Originating Timing Difference

Definition

An originating timing difference in accounting refers to the initial recognition of differences between the carrying amounts of assets and liabilities on the balance sheet and their corresponding tax bases. These differences will lead to taxable or deductible amounts in future periods and thus give rise to deferred tax assets or liabilities. They are temporary differences that will reverse over time, aligning the financial accounting income with taxable income.

Examples

Depreciation Methods: If a company uses straight-line depreciation for financial reporting but accelerated depreciation for tax purposes, the depreciation expense recorded on the books will differ from the depreciation expense deducted for tax purposes. This difference creates an originating timing difference.
Warranty Liabilities: A company might recognize warranty liabilities as expenses in the period when the related goods are sold for financial reporting purposes, but for tax purposes, the expenses might not be deductible until the company actually incurs the warranty costs.
Revenue Recognition: A company that uses percentage-of-completion for recognizing revenue from long-term contracts may have different revenues recorded for financial reporting and tax reporting, leading to originating timing differences.

Frequently Asked Questions

What is the difference between originating timing difference and reversing timing difference?

Originating timing difference refers to the initial recognition of temporary differences between the carrying amounts of assets and liabilities and their tax bases. Reversing timing difference occurs when those initial differences start to reverse over time, effectively aligning the financial accounting income with taxable income.

How does an originating timing difference impact deferred tax?

Originating timing differences create deferred tax assets or liabilities. If the book value is greater than the tax base, this results in a deferred tax liability. Conversely, if the tax base is greater than the book value, it results in a deferred tax asset.

Why is understanding originating timing differences important?

Recognizing and understanding originating timing differences is crucial for accurate financial reporting and tax planning, as these differences affect the timing and amount of taxable income and, thus, tax liabilities.

How are originating timing differences accounted for?

Originating timing differences are accounted for by recognizing deferred tax assets and liabilities on the balance sheet and adjusting these values as the timing differences reverse over time.

Can originating timing differences result in permanent differences?

No, originating timing differences are by definition temporary and will reverse in future periods, unlike permanent differences which do not reverse.

Timing Difference: The overall term for differences in the timing of recognizing certain items for financial reporting purposes versus tax purposes, which include both originating and reversing timing differences.
Deferred Tax Asset: An item on the balance sheet that results from overpayment or advance payment of taxes and can be used to offset future tax liabilities.
Deferred Tax Liability: A liability on the balance sheet that arises from temporary differences between the tax base of assets or liabilities and their carrying amounts in the financial statements, which are expected to result in future tax payments.
Tax Base: The value of an asset or liability for tax purposes.
Temporary Differences: Differences between the book value and tax base of assets or liabilities that result in taxable or deductible amounts in future periods.

Online References

Suggested Books for Further Studies

“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
“Financial Accounting: An Introduction to Concepts, Methods and Uses” by Clyde P. Stickney and Roman L. Weil
“Taxation for Decision Makers” by Shirley Dennis-Escoffier and Karen A. Fortin

Accounting Basics: “Originating Timing Difference” Fundamentals Quiz

### What is an originating timing difference? - [x] An initial difference between the carrying amount of an asset or liability and its tax base. - [ ] A permanent difference between book and tax expense. - [ ] A difference that has no tax implications. - [ ] A difference related to expense recognition only. > **Explanation:** An originating timing difference refers to the initial recognition of differences between the carrying amounts of assets or liabilities and their tax bases, leading to future taxable or deductible amounts. ### Which scenario best illustrates an originating timing difference? - [x] Using different depreciation methods for financial and tax reporting. - [ ] Using the same methods for revenue recognition. - [ ] Paying more taxes than required by law. - [ ] Recording expenses only when incurred. > **Explanation:** Originating timing differences are often caused by using different methods for financial and tax reporting, such as different depreciation methods. ### What is the result of an originating timing difference? - [x] Creation of deferred tax assets or liabilities. - [ ] Immediate tax savings. - [ ] Permanent reduction of tax liability. - [ ] No impact on financial statements. > **Explanation:** Originating timing differences result in the creation of deferred tax assets or liabilities that will affect future taxable income. ### Can originating timing differences reverse? - [x] Yes, they will reverse over time. - [ ] No, they are permanent. - [ ] Only if the tax law changes. - [ ] Only if the company's policies change. > **Explanation:** Originating timing differences are temporary and will reverse in future periods, aligning the book and tax values. ### Which accounting entity provides guidelines for dealing with originating timing differences? - [ ] FASB - [ ] IASB - [ ] IRS & FASB - [x] FASB & IASB > **Explanation:** Both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) provide guidelines for accounting for originating timing differences. ### What is an example of generating an originating timing difference? - [x] Recording different depreciation amounts for tax and book purposes. - [ ] Recording sales revenue only when cash is received. - [ ] Ignoring warranty expenses in financial statements. - [ ] Matching tax and book reporting exactly. > **Explanation:** Recording considerably different depreciation amounts for tax and book purposes generates an originating timing difference. ### Why is an originating timing difference not a permanent difference? - [x] It will eventually reverse, aligning the book and tax amounts. - [ ] It does not affect taxable income. - [ ] It is mandated by tax laws. - [ ] It results in tax savings every year. > **Explanation:** An originating timing difference is temporary and will eventually reverse, making financial book and tax income align. ### How do originating timing differences typically manifest in financial statements? - [x] As deferred tax assets or liabilities. - [ ] As increased cash flows. - [ ] As revenue decreases. - [ ] As expenses only. > **Explanation:** Originating timing differences manifest in the financial statements as deferred tax assets or liabilities, reflecting future tax impacts. ### When does an originating timing difference first appear? - [x] When the tax base and carrying amount initially differ. - [ ] When the asset is sold. - [ ] After 10 years. - [ ] When the company files a tax return. > **Explanation:** Originating timing differences first appear when there is an initial difference between the tax base and carrying amount of an asset or liability. ### Originating timing differences create which type of difference with respect to tax? - [x] Temporary difference - [ ] Permanent difference - [ ] No difference - [ ] Revenue difference > **Explanation:** Originating timing differences create temporary differences, which will reverse over future periods.

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