Temporary differences and tax base under IAS 12

Getting the tax base right is the hardest part of deferred tax, and the part exam questions test most. This guide explains how to find the tax base of an asset and a liability, how to tell taxable and deductible temporary differences apart, and works through five common items.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Temporary differences are differences between the carrying amount of an asset or liability and its tax base. They are taxable temporary differences when they will create taxable amounts in future, giving a deferred tax liability, and deductible temporary differences when they will create deductions, giving a deferred tax asset. The tax base of an asset is the amount deductible for tax against future benefits; the tax base of a liability is its carrying amount less amounts deductible in future.

At a glance

Temporary difference
Carrying amount vs tax base
Taxable
Gives a deferred tax liability
Deductible
Gives a deferred tax asset
Asset tax base
Future deductions available
Liability tax base
Carrying amount less future deductions
Permanent differences
No deferred tax
Temporary differences and tax base under IAS 12Temporary difference: Carrying amount vs tax base; Taxable: Gives a deferred tax liability; Deductible: Gives a deferred tax asset; Asset tax base: Future deductions available; Liability tax base: Carrying amount less future deductions; Permanent differences: No deferred tax.KEY FACTS AT A GLANCETemporary differences and tax base under IAS 12Temporary differenceCarrying amount vs taxbaseTaxableGives a deferred taxliabilityDeductibleGives a deferred taxassetAsset tax baseFuture deductionsavailableLiability tax baseCarrying amount lessfuture deductionsPermanent differencesNo deferred taxChecked against official sourcesTax BakersTemporary differences and tax base under IAS 12Temporary difference: Carrying amount vs tax base; Taxable: Gives a deferred tax liability; Deductible: Gives a deferred tax asset; Asset tax base: Future deductions available; Liability tax base: Carrying amount less future deductions; Permanent differences: No deferred tax.KEY FACTS AT A GLANCETemporary differences and tax baseunder IAS 12Temporary differenceCarrying amount vs tax baseTaxableGives a deferred tax liabilityDeductibleGives a deferred tax assetAsset tax baseFuture deductions availableLiability tax baseCarrying amount less future deductionsPermanent differencesNo deferred taxChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What is the tax base of an asset and a liability?

  • Tax base of an asset: the amount that will be deductible for tax against the taxable economic benefits the asset produces. A machine with tax written-down value of 50,000 has a tax base of 50,000. If the benefits are not taxable, the tax base equals the carrying amount.
  • Tax base of a liability: its carrying amount less any amount that will be deductible in future. A warranty provision of 10,000 deductible when paid has a tax base of nil. For revenue received in advance, it is the carrying amount less revenue that will not be taxable in future.

Taxable vs deductible temporary differences

AssetLiability
Carrying amount above tax baseTaxable: deferred tax liabilityDeductible: deferred tax asset
Carrying amount below tax baseDeductible: deferred tax assetTaxable: deferred tax liability

Five temporary difference examples

Five items: carrying amount, tax base, differenceFive items: carrying amount, tax base, differenceCarrying amountTax baseDifferenceMachine80,00050,00030,000 taxableInterestreceivable2,000Nil2,000 taxableTradereceivables95,000100,0005,000 deductibleWarrantyprovision10,000Nil10,000 deductibleFine payable4,0004,000None
Assets above their tax base and liabilities below it give taxable differences; the reverse gives deductible ones.
  1. Machine: carrying amount 80,000, tax base 50,000 after accelerated tax depreciation: taxable difference of 30,000.
  2. Interest receivable taxed when received: carrying amount 2,000, tax base nil: taxable difference of 2,000.
  3. Trade receivables: carrying amount 95,000 after a 5,000 loss allowance that is deductible only when debts are written off; tax base 100,000: deductible difference of 5,000.
  4. Warranty provision: carrying amount 10,000, tax base nil: deductible difference of 10,000.
  5. Fine payable, never deductible: carrying amount 4,000, tax base 4,000: no temporary difference.

At 25%, the taxable differences of 32,000 give a deferred tax liability of 8,000, and the deductible differences of 15,000 a deferred tax asset of 3,750, so a net liability of 4,250. The Deferred tax calculator (Excel) opens with these five items.

What is the difference between temporary and permanent differences?

A permanent difference is income or expense that is never taxable or deductible, such as a fine, entertainment that tax law disallows, or exempt dividends. It affects only the current year's taxable profit and the effective tax rate, never deferred tax. IAS 12 does not use the term, but its result is the same: no temporary difference arises because carrying amount and tax base are equal or the benefits are not taxable.

What about business combinations?

When a company acquires another, it measures the acquired assets and liabilities at fair value, but their tax bases usually stay the same. Each fair value adjustment creates a temporary difference, and the deferred tax on it is part of the acquisition accounting, which in turn changes the goodwill. A brand recognised at fair value of 1,000 with a tax base of nil, at 25%, creates a deferred tax liability of 250 and increases goodwill by the same amount.

Where is deferred tax not recognised?

  • On the initial recognition of goodwill.
  • On the initial recognition of an asset or liability in a transaction that is not a business combination, affects neither accounting nor taxable profit, and does not give rise to equal taxable and deductible differences.
  • On investments in subsidiaries, branches, associates and joint arrangements, where the parent controls the timing of reversal and reversal is not probable in the foreseeable future.
  • On deferred taxes related to Pillar Two top-up taxes, under a temporary exception.

Where to go next

Follow one difference over time in deferred tax with examples, and see when the asset side can be recognised in recognising deferred tax assets.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is a temporary difference?

A difference between the carrying amount of an asset or liability and its tax base.

What is the tax base of an asset?

The amount deductible for tax against the taxable economic benefits the asset will produce.

What is the difference between taxable and deductible temporary differences?

Taxable differences will increase future taxable profit and give deferred tax liabilities; deductible differences will reduce it and give deferred tax assets.

Do permanent differences create deferred tax?

No. They affect only current tax and the effective tax rate.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 12 Income Taxes

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 12Deferred tax liabilities and assets with examplesIAS 12Recognising deferred tax assets and tax lossesIAS 12IAS 12 income taxes explained

More in IAS 12

TopicAll 6 guides in IAS 12

This guide is general information. It is not tax or legal advice for your situation.