Taxable temporary differences and deferred tax liabilities

Learning objectives

• Identify the situations that give rise to a taxable temporary difference (an asset whose carrying amount exceeds its tax base).L1, L2
• Calculate the taxable temporary difference and the related deferred tax liability.L1, L2
• Record the origination and reversal of a deferred tax liability.L2
• Analyse the effect of a revaluation or of a fair value measurement with no equivalent tax adjustment, even where there is no intention to dispose of the asset.L2, L3

Normative references

• IAS 12 §15A deferred tax liability is recognised for all taxable temporary differences, except to the extent that it arises from (a) the initial recognition of goodwill or (b) the initial recognition of an asset or liability in a transaction that is not a business combination, that at the time of the transaction affects neither accounting profit nor taxable profit (tax loss) and that does not give rise to equal taxable and deductible temporary differences (condition (b)(iii) added in 2021).
• IAS 12 §16Recognising an asset implies that its carrying amount will be recovered in the form of future economic benefits; when the carrying amount exceeds the tax base, the taxable economic benefits will exceed the amount allowed as a deduction for tax purposes: the difference is a taxable temporary difference, and the obligation to pay the resulting income taxes is a deferred tax liability.
• IAS 12Some temporary differences arise when income or expense is included in accounting profit in one period but in taxable profit in a different period, for example: interest revenue recognised on a time-proportion basis but taxed on a cash basis; accelerated tax depreciation of an asset; development costs capitalised and amortised to profit or loss although they were deducted for tax purposes in the period in which they were incurred.
• IAS 12 §18Temporary differences also arise when: (a) the identifiable assets acquired and liabilities assumed in a business combination are recognised at fair value (IFRS 3) with no equivalent tax adjustment (para. 19); (b) assets are revalued with no equivalent tax adjustment (para. 20); (c) goodwill arises in a business combination (para. 21); (d) the tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example for a non-taxable grant related to an asset (paras. 22 and 33); (e) the carrying amount of investments in subsidiaries, branches, associates or joint arrangements comes to differ from their tax base (paras. 38 to 45). Exchange differences on non-monetary items are dealt with in para. 41.
• IAS 12 §20When assets are carried at fair value or revalued with no equivalent tax adjustment, the difference between the carrying amount of the revalued asset and its tax base is a temporary difference that gives rise to a deferred tax liability or asset, even if the entity does not intend to dispose of the asset.
• IAS 12 §41When non-monetary assets and liabilities are measured in the entity's functional currency but taxable profit (tax loss) is determined in a different currency, changes in exchange rates give rise to temporary differences that result in a deferred tax liability or asset.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

28 questions

• Where the carrying amount of an asset exceeds its tax base, the difference is a taxable temporary difference, and the tax that will be payable on it is a deferred tax liability.L1
• An entity that revalues land without an equivalent tax adjustment recognises no deferred tax on the difference, provided it does not intend to dispose of the land.L2
• Where non-monetary assets are measured in the entity's functional currency but taxable profit is determined in another currency, exchange rate changes may give rise to temporary differences resulting in deferred tax.L2
• Which of these situations at Garbellis gives rise to a taxable temporary difference? (Tax treatments: case data.)L1
• A deferred tax liability is recognised for all taxable temporary differences, subject to exceptions. Which ones?L1
• Ferrantis capitalises development costs, which are then amortised through profit or loss; tax law (case data) deducted them in full in the year they were incurred. What is the consequence under IAS 12?L2
• In a business combination, the Malvenne group measures the identifiable assets acquired at fair value; the legislation (case data) retains their previous tax bases. Which statement is correct?L2
• Of the following items of Hélvard (tax data from the case), which give rise to a taxable temporary difference?L2
• The Thoronde group revalues its owner-occupied buildings under its accounting policy (case data); tax law does not change their tax base. Which statements are correct?L3
• Under IAS 12, which of these situations may give rise to temporary differences?L2
• A machine of Peyrolles, depreciated faster for tax than for accounting, has a carrying amount of {carrying_amount} and a tax base of {tax_base}. The rate expected on reversal, enacted at the reporting date, is {tax_rate}%. Compute the taxable temporary difference and the deferred tax liability.L1
• The haulier Lirvalle uses declining-balance tax depreciation on its truck fleet: at the reporting date, the fleet has a carrying amount of {carrying_amount} and a tax base of {tax_base}. With an expected rate of {tax_rate}% (enacted at the reporting date), what are the temporary difference and the deferred tax liability?L2
• Cordelan revalues, under its accounting policy (case data), land whose tax base remains equal to its cost, {tax_base}; the revalued amount is {new_carrying_amount}. Cordelan has no intention of selling the land. With an expected rate of {tax_rate}%, compute the temporary difference and the deferred tax liability.L2
• After revaluation (the group's accounting policy, case data), the office building occupied by the Vantorel group's head office has a carrying amount of {new_carrying_amount}; the legislation ignores the revaluation and its tax base, after tax depreciation, is {tax_base}. The group intends to occupy the building indefinitely. With an expected rate of {tax_rate}%, compute the temporary difference and the deferred tax liability.L3
• Ambrevin has capitalised {capitalised_costs} of development costs, amortised by {amortisation_to_date} at the reporting date. Tax law (case data) deducted them in full in the year they were incurred. With an expected rate of {tax_rate}%, compute the temporary difference and the deferred tax liability.L2
• At the end of its first year of activity, Brunelière identifies a taxable temporary difference of {temporary_difference} on its equipment, depreciated faster for tax; no deferred tax existed at the start of the year. The expected rate is {tax_rate}%. Record the entry, the difference arising from depreciation recognised in profit or loss.L2
• The leasing company Orbecque recognises accrued interest taxed only when received (case data). The related deferred tax liability was {opening_dtl} at the start of the year; at the reporting date, the temporary difference reaches {closing_temporary_difference}, at the expected rate of {tax_rate}%. Record the change, entirely related to income recognised in profit or loss.L2
• Carmaux's machine is reaching the end of its tax depreciation: accounting depreciation now exceeds tax depreciation and the taxable difference is decreasing. The deferred tax liability was {opening_dtl} at the start of the year; the temporary difference is only {closing_temporary_difference} at the reporting date, at the expected rate of {tax_rate}%. Record the change.L2
• Ombrival holds two machines depreciated faster for tax. At the reporting date, the taxable temporary differences are {difference_machine_a} (machine A) and {difference_machine_b} (machine B); the expected rate is {tax_rate}% and the deferred tax liability was {opening_dtl} at the start of the year. Record the change in profit or loss.L2
• A warehouse of Lermantes has a carrying amount of 400,000 and a tax base of 280,000; the expected rate is 25%. The accountant recognises a deferred tax liability of 100,000. What is the error?L2
• The Halvignon group revalues a vineyard (the group's accounting policy, case data) from 2,000,000 to 2,600,000; the tax base remains 2,000,000. The controller recognises no deferred tax, writing: 'the estate is strategic, it will never be sold'. What is the error?L3
• Pélagrine holds listed shares measured at fair value, 860,000 at the reporting date; their cost, 700,000, remains their tax base and the gain will be taxed only on disposal (case data). Pélagrine intends to hold them for the long term. With an expected rate of 25%, which analysis should be adopted?L3
• On acquiring Ternelle, the Sauvigal group recognises a brand in its consolidated financial statements at fair value, 500,000. In Ternelle, taxed separately, the internally created brand has no tax base (case data). The finance director considers that no deferred tax should be recognised, since the transaction 'does not go through profit or loss'. Which analysis should be adopted?L3
• At the reporting date, Vellouse has: accrued interest receivable of 16,000, taxed when received; a machine with a carrying amount of 250,000 and a tax base of 210,000 (case data). The expected rate is 25%. What total deferred tax liability does it recognise?L2
• Vesmarin holds a bond measured at fair value, 60,000 below its cost, which remains its tax base (case data). It intends to hold the bond to maturity. Which statements are correct?L3
• The mutual insurer Saint-Vrain holds a bond portfolio measured at fair value, {fair_value} at the reporting date; its tax base remains cost, {tax_base} (case data). It intends to hold the securities to maturity, and its forecasts make sufficient taxable profit probable. With an expected rate of {tax_rate}%, compute the deductible difference and the deferred tax asset.L3
• The regional bank Vauzelle holds bonds at fair value, 2,300,000 at the reporting date, with a tax base of 2,500,000 (cost). Sufficient taxable profit is probable (case data). The tax manager rules out any temporary difference: 'we will hold these securities to maturity, the loss will disappear'. What is the error?L3
• Escoulan holds bonds at fair value, 80,000 below their tax base. Based on management's documented analysis (case data), no taxable profit is probable in the periods in which the loss could be deducted, nor from any other source. Which analysis should be adopted?L3