What characterizes temporary differences?

Temporary differences are characterized by their ability to reverse over time, impacting the timing of taxable income compared to financial income. When financial income is recognized in a financial reporting context but not for tax purposes, or vice versa, a temporary difference arises. This creates deferred tax assets or liabilities.

For instance, if a company recognizes revenue for financial reporting purposes before it is recognized for tax purposes, a deferred tax asset may occur as the company will pay less tax initially but will incur it later when the income is recognized. Conversely, if expenses are deducted for tax purposes earlier than they are recognized in financial statements, a deferred tax liability arises.

This is distinct from permanent differences, which do not reverse and arise from transactions or items that are treated differently in financial reporting compared to tax accounting, leading to a permanent disparity in taxable income.

The reason other options do not accurately describe temporary differences is that they cannot be classified as non-reversible (as that is characteristic of permanent differences), they do not always relate to permanent differences, and they are not limited to a single accounting period, as they can span multiple periods until they reverse.