IAS 12 — Temporary Differences & Tax Bases: The Foundation of Deferred Tax
Understand tax bases, taxable and deductible temporary differences, the asset-versus-liability flip, and how these mechanics produce deferred tax assets and liabilities.
Every deferred tax calculation you will ever perform comes down to comparing two numbers for the same asset or liability: its carrying amount in the financial statements, and its tax base under tax law. Get comfortable with this one comparison and the entire deferred tax topic — usually one of the most feared areas in DipIFR and ACCA exams — becomes mechanical rather than mysterious.
Watch the Lesson
Temporary Differences & Tax Bases — The Foundation of Deferred Tax
Taught by Dr. Hesham Mokhiemer
This is a free preview lesson from the IAS 12 module inside DipIFR Masterclass and the IFRS CERT Course. Watch the full clip above, then read the companion notes below — this is exactly the depth and teaching style you get across all 30+ IFRS standards in the full programme.
Why Deferred Tax Exists
Accounting profit and taxable profit are rarely the same number. Tax law allows certain deductions earlier or later than accounting standards do, and recognises certain items differently altogether. Deferred tax exists to bridge that gap — to recognise, today, the future tax consequences of differences that already exist between your accounting numbers and your tax numbers. The entire mechanism starts with one concept: the tax base.
What Is a "Tax Base"? — IAS 12.5, 12.7-8
The tax base is the value tax law assigns to an asset or liability — and the definition differs depending on which one you're looking at:
Tax base of an ASSET
The amount that will be deductible for tax purposes against any taxable economic benefits that flow to the entity when it recovers the asset's carrying amount. If those future economic benefits won't be taxable at all, the tax base simply equals the carrying amount — no temporary difference arises.
Tax base of a LIABILITY
Its carrying amount, LESS any amount that will be deductible for tax purposes in respect of that liability in future periods. For revenue received in advance, the tax base is the carrying amount, less any amount of that revenue that will not be taxable in future periods.
Temporary Difference Defined — IAS 12.5
A temporary difference is simply the gap between the carrying amount of an asset or liability and its tax base. There are two types, and which one you have determines whether you end up with a deferred tax asset or a deferred tax liability:
Temporary difference — results in taxable amounts in future periods → Deferred Tax LIABILITY
Temporary difference — results in deductible amounts in future periods → Deferred Tax ASSET (if recoverable)
Numbers to compare for every item: Carrying Amount vs Tax Base — that's the whole mechanism
The Flip: Assets vs Liabilities
Here is the single most important — and most frequently reversed-by-mistake — relationship in the entire deferred tax topic. The direction of the comparison flips depending on whether you're looking at an asset or a liability:
📈 For an ASSET
📉 For a LIABILITY
Why the flip makes sense: For an asset, a HIGHER carrying amount than tax base means you've already used up more of your tax deduction than your book value suggests — so MORE tax will be payable in future = a liability. For a liability, a HIGHER carrying amount than tax base (like an unpaid provision) means a tax deduction is still WAITING for you in the future when you actually pay it — so LESS tax will be payable later = an asset. The logic is consistent; only the direction looks reversed because assets and liabilities sit on opposite sides of the balance sheet.
Common Examples — At a Glance
| Item | Why a Difference Arises | Type | Deferred Tax |
|---|---|---|---|
| Plant & equipment | Tax allows faster depreciation than accounting (accelerated capital allowances) | Taxable | DTL |
| Capitalised development costs | Capitalised for accounting (IAS 38) but fully expensed for tax in the year incurred | Taxable | DTL |
| Fair value gains — investment property | Recognised in accounting profit immediately but not taxable until realised | Taxable | DTL |
| Warranty / restructuring provisions | Recognised as an accounting liability now, but only tax-deductible when actually paid | Deductible | DTA |
| Impairment losses on assets | Recognised for accounting immediately, but not allowed for tax until the asset is disposed of or written off | Deductible | DTA |
| Unused tax losses carried forward | No carrying amount on the balance sheet, but represents future deductible amounts | Deductible | DTA |
Common Classification Traps
Forgetting to flip the logic for liabilities
Applying the asset rule ("carrying amount higher = liability") directly to a liability item produces the exact opposite — and wrong — answer. Always pause and ask: am I looking at an asset or a liability, before applying the comparison.
