Enacted or substantively enacted rates

Learning objectives

• Determine the rate applicable to current tax and deferred tax (enacted or substantively enacted by the end of the reporting period, expected to apply on reversal).L1, L2
• Calculate the effect of a change in tax rate on deferred tax balances, and an average rate for a graduated rate scale.L2, L3
• Assess whether an announced rate is substantively enacted at the end of the reporting period.L3

Normative references

• IAS 12 §46Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
• IAS 12 §47Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
• IAS 12 §48Enacted tax rates (and tax laws) are generally used; in some jurisdictions, announcements of tax rates by the government have the substantive effect of actual enactment, which may follow the announcement by a period of several months: tax assets and liabilities are then measured using the announced tax rates (and tax laws).
• IAS 12When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse.
• IAS 12 §52AIn some jurisdictions, income taxes are payable at a higher or lower rate, or are refundable or payable, if part or all of the net profit or retained earnings is paid out as a dividend; current and deferred tax are then measured at the tax rate applicable to undistributed profits.
• IAS 12 §60The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences, in particular as a result of: (a) a change in tax rates or tax laws; (b) a reassessment of the recoverability of deferred tax assets; (c) a change in the expected manner of recovery of an asset. The resulting deferred tax is recognised in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

47 questions

• A machine of Peyrolles, depreciated faster for tax than for accounting, has a carrying amount of {carrying_amount} and a tax base of {tax_base}. The rate expected on reversal, enacted at the reporting date, is {tax_rate}%. Compute the taxable temporary difference and the deferred tax liability.L1
• The haulier Lirvalle uses declining-balance tax depreciation on its truck fleet: at the reporting date, the fleet has a carrying amount of {carrying_amount} and a tax base of {tax_base}. With an expected rate of {tax_rate}% (enacted at the reporting date), what are the temporary difference and the deferred tax liability?L2
• Cordelan revalues, under its accounting policy (case data), land whose tax base remains equal to its cost, {tax_base}; the revalued amount is {new_carrying_amount}. Cordelan has no intention of selling the land. With an expected rate of {tax_rate}%, compute the temporary difference and the deferred tax liability.L2
• After revaluation (the group's accounting policy, case data), the office building occupied by the Vantorel group's head office has a carrying amount of {new_carrying_amount}; the legislation ignores the revaluation and its tax base, after tax depreciation, is {tax_base}. The group intends to occupy the building indefinitely. With an expected rate of {tax_rate}%, compute the temporary difference and the deferred tax liability.L3
• Ambrevin has capitalised {capitalised_costs} of development costs, amortised by {amortisation_to_date} at the reporting date. Tax law (case data) deducted them in full in the year they were incurred. With an expected rate of {tax_rate}%, compute the temporary difference and the deferred tax liability.L2
• At the end of its first year of activity, Brunelière identifies a taxable temporary difference of {temporary_difference} on its equipment, depreciated faster for tax; no deferred tax existed at the start of the year. The expected rate is {tax_rate}%. Record the entry, the difference arising from depreciation recognised in profit or loss.L2
• The leasing company Orbecque recognises accrued interest taxed only when received (case data). The related deferred tax liability was {opening_dtl} at the start of the year; at the reporting date, the temporary difference reaches {closing_temporary_difference}, at the expected rate of {tax_rate}%. Record the change, entirely related to income recognised in profit or loss.L2
• Carmaux's machine is reaching the end of its tax depreciation: accounting depreciation now exceeds tax depreciation and the taxable difference is decreasing. The deferred tax liability was {opening_dtl} at the start of the year; the temporary difference is only {closing_temporary_difference} at the reporting date, at the expected rate of {tax_rate}%. Record the change.L2
• Ombrival holds two machines depreciated faster for tax. At the reporting date, the taxable temporary differences are {difference_machine_a} (machine A) and {difference_machine_b} (machine B); the expected rate is {tax_rate}% and the deferred tax liability was {opening_dtl} at the start of the year. Record the change in profit or loss.L2
• A warehouse of Lermantes has a carrying amount of 400,000 and a tax base of 280,000; the expected rate is 25%. The accountant recognises a deferred tax liability of 100,000. What is the error?L2
• Pélagrine holds listed shares measured at fair value, 860,000 at the reporting date; their cost, 700,000, remains their tax base and the gain will be taxed only on disposal (case data). Pélagrine intends to hold them for the long term. With an expected rate of 25%, which analysis should be adopted?L3
