Temporary differences are usually calculated on the differences between the carrying amount of an asset or liability recognized in the statements of financial position and the amount attributed to that asset or liability for tax at the beginning and end of the year.
The differences in the charges to the profit and loss account compared to the amounts taxable or allowable can also be calculated and should reconcile the change in position at the beginning and end of the year.
The following example assumes that a company purchases an asset for $1,000 which is depreciated for accounting purposes on a straight-line basis of five years of $200/year.
The company claims tax depreciation of 25% per year on a reducing balance basis.
The applicable rate of corporate income tax is assumed to be 35%, and the net value is subtracted.
However, differences can arise such as in relation to revaluation of fixed assets qualifying for tax depreciation, which gives rise to a deferred tax asset under a balance sheet approach, but in general should have no impact under a timing difference approach.
Other accounting standards which deal with deferred tax include: Management has an obligation to accurately report the true state of the company, and to make judgements and estimations where necessary.