In the last 4 parts, i Capital looked at [1]. Is Tax a Distribution of Earnings or a Business Expense? [2]. Accounting Profit versus Taxable Profit, Tax Paid versus Tax Expense and [3]. What is Deferred Tax? [4]. Deferred Tax Under International Accounting Standards (IAS) 12 and [5]. IAS 12 (1979) : Timing Difference Method based on [a]. Permanent differences, [b]. Timing differences, [c]. Deferred tax asset and [d]. Deferred tax liability.

[6]. IAS 12 (1996): Temporary Difference Method
In technical terms, temporary differences are “differences between the tax base of an asset or liability and its carrying amount in the Balance Sheet”. Definitions aside, the fact is that timing differences are a subset of temporary differences, meaning to say all timing differences are in fact temporary differences. However, temporary differences cover a wider definition to include items that do not give rise to timing differences, such as asset revaluation with no tax adjustments. The question now is: since both timing differences and temporary differences are basically the same, what differentiates the two methods? As presented in the earlier part, the timing difference method calculates deferred tax by focusing on the difference between accounting profit and taxable profit. However, the temporary difference method calculates deferred tax by focusing on the difference between the carrying amount of assets and liabilities as stated in the balance sheet and their respective tax base.

Tax Bases in Temporary Differences Method

[a]. Tax Base of Assets
In a layman's term, the tax base of an asset is the amount of an asset that will be tax deductible in future period/s as at the balance sheet date. If the amount of the asset had been wholly claimed for tax purposes, its tax base will be nil for no amount will be tax deductible in future period/s. Such condition arises when [i]. Expenses are claimed for tax purposes when incurred but recognized as an asset in the balance sheet (e.g. Provision for retirement benefits, development costs, etc), [ii]. Assets that are accrued on balance sheet but will be taxable only upon actual receipt (e.g. accrued incomes). On the other hand, if the asset will not be taxed in the future period/s, the tax base will equal the carrying amount (e.g. sales debtors where the attributable sales had already been included in calculating taxable income).

[b]. Tax Base of Liabilities
The tax base of a liability is the amount of the liability shown in the balance sheet (ie carrying amount) less the amount of the liability that will be tax deductible in future period/s. If the whole amount of the liability will be tax deductible (eg accrued expenses that is taxed on cash payment basis, prepaid income that has already been taxed on receipt basis, etc), the tax base for the liability is nil. If the settlement of a liability does not give rise to tax liabilities (eg principal loan repayment) or not subject to tax deductibility (eg accrued tax-disallowed expenses such as donations to unapproved organizations), the tax base of the liability would equal the carrying amount of the liability.

[c]. Tax Base of Items not recognized in the balance sheet

Some items have tax bases but are not recognized as assets or liabilities. For these items, the deferred tax also needs to be calculated. One of the examples would be research cost, where it is recognized as an expense in calculating accounting profit when incurred but will only be deducted for tax purposes in a later period.