Question

When a change in the tax law or rates occurs, the effect of the change on a deferred tax liability or asset is:

1) Not recognized.
2) Recognized as an adjustment as of the effective date of the change.
3) Recognized as an adjustment as of the enactment date of the change.
4) Recognized as a prior-period adjustment.

Answer 1

The effect of a change in tax law or rates on a deferred tax liability or asset is recognized as of the enactment date of the change. Therefore, the correct option is 3.

Step-by-step explanation:

When there is a change in tax law or