• At the reporting date, Vellouse has: accrued interest receivable of 16,000, taxed when received; a machine with a carrying amount of 250,000 and a tax base of 210,000 (case data). The expected rate is 25%. What total deferred tax liability does it recognise?L2
• Castelmure has recognised a warranty provision of {provision}, deductible for tax when repairs are made. Its documented forecasts make sufficient taxable profit probable (case data). The expected rate is {tax_rate}%. Compute the deductible difference and the deferred tax asset.L2
• The printer Lauzerte has a pension liability of {pension_liability}, built up as service is provided; tax law deducts the costs only when benefits are paid (case data). Sufficient taxable profit is probable. With an expected rate of {tax_rate}%, what are the deductible difference and the deferred tax asset?L2
• At the reporting date, Montbrisac has a litigation provision of {provision}, deductible when paid, and revenue received in advance of {revenue_in_advance}, taxed when received (case data). Sufficient taxable profit is probable; the expected rate is {tax_rate}%. Compute the total deductible differences and the deferred tax asset.L2
• The mutual insurer Saint-Vrain holds a bond portfolio measured at fair value, {fair_value} at the reporting date; its tax base remains cost, {tax_base} (case data). It intends to hold the securities to maturity, and its forecasts make sufficient taxable profit probable. With an expected rate of {tax_rate}%, compute the deductible difference and the deferred tax asset.L3
• At the end of its first year, Pradelune identifies a deductible temporary difference of {deductible_difference}, arising from provisions recognised in profit or loss and deductible when paid. Sufficient taxable profit is probable; the expected rate is {tax_rate}%. No deferred tax existed at the start of the year. Record the entry.L2
• At the distributor Fenestrelle, provisions for returns, deductible when customers are refunded, are increasing. The deferred tax asset was {opening_dta} at the start of the year; the deductible difference reaches {closing_deductible_difference} at the reporting date, at the expected rate of {tax_rate}%, sufficient taxable profit remaining probable. Record the change in profit or loss.L2
• This year Rocheblave paid a large part of a termination benefit provided for last year; the payment was deducted from its taxable profit. The deferred tax asset was {opening_dta} at the start of the year; the remaining deductible difference is only {closing_deductible_difference} at the reporting date, at the expected rate of {tax_rate}%. Record the change.L2
• At 31 December 20X5, Solvara brings a solar plant into use and recognises a dismantling provision of {dismantling_cost}, included in the cost of the plant (treatment in the case). The tax law (data) recognises neither this component nor the provision before payment. The current rate is 25%, but an enacted law sets at {enacted_rate}% the rate for the years in which the differences will reverse. Future taxable profit is probable. Record the deferred tax entry.L3
• The current tax liability for the period is measured at the amount the entity expects to pay, applying the tax rates and tax laws enacted or substantively enacted by the reporting date.L1
• A deferred tax liability is always measured at the tax rate of the current period, even if a law enacted before the reporting date sets another rate for the year in which the difference will reverse.L1
• A tax rate merely announced by the government can never be used to measure tax assets and liabilities: only the official publication of the law counts.L1
• Velmoriac's reporting date is 31 December 20X5. A law lowering the tax rate from 20X6 is enacted on 20 January 20X6, before the financial statements are authorised for issue; it was neither enacted nor substantively enacted at 31 December. Velmoriac must measure its deferred tax liability at 31 December 20X5 at the new rate.L2
• Which rate is used to measure a deferred tax liability?L1
• How is the current tax liability for a period already ended, for which the tax return has not yet been filed, measured?L1
• In Marquenne's jurisdiction, the tax rate depends on the level of taxable profit (graduated rate scale). Which rate does it apply to its temporary differences?L2
• In Tessavel's jurisdiction, retained profits are taxed at a higher rate than distributed profits. At the reporting date, no dividend is recognised as a liability. Which rate does Tessavel use for its current and deferred tax?L2
• Corbrival has a taxable temporary difference that will reverse half in 20X6 and half in 20X7. The law enacted before the reporting date sets the rate at 27% in 20X6 and then at 25% from 20X7. How does it measure the deferred tax liability?L2
• Which of the following statements about the tax rates to be used are correct?L2
• Lunoria is determining the rate applicable to its temporary differences. Which factors must it take into account?L2
• At the reporting date of 31 December 20X5, in which of the following situations may Drevanne measure its deferred tax at a new rate? (The facts on the legislative procedure are case data.)L2
