Aquinas revalues a non-current asset from €1,000 to €1,200. As the tax base of the asset is

€1,000, a taxable temporary difference of €200 therefore exists and gives rise to a deferred tax liability. | :

As Aquinas recovers the benefits embodied in the asset, the entity will only be able to claim tax deductions of €1,000. The temporary difference will therefore reverse and Aquinas will have to pay tax on the ‘excess’ of €200.

Acompany purchased a machine at a cost of €100,000 during Year 1. The machine’s useful economic life is 4 years and the company received 100% capital allowances in Year 1. The tax rate is 40%.

An entity recognises an accounting liability of €1,000, but the tax base of the liability is zero.
A deductible temporary difference of €1,000 therefore exists, giving rise to a deferred tax asset.
As the entity settles the liability in future periods, the payments will be deductible for tax purposes. The temporary difference will therefore reverse and the entity will ‘recover’ tax relating to the €1,000 deduction

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Year 1 Year 2 Year 3 Year 4 Depreciation 25,000 25,000 25,000 25,000 Capital allowances 100,000 Nil Nil Nil Difference 75,000 (25,000) (25,000) (25,000) Originating Reverse Reverse Reverse difference 40% (30,000) 10,000 10,000 10,000 DR SPLOCI - SFP-Deferred CR P/L SFP- Tax SPLOCI P/L SFP - Deferred Tax SPLOCI - P/L SFP-Deferred Tax SPLOCI - P/L Deferred Tax