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CFA Level I · CFA Level I Exam · Analysis of Income Taxes

A company has a net deferred tax liability on its balance sheet. The government enacts a reduction in the statutory tax rate that applies to future periods. Under IFRS, the change in the rate will most likely result in:

A cut in the enacted tax rate reduces a deferred tax liability. The reduction is recorded in the period of enactment as a deferred tax benefit, lowering income tax expense, because deferred taxes are remeasured at enacted rates expected to apply when the temporary differences reverse.

  1. Aa deferred tax benefit that reduces income tax expense in the period of enactmentCorrect
  2. Ba deferred tax expense that increases income tax expense in the period of enactment
  3. Cno change in the deferred tax liability until the temporary differences reverse

Explanation

Deferred tax balances are remeasured at the enacted rate expected to apply when the differences reverse. A lower rate shrinks a deferred tax liability, and the decrease is recognized as a deferred tax benefit that lowers income tax expense in the period of enactment. Waiting until reversal is incorrect because remeasurement happens on enactment.

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