The sums of income taxes that an entity expects to pay in future periods in relation to taxable temporary differences. It is a notional liability that reflects an entity’s income taxation associated with a tax obligation accumulated in one accounting period but is due in a subsequent period. In other words, it is a tax overpaid due to temporary differences. It arises when an entity has a specific amount of income for an accounting period and that amount differs from the taxable amount on its tax return. When this amount is lesser than the estimated tax, an entry is made in the form of a liability, which means that the amount appearing on the balance sheet is payable at a future time.
An example is when an entity applies a depreciation method that results in a larger deduction than the amount determined by the tax authorities. In this case, a temporary difference comes up and would need to be added as a liability to the statement of financial position to account for this specific situation.
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