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

Which of the following statements best describes the difference between accounting profit and taxable income?

Taxable income is determined by the rules of the tax authority, while accounting profit is determined under financial reporting standards such as IFRS. Because the rules differ, the two figures often differ in any given period, so they are not generally equal.

  1. ATaxable income is set by tax rules; accounting profit follows financial reporting standards.Correct
  2. BAccounting profit is calculated using tax authority rules, while taxable income follows IFRS.
  3. CBoth measures always equal each other over a single reporting period.

Explanation

Accounting profit (pre-tax income) is prepared under financial reporting standards such as IFRS, whereas taxable income is computed under the tax authority's rules. The two commonly differ in a period because recognition and measurement rules differ. Option B reverses the two frameworks, and option C is wrong because differences are common.

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