Question

Under IFRS when a change in the tax rates is enacted

I. Companies should record its effect on existing deferred tax accounts immediately.
II. Companies report the effect of changes in tax rates on deferred tax accounts in the period the new rate becomes effective.
III. Companies report the effect of changes in tax rates on deferred tax accounts that arise in future periods when the new tax rates are in effect.
a. I Only.
b. II Only.
c. III Only.
d. Either I, II, or III, depending on how frequently tax rates change in the company's tax jurisdiction.

Answer 1

The correct response under IFRS regarding changes in tax rates is that they should be recorded immediately on existing deferred tax accounts, the correct answer to the student's question is: Companies should record the effect of changes in tax rates on deferred tax accounts immediately, which corresponds to option (a) I Only.

Step-by-step explanation:

Under IFRS when a change in the tax rates is enacted, companies should record its effect on existing deferred tax accounts immediately. This rule is because deferred taxes represent future tax effects of current transactions and events, and hence, when tax rates change, the amounts of deferred tax assets and liabilities must also change to reflect the rate at which they will be settled or realized in the future. Therefore, the correct answer to the student's question is: Companies should record the effect of changes in tax rates on deferred tax accounts immediately, which corresponds to option (a) I Only.