• At 31 December 20X5, Aubriset has a taxable temporary difference of {taxable_difference}, arising from accelerated tax depreciation, which will reverse in full in 20X6. The 20X5 rate is {current_rate}%; a law enacted in October 20X5 sets the rate at {enacted_rate}% from 20X6. Compute the deferred tax liability at 31 December 20X5.L2
• Tauvrelle has capitalised development costs of {difference}, deducted for tax purposes when incurred (tax data of the case); they will be amortised in the accounts by thirds in 20X6, 20X7 and 20X8. A law enacted in 20X5 provides for a gradual rate cut: {rate_x6}% in 20X6, {rate_x7}% in 20X7 and {rate_x8}% in 20X8. Compute the deferred tax liability at 31 December 20X5.L3
• Sivrance carries a deferred tax liability computed at {old_rate}% on a taxable temporary difference of {difference}, arising from accelerated tax depreciation recognised in profit or loss. In November 20X5, an enacted law sets the rate applicable on reversal at {new_rate}%. The difference is unchanged at 31 December 20X5. Compute the liability at the reporting date and the deferred tax income from the rate change.L2
• Pellonde has deductible temporary differences (provisions deductible when paid, recognised in profit or loss) of {opening_difference} at the start of the year, for which a deferred tax asset is recognised at {old_rate}%. A law enacted in 20X5 raises the rate applicable on reversal to {new_rate}%. At the reporting date, the differences amount to {closing_difference}; the asset remains fully recoverable. Compute the asset at the reporting date and the part of its change due to the rate change alone, measured on the opening differences (breakdown convention of the case).L3
• Trazmont is taxed under a graduated scale (case data): 15% up to 200,000 of taxable profit, 25% from 200,000 to 600,000 and 30% above. Its expected taxable profit for the year of reversal is {expected_profit}. It has a taxable temporary difference of {difference} that will reverse in that year. Compute the expected average rate and the deferred tax liability.L3
• Halverine is subject to a graduated scale (case data): 10% up to 100,000 of taxable profit, 20% from 100,000 to 300,000 and 28% above. It has a deductible temporary difference of {difference} that will reverse next year, for which it expects taxable profit of {expected_profit}; the asset is recoverable. Compute the expected average rate and the deferred tax asset.L3
• Norvalis carries a deferred tax liability at {old_rate}% on a taxable difference of {difference}, arising from accelerated tax depreciation. A law enacted in December 20X5 sets the rate applicable on reversal at {new_rate}%. The difference is unchanged. Record the entry at 31 December 20X5.L2
• Bremoise recognises a fully recoverable deferred tax asset at {old_rate}% on deductible differences of {difference} (accrued expenses recognised in profit or loss, deductible when paid). A law enacted before the reporting date raises the rate applicable on reversal to {new_rate}%. Record the adjusting entry at the reporting date.L2
• For 20X5, Ferrolde has taxable profit of {taxable_profit}, taxed at {rate_x5}%. A taxable temporary difference of {new_difference} arose in 20X5 (accelerated tax depreciation) and will reverse in 20X6, for which a law enacted in 20X5 sets the rate at {rate_x6}%. No tax has been paid. Record the current and deferred tax entries at 31 December 20X5.L3
• Glanvire has a taxable difference of 500,000. The rate enacted for the year of reversal is 26%. The leading candidate in next year's election promises to bring it down to 20%; no bill has been tabled. The accountant measured the deferred tax liability at 100,000 (500,000 × 20%). Where is the error?L3
• Ruvenac has deductible differences of 240,000 that will reverse in 20X7. The rate is 30% in 20X5; a law enacted in 20X5 sets it at 32% from 20X7. The recoverable deferred tax asset was recognised at 72,000. Where is the error?L3
• Saltiere operates in a jurisdiction where, according to the case data, the rates announced by the government when presenting the budget are binding in practice: the parliamentary vote, held several months later, has never changed an announced rate. On 15 November 20X5, the government announces a rate cut from 28% to 24% from 20X6. Which rate does Saltiere use at 31 December 20X5 for its differences reversing from 20X6?L3
• At 31 December 20X5, a bill raising the rate from 25% to 29% is at first reading in the parliament of Vendrasse's jurisdiction. According to the case data, the opposition has tabled amendments on the rate, the final vote is scheduled for May 20X6 and, in this jurisdiction, only that vote makes the rate applicable. Vendrasse has deductible differences for which the deferred tax asset is recoverable. Which rate does it use?L3
• Zephalon's reporting date is 31 March 20X6. A law cutting the rate from 30% to 27% for financial years beginning on or after 1 April 20X6 is debated throughout the winter; according to the case data, the rate was neither enacted nor substantively enacted at 31 March 20X6 and the law is finally enacted on 10 May 20X6, before the financial statements are authorised for issue. Which rate does Zephalon use for its taxable differences at 31 March 20X6?L3
• As long as the amount of the temporary differences does not change, the enactment of a new tax rate has no effect on the deferred tax assets and liabilities recognised.L2