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Basic Question 6 of 15
When future tax rates change, the rate to be used is the ______.
B. rate in effect when it is known that the future tax rate will change
C. new rate in effect when the reversal occurs
D. old rate in effect when the reversal occurs
A. rate in effect when the temporary difference originates
B. rate in effect when it is known that the future tax rate will change
C. new rate in effect when the reversal occurs
D. old rate in effect when the reversal occurs
User Contributed Comments 7
| User | Comment |
|---|---|
| Rotigga | What does it mean, "When the reversal occurs?" |
| Masterkang | Example: Company chooses Tax-Depreciation of 2 years and Financial statement depreciation of 3 years. Deferred tax liablities are created in 2007 and 2008, and in year 2009, the effect reverses. Thats "when the reversal occurs." |
| Seancfa1 | Thank-you for the explanation Masterkang |
| Shaan23 | This makes little sense to me. Shouldnt you use the new rate whenever the new rate is ANNOUNCED? Why does a companies time of reversal have anything to do with when the new tax rate should be used. Should'nt you use the new rate whenever the govt has a new rate? |
| robbiecow | @Shaan23 you are correct and that is what the answer is stating to do. You use the new rate to adjust the existing DTA or DTL up or down, as well as use the new rate going forward. The book has a few examples of showing tax rate changes and how they affect DTL and DTA |
| mlaique | Why is not A? I was stuck between A or C. |
| kingirm | If the future rate goes up from 23 to 25 % this doesn't look like a "reversal" but more like a "change"...no ? |
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Tamara Schultz
Learning Outcome Statements
explain how deferred tax liabilities and assets are created and the factors that determine how a company's deferred tax liabilities and assets should be treated for the purposes of financial analysis
CFA® 2024 Level I Curriculum, Volume 3, Module 9.