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Meaning of ‘reverses’ in taxable and deductible temporary differences

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.

Example:

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

= 0

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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KnowledgEquity Financial Reporting students have been using the KnowledgEquity support resources, including video tutorials, weekly webinars, module quizzes plus the CPA study guide to prepare for their all important exam.

All the best with your studies!

Theashen

 

Theashen Vandiar with nameTo learn more and get access to support resources for your CPA, check out KnowledgEquity’s Financial Reporting Support for your CPA courses. You can try our CPA Assist for Financial Reporting which includes 10 hours of free content, there are short explanatory videos, module quizzes, webinars and flowcharts to help you embed your knowledge and be able to understand the subject. Plus in our paid courses, you can access all the resources, including practice exams (marked) and an exam preparation webinar – learn more here, Financial Reporting courses. Once you have concepts like these embedded in your knowledge data bank, you will be ready to take on your CPA exam!

Theashen Vandiar

 

 

 

 

 

January 24, 2018

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