ACCA Financial Reporting (F7) Practice Exam

What is a deferred tax liability?

1. A tax obligation arising due to permanent differences

2. A future tax benefit from deductible expenses

3. A tax obligation arising due to temporary differences that will result in taxable amounts in future periods

4. An amount owed to the IRS

The correct answer is: A tax obligation arising due to temporary differences that will result in taxable amounts in future periods

A deferred tax liability is defined as a tax obligation that arises from temporary differences between the accounting income reported in the financial statements and the taxable income reported to tax authorities. These temporary differences occur when the recognition of revenues or expenses differs between financial reporting and tax reporting, leading to situations where a company recognizes income in its financial statements before it is taxable, or recognizes an expense before it can be deducted for tax purposes. In essence, a deferred tax liability represents the future tax payments that a business will be required to pay when these temporary differences reverse. For example, if a company uses accelerated depreciation methods for tax purposes, it may report lower taxable income in the early years of an asset’s life. However, for financial reporting, it may report higher earnings, thus creating a deferred tax liability to recognize that it will pay taxes on these earnings in future periods when the temporary difference reverses. The other options do not accurately describe a deferred tax liability. A deferred tax liability does not arise from permanent differences, which do not reverse and impact tax obligations in the future. Additionally, it is not related to future tax benefits resulting from deductible expenses; that would be classified as a deferred tax asset instead. Lastly, while a deferred tax liability is indeed an obligation to pay