Deferred Tax Asset & Liability: Enacted Future Tax Rate

How do you measure deferred tax assets and liabilities when the enacted future tax rate changes? In this CPA exam lecture, Professor Farhat shows CPA, CMA, and EA candidates and accounting students how to apply enacted future tax rates to reversing temporary differences — using the enacted rate for each period, adjusting existing deferred balances when rates change, and computing income tax expense from current and deferred amounts. Ideal for anyone studying intermediate accounting, accounting for income taxes, and FAR-topic deferred tax measurement.
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Video Timeline & Key Concepts:
0:00 — Introduction
0:45 — Using enacted tax rates for the periods when temporary differences reverse
1:13 — Adjusting a deferred tax position immediately when the rate changes
2:09 — Example: future taxable amounts reversing at different enacted rates
5:02-5:45 — Calculating the deferred tax liability using each year's enacted rate
6:01-6:31 — Deriving income tax expense from current taxes payable and the change in deferred tax
6:35-7:25 — Adjusting when a company already has an existing deferred tax balance
Frequently Asked Questions:
What tax rate do you use to measure deferred taxes?
You use the enacted tax rate expected to apply in the period when the temporary difference reverses. If different rates are enacted for different future years, you apply each year's specific enacted rate to the amount reversing that year.
What happens when the enacted tax rate changes after a deferred tax balance is recorded?
When a new rate is enacted, the deferred tax asset or liability is remeasured using the new rate. The effect of the change is recognized immediately through income tax expense in the period the rate change occurs.
How do you calculate a deferred tax liability with multiple enacted rates?
Multiply each year's reversing taxable amount by the enacted tax rate for that specific year, then add the results together. The total is the deferred tax liability that should appear on the balance sheet.
How is income tax expense determined?
Income tax expense is the sum of current income taxes payable and the change in the deferred tax liability or asset for the period. It reflects both the taxes owed now and the future tax effects of temporary differences.
How do you handle an existing deferred tax balance?
When a deferred tax liability or asset already exists, you adjust it to the newly calculated balance. The entry records only the net increase or decrease needed to bring the account to its correct amount.
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