Financial Reporting Module 4
Meaning of ‘reverses’ in taxable and deductible temporary differences
Financial Reporting Module 4 has a lot of content to cover and I frequently get asked about the meaning of ‘reverses’ in taxable and deductible temporary differences. Here’s an explanation and example which hopefully helps!
When a taxable temporary difference ‘reverses’, it simply means that it stops being a temporary difference and actually becomes taxable in that year. When a deductible temporary difference ‘reverses’, it simply means that it stops being a temporary difference and actually gets deducted in that year.
Assume that you have a debtor for $100 and the tax is based on the cash basis.
CA = 100
FDA = 0
FTA = 100 (this is because the tax is based on the cash basis and so in the future, when the debtor pays the entity in cash, it would be taxed at that stage in the future. Hence a FTA)
So, TB = CA + FDA – FTA
= 100 + 0 – 100
This means we would have deferred tax because our accounting carrying amount is 100 and TB is 0.
TAXABLE temporary difference is 100 (100 CA – 0 TB).
Deferred tax is $30 (100 x 30%).
So, in the next year, when the debtor ‘settles’ the debt, (i.e. pays the amount owing) the taxable temporary difference ‘reverses’. That is, the $100 now becomes taxable in that year.
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