[Anonymous]

I have not taken REG yet so I am still not that familiar with the different treatments on tax return and financial statements. What is the best way to remember those temporary and permanent differences? There’s a full page of the differences on Becker F6-61. Do we have to know all to do well on the exam? Though on the homework problems, they normally give easy ones like municipal interests, life insurances, or they just tell you if they are temp or perm. Is it like that for the actual FAR exam?

Thanks!

[jimboace88]

If you know one temporary difference, you can use that as a base to go off of. The easy one to think about is depreciation. Accelerated depreciation on the tax return will cause TAX income to be lower than BOOK income. You're taking more depreciation on the tax return than you are on the books–tax expense before financial statement expense. When tax income is lower than book income (or when book is greater than tax, whichever way you like to think of it), you will have a deferred tax liability.

When tax income is greater than book income (or when book is less than tax), you will have a deferred tax asset. A good example of this is revenue from a rental property or magazine subscriptions. When you get that cash, the government is taxing it all right away and considers it all revenue–they're cash basis, after all. For the purposes of your financial statements, you haven't recognized all the revenue yet.

An easy, condensed way to memorize it if you can keep it straight in your head along with the million other topics in FAR is:

Book > Tax = Deferred tax liability

Book < Tax = Deferred tax asset

Of course, this is only in regards to temporary differences, but I think that's the best way to think about it conceptually.

As far as what's temporary and what's permanent, I can't imagine they will throw out some highly technical REG-type item and expect us to know the nature of it. I think life insurance proceeds, municipal bond interest, and maybe a fine or penalty that's deductible for financial statement purposes but not tax is as far as they'll go.

FAR 07/27/11 - 87
AUD 10/01/11 - 85
BEC 11/15/11 - 87
REG 01/03/12 - 92

[thechamp26]

Temporary differences are just “timing” differences and will always REVERSE. The reason we set up deferred tax assets (to account for the future benefit that will arise) and deferred tax liabilities (to account for future taxes that will arise) is to account for these timing differences.

The best way to think about this is to ask yourself – will GAAP = Tax at any point in time?

[Author]

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