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Temporary Differences

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Temporary Differences
* Case 12-4 Temporary Differences
SFAS No. 109, “Accounting for Income Taxes,” requires inter-period tax allocation for temporary differences.
Required:
a. Define the term temporary difference. b. List the examples of temporary differences contained in SFAS No. 109. c. Defend inter-period income tax allocation.

a. Temporary Difference – Definition

An assumption inherent in an enterprise 's statement of financial position prepared in accordance with generally accepted accounting principles is that the reported amounts of assets and liabilities will be recovered and settled, respectively. Based on that assumption, a difference between the tax basis of an asset or a liability and its reported amount in the statement of financial position will result in taxable or deductible amounts in some future year(s) when the reported amounts of assets are recovered and the reported amounts of liabilities are settled (SFAC No. 109, par. 11).

Income tax liabilities (or assets) can arise when the amount of pretax income reported on a company’s income statement is not the same as what is reported on the company’s income tax return. These differences arise since the income tax laws measure income differently than GAAP: tax accounting is performed on a cash basis, whereas GAAP uses the accrual basis. Therefore, temporary differences will arise when a company’s tax return and income statement report revenues and expenses in different years. When these temporary differences exist, companies determine income tax expense based on the income reported on the income statement, which is often different from the amount of taxes payable to the government.
Although the temporary difference originates in one period, it reverses in subsequent periods and the tax laws permit companies to delay reporting their income as part of taxable income, therefore the company also delays paying taxes on that income. The temporary differences are due primarily to timing



References: Arthur, R. W., Dieter, R., & John, E. S. (1984). Tax allocation revisited. The CPA Journal (Pre-1986), 54(000003), 10-10. Retrieved from: http://search.proquest.com/docview/211895970?accountid=12085 Leahey, A. L. (1993). Grasping the fundamentals of SFAS 109 - accounting for income taxes. The CPA Journal, 63(10), 54-54. Retrieved from: http://search.proquest.com/docview/212303289?accountid=12085 Schroeder, R.G., Clark, M.W., & Cathey, J.M. (2011). Financial Accounting Theory and Analysis: Text and Cases, (10th ed.). New Jersey: John Wiley and Sons Inc. Spiceland, J.D., Sepe J.F., & Nelson, M.W. (2011). Intermediate Accounting (6th ed.). New York, NY: Mcgraw-Hill/Irwin.

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