Lesson 2 of 7 · All lessons in this module
- Accounting profit, taxable income and the tax base
- Temporary versus permanent differencesVideo lesson
- Deferred tax balances and income tax expenseVideo lesson
- Realising deferred tax assets and tax rate changesVideo lesson
- Effective, statutory and cash tax ratesVideo lesson
- Tax disclosures and financial analysis
- Integrated cases: reading a tax note, cash tax versus effective tax
Lesson 2 of 7 · 13 min
Temporary versus permanent differences
A temporary difference reverses later and creates deferred tax; a permanent difference never reverses, creates no deferred tax and pushes the effective tax rate away from the statutory rate.
In short
- Temporary differences reverse in future periods; permanent differences never do.
- Taxable temporary differences mean more taxable income later → deferred tax liability (DTL).
- Deductible temporary differences mean less taxable income later → deferred tax asset (DTA).
- Asset: carrying amount > tax base → DTL; carrying amount < tax base → DTA. Liability: the reverse.
- Permanent differences (non-deductible fines, tax-exempt income, tax credits) create no deferred tax and make the effective tax rate differ from the statutory rate.
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