ACCA Financial Reporting (F7) Practice Exam 2025 – Complete Prep Guide

A taxable temporary difference is characterized by an expected increase in taxable income in future periods when an asset or liability is settled. This arises from situations where the carrying amount of an asset is greater than its tax base. For instance, if an asset's book value exceeds its tax base, this difference implies that, upon realization or settlement of the asset, taxable income will increase, leading to a future tax obligation.

In accounting terms, taxable temporary differences are significant in the determination of deferred tax liabilities, as they indicate amounts that will eventually need to be taxed when the accounting and tax values converge. This understanding is crucial for accurate financial reporting and tax planning, as it helps recognize future tax expenses that will impact cash flow.

The other options do not accurately capture the essence of taxable temporary differences. While some deal with differences in temporary adjustments or fair value, they do not specifically address the implications of taxation that manifests upon settlement, which is the defining characteristic of taxable temporary differences.