What is Temporary Differences?
Temporary differences under IAS 12 are differences between the carrying amount of an asset or liability in the financial statements and its tax base. They give rise to deferred tax assets or deferred tax liabilities because they will reverse in future periods.
How It Works
- Compare the carrying amount of each asset and liability with its tax base.
- Identify each temporary difference as taxable or deductible.
- Multiply the difference by the enacted tax rate to compute the deferred tax effect.
- Recognise a deferred tax liability for taxable temporary differences.
- Recognise a deferred tax asset for deductible temporary differences if recovery is probable.
Saudi Context
Saudi entities with foreign-shareholder portions that bear corporate income tax must track deferred tax using IAS 12 as adopted by SOCPA. ZATCA reviews deferred tax disclosures alongside the income tax return.
Example
A fixed asset has a carrying amount of SAR 1M but a tax base of SAR 700K due to accelerated tax depreciation. The SAR 300K taxable temporary difference at 20% gives a deferred tax liability of SAR 60K.