CFA Practice Question

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CFA Practice Question

When future tax rates change, the rate to be used is the ______.

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
Correct Answer: C

When future enacted tax rates change, the rate used to determine the amount in the deferred tax or liability should be the new rate.

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" ?
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