IFRS for SMEs) IFRS for SMEs Income Taxes and Deferred Tax 1 — Questions and Answers
Question 1: Under IFRS for SMEs, a deferred tax liability arises when:
- The carrying amount of an asset exceeds its tax base (Correct answer)
- The carrying amount of an asset is less than its tax base
- Tax is paid in advance of recognition in profit or loss
- An entity uses accelerated depreciation for accounting
Correct answer: The carrying amount of an asset exceeds its tax base
A deferred tax liability arises from a taxable temporary difference, which occurs when the carrying amount of an asset exceeds its tax base, resulting in future taxable amounts.
Question 2: Under IFRS for SMEs, a deferred tax asset is recognized for deductible temporary differences:
- Only to the extent that it is probable that sufficient future taxable profit will be available (Correct answer)
- Always, without any recoverability test
- Only for losses carried forward
- When tax rates are expected to decrease
Correct answer: Only to the extent that it is probable that sufficient future taxable profit will be available
IFRS for SMEs requires that a deferred tax asset for deductible temporary differences be recognized only when it is probable that future taxable profits will be available against which the deductible amount can be utilized.
Question 3: Under IFRS for SMEs, deferred tax assets and liabilities are measured at:
- The tax rates expected to apply when the temporary difference reverses, based on enacted or substantively enacted rates (Correct answer)
- The current period's effective tax rate
- Historical cost tax rates
- An undiscounted estimate only
Correct answer: The tax rates expected to apply when the temporary difference reverses, based on enacted or substantively enacted rates
Deferred taxes are measured using the tax rates expected to apply to the period when the asset is realized or the liability is settled.
Question 4: Under IFRS for SMEs, which of the following temporary differences does NOT give rise to a deferred tax liability?
- Initial recognition of goodwill not deductible for tax purposes (Correct answer)
- Accelerated tax depreciation exceeding accounting depreciation
- Revaluation surplus on property
- Capitalized development costs deductible on a cash basis for tax
Correct answer: Initial recognition of goodwill not deductible for tax purposes
IFRS for SMEs provides an exemption from recognizing a deferred tax liability on initial recognition of goodwill where the goodwill is not tax-deductible.
Question 5: Under IFRS for SMEs, current tax for the current and prior periods is measured at:
- The amount expected to be paid (or recovered) using tax rates enacted or substantively enacted at the reporting date (Correct answer)
- The prior year effective tax rate applied to current taxable income
- Management's best estimate without reference to enacted rates
- The statutory rate published at the start of the year
Correct answer: The amount expected to be paid (or recovered) using tax rates enacted or substantively enacted at the reporting date
Current tax is the expected tax payable or recoverable, calculated at tax rates and laws that have been enacted or substantively enacted by the reporting date.
Question 6: Under IFRS for SMEs, deferred tax assets and liabilities are NOT discounted because:
- The standard prohibits discounting, citing the complexity of scheduling temporary differences (Correct answer)
- Discounting produces the same result as undiscounted amounts
- Tax authorities do not recognize time value of money
- IFRS for SMEs follows local GAAP in each jurisdiction
Correct answer: The standard prohibits discounting, citing the complexity of scheduling temporary differences
IFRS for SMEs explicitly prohibits discounting of deferred tax assets and liabilities because reliable scheduling of temporary differences is often impracticable.
IFRS for SMEs) IFRS for SMEs Income Taxes and Deferred Tax 1
Under IFRS for SMEs, a deferred tax liability arises when: