Principles of Revenue Recognition and ...
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Temporary differences occur whenever there is a difference between the tax base and the carrying amount of assets and liabilities on the balance sheet.
Permanent differences are differences between the tax and financial reporting of revenue or expense items that will not be reversed in future.
The formation of deferred tax assets or liabilities from temporary differences can only occur if the differences will reverse themselves at some future date and to such an extent that the balance sheet items are expected to create future economic benefits for the company.
Temporary differences are divided into: (i) taxable temporary differences, and (ii) deductible temporary differences.
Taxable temporary differences are temporary differences that result in a taxable amount in future when determining the taxable profit as the relevant balance sheet item is recovered or settled.
Taxable temporary differences result in a deferred tax liability when the carrying amount of an asset exceeds its tax base, or when the tax base of liability exceeds its carrying amount.
Deductible temporary differences are temporary differences that result in a reduction or deduction of taxable income in future when the relevant balance sheet item is recovered or settled. They result in a deferred tax asset when the tax base of an asset exceeds its carrying amount, or the carrying amount of liability exceeds its tax base.
Since they are irreversible, permanent differences do not give rise to deferred tax assets or liabilities. Examples of the items which give rise to permanent differences include:
All permanent differences result in a difference between a company’s effective tax rate and statutory tax rate.
The following examples will help to highlight the implications of temporary differences and permanent differences.
Question 1
Which of the following statements is least likely accurate?
- Permanent differences arise when there is a difference between the tax base and the carrying amount of assets and liabilities.
- Temporary differences arise when there is a difference between the tax base and the carrying amount of assets and liabilities.
- Permanent differences are differences between the tax and financial reporting of revenue or expense items which will not be reversed in future.
Solution
The correct answer is A.
Temporary differences, and not permanent differences, arise whenever there is a difference between the tax base and the carrying amount of assets and liabilities.
Question 2
Canadian Syrup Inc. received a government grant of $2,000 for buying a domestically manufactured machine. The governmental grant would result in:
- A permanent tax difference.
- A taxable temporary tax difference.
- A deductible temporary tax difference.
Solution
The correct answer is A.
The grant would result in a permanent difference because the difference is not expected to reverse in the future.