CIMA F1: The Deferred Tax Direction Candidates Get Backwards

Deferred tax is one of the more mechanical topics on the CIMA F1 syllabus — there is a defined comparison to make and a defined rule to apply, with very little judgement involved. That should make it one of the safest topics to pick up marks on. In practice, it is one of the topics where a specific, simple error shows up again and again: candidates get the direction backwards, recording a deferred tax asset where the rule requires a liability, or the other way round.

What deferred tax is actually comparing

Under IAS 12 Income Taxes, deferred tax exists because accounting profit and taxable profit are calculated on different bases, and those differences unwind over time. The mechanic starts with a single comparison, applied asset by asset or liability by liability: the carrying amount in the financial statements against the tax base — broadly, the amount that will be deductible for tax purposes in the future in respect of that asset or liability. Whenever those two numbers differ, there is a temporary difference, and IAS 12 requires deferred tax to be recognised on it, subject to specific exceptions and, for deferred tax assets, a recognition test.

This comparison sits early in the CIMA F1 syllabus's coverage of income taxes, and it is worth learning as a fixed routine rather than re-deriving it from first principles in the exam. If the mechanics still feel unfamiliar, our practical guide to deferred tax under IAS 12 walks through the full calculation before you tackle F1-style questions: identify the carrying amount, identify the tax base, compare the two, then apply the rule below.

Carrying amount higher than tax base: a liability

Where an asset's carrying amount exceeds its tax base, that is a taxable temporary difference. The classic F1 example is property, plant and equipment where tax depreciation, or capital allowances, has run ahead of accounting depreciation — the asset has been written down further for tax than in the books, so its tax base is lower than its carrying amount. The logic is that the entity will, in effect, get less tax relief in future periods relative to the accounting depreciation still to be charged, because most of the tax relief has already been used. That future extra tax cost is a liability today, so a taxable temporary difference always creates a deferred tax liability.

Tax base higher than carrying amount: an asset, with a condition

Where the tax base of an asset exceeds its carrying amount, or a liability's carrying amount exceeds its tax base — for example, a provision that is not yet deductible for tax — that is a deductible temporary difference. Here the entity is expected to obtain tax relief in the future that it has not yet had in the accounts, so it gives rise to a deferred tax asset. The common F1 example is a provision, such as a warranty or restructuring provision, that has been expensed and recognised in the financial statements but is not tax-deductible until the related cash is actually paid.

Unlike a deferred tax liability, a deferred tax asset is not recognised automatically. IAS 12 requires it to be recognised only to the extent that it is probable the entity will have sufficient future taxable profit against which the deductible temporary difference can be utilised. A loss-making entity with no clear evidence of future profits should not be recognising the full deferred tax asset that the temporary difference alone would suggest.

The direction candidates get backwards

The recurring F1 error is exactly this direction. Faced with a scenario where accounting depreciation is lower than tax depreciation, meaning carrying amount is above tax base, a surprising number of scripts record a deferred tax asset — reasoning, loosely, that there is a difference, so it must be something the company can claim back. The rule runs the other way: a larger carrying amount than tax base means less tax relief is left to come, which is a future liability, not an asset. The reverse error also appears: a deductible temporary difference, where the tax base is larger, gets recorded as a liability instead of an asset.

A reliable way to avoid the swap is to anchor the rule to the balance sheet comparison rather than trying to remember it as an abstract statement. Carrying amount higher than tax base points to a liability; tax base higher than carrying amount points to an asset, subject to the probable-future-profits test. If you find yourself unsure mid-calculation, go back to that comparison rather than guessing from memory — it is the one step in the whole topic that is purely mechanical, so there is no reason to get it wrong once the habit is built.

Keeping the movement, not just the balance, correct

F1 questions typically also test the movement in the deferred tax balance through the year — the increase or decrease is normally charged or credited to the statement of profit or loss, with specific exceptions such as amounts relating to items recognised in other comprehensive income, which sit outside the core F1 requirement. Getting the opening-to-closing direction of the temporary difference right first is what makes the movement calculation reliable; if the liability-versus-asset classification is wrong at the outset, the movement will be wrong too, even if the arithmetic on the balances is otherwise correct.

Does a temporary difference always mean deferred tax is recognised?

Almost always for liabilities, but not automatically for assets. A taxable temporary difference gives rise to a deferred tax liability with only limited exceptions. A deductible temporary difference gives rise to a deferred tax asset only to the extent it is probable there will be sufficient future taxable profit to use it against.

What is the simplest way to check whether it is an asset or a liability?

Compare the carrying amount to the tax base for that specific item. Carrying amount higher than tax base is a taxable temporary difference and a deferred tax liability. Tax base higher than carrying amount is a deductible temporary difference and a potential deferred tax asset.

Why do accelerated capital allowances usually create a deferred tax liability?

Because tax depreciation is claimed faster than accounting depreciation is charged, the asset's tax base falls below its carrying amount. That means less tax relief is available in future periods relative to the remaining accounting depreciation, which is recognised now as a deferred tax liability.

Deferred tax rewards candidates who trust the mechanic instead of their instinct about which way round it feels like it should go. Fix the carrying-amount-versus-tax-base comparison as your starting point on every question, and the liability-or-asset direction stops being a guess. Once these basics are solid, our article on deferred tax in business combinations shows how the same principles extend into ACCA SBR. Learnsignal's CIMA F1 course works through this topic with exactly this kind of scenario practice.