Confusing permanent differences with temporary differences
Some differences between accounting and tax NEVER reverse — non-deductible fines and penalties, for example, or certain non-taxable government grants. These are permanent differences and create NO deferred tax at all. Only differences that will reverse in a future period qualify as temporary differences under IAS 12.
Assuming every deductible temporary difference automatically creates a recognised deferred tax asset
A deductible temporary difference is a necessary condition for a deferred tax asset — but not sufficient on its own. IAS 12.24 requires it to be PROBABLE that future taxable profit will be available against which the deductible temporary difference can be utilised. We cover this recognition test in full in the next module.
Worked Example — Al-Markaz Holding Co.
Al-Markaz Holding Co. has a 20% statutory income tax rate. The following items appear in its accounts at year end:
| Item | Carrying Amount | Tax Base | Temporary Difference | Type | Deferred Tax (20%) |
|---|---|---|---|---|---|
| Plant & equipment (asset) | 4,200,000 | 3,100,000 | 1,100,000 | Taxable | 220,000 DTL |
| Capitalised development costs (asset) | 950,000 | 0 | 950,000 | Taxable | 190,000 DTL |
| Warranty provision (liability) | 850,000 | 0 | 850,000 | Deductible | 170,000 DTA* |
| Trade receivables (asset) | 600,000 | 600,000 | 0 | None | — |
| Net Deferred Tax Liability | 240,000 |
A Note on Zakat vs Income Tax in the GCC
Saudi-specific nuance: Saudi-owned shares in a company are typically subject to Zakat (not income tax), while foreign-owned shares are subject to the 20% statutory income tax. Whether IAS 12 deferred tax mechanics apply to the Zakat-attributable portion is a genuinely debated area in GCC practice — some entities apply IAS 12 by analogy to Zakat, others treat Zakat as entirely outside its scope. This module focuses on the IAS 12 mechanics in their pure form; the Zakat interaction is covered as a dedicated GCC-context topic elsewhere in the course.
Module 5: Recognition of Deferred Tax Assets — The Probable Taxable Profit Test
Continue Your IFRS Journey
This lesson is one part of a structured, 30+ standard IFRS curriculum. If the teaching style and depth here is what you're looking for, here's where to go next:
DipIFR Masterclass
The complete IFRS curriculum mapped to the ACCA DipIFR syllabus — every standard taught with full worked examples and Excel models, exactly like this lesson.
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IFRS CERT Course
A practitioner-focused IFRS certification for finance professionals applying these standards in real GCC company accounts — not exam-focused, job-focused.
- GCC case studies in every module
- Real company worked examples
- Downloadable application checklists
- Certificate of completion
Frequently Asked Questions
Why does tax law allow faster depreciation than accounting in the first place?
Governments use accelerated capital allowances (faster tax depreciation than accounting depreciation) as a deliberate economic policy tool — it encourages capital investment by giving companies larger tax deductions earlier, improving cash flow in the years right after a major purchase. The accounting carrying amount, by contrast, is meant to reflect a more even, economically realistic consumption of the asset's benefits over its useful life. The temporary difference this creates is simply timing — eventually, once the asset is fully depreciated both ways, the total deduction is identical; only the YEAR in which you get it differs, which is exactly what deferred tax is designed to capture.
Is the tax base always zero for fully expensed items, or can it be more complex?
It's often zero for simple cases — like a provision that hasn't been paid yet, where no tax deduction has occurred. But the tax base can be more complex for partially-deducted items. For an asset, you calculate the tax base as original cost less whatever has already been claimed as a tax deduction (tax depreciation to date) — which may differ meaningfully from accounting carrying amount if tax and accounting depreciation rates differ. The course's Excel workbook walks through several of these more complex tax base calculations step by step.
Does this module cover how to calculate the actual deferred tax expense in the income statement, or just the balance sheet temporary differences?
This module focuses specifically on identifying and measuring temporary differences and tax bases — the balance sheet side of the equation. The movement in deferred tax balances between periods (which drives the deferred tax expense or credit in the income statement) is covered in a separate module, since it requires understanding both this module's mechanics and the recognition criteria covered in Module 5.
Dr. Hesham Mokhiemer
Global Distinguished Trainer · IFRS Expert · Founder, The Financeer AcademyDr. Hesham Mokhiemer has trained over 18,000 finance professionals across Saudi Arabia, UAE, Kuwait, Bahrain, and Egypt in IFRS, Power BI, and financial reporting. He is the founder of The Financeer Academy and the creator of the DipIFR Masterclass and CertIFR preparation courses.
