 1,000 might have a carrying amount of 800 in the accounts after one year but a tax base of 600, because tax depreciation is faster. The 200 difference is temporary: by the end of the machine's life, both values will reach zero. Because the company has already taken more tax deductions than accounting expense, it will pay more tax later, so the difference creates a deferred tax liability.
Other temporary differences create deferred tax assets, for example when expenses are recognised in the accounts before they are deductible for tax, such as provisions for future costs.
Temporary differences are the basis of deferred tax accounting under both IFRS and US GAAP. They differ from permanent differences, which never reverse and therefore do not create deferred tax.
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