- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 27. Income Taxes
- Subject 3. Determining the Tax Base of Assets and Liabilities
CFA Practice Question
Which transaction would require the recognition of deferred income tax consequences?
II. Unrealized losses on temporary investments
I. Interest revenue on municipal bonds
II. Unrealized losses on temporary investments
A. I only
B. II only
C. Neither of them
User Contributed Comments 4
| User | Comment |
|---|---|
| teje | Why not B? unrealized gains or losses from temporary investments will difference in tax expense, whereas in tax books, the gain or loss o the investment is not recognized until sold. Therefore, wouldn't this result in a temporary difference, resulting in a deferred tax? |
| charliedba | No you cannot recognize unrealized losses/gains on temporary investments so the financial treatment and tax treatment are the same. No deferred income tax will result. |
| hevans | Wouldn't unrealized PnL for temporary investment be treated as trading assets with the change flowing through the I/S? |
| CJPerugini | To answer your question. Think of it like owning a stock. You bought it at $25 and it's now worth $30. You haven't sold it yet (unrealized gain), therefor you would not pay taxes on it. With respect to the financial statements, this would be classified under other comprehensive income and it does not impact taxable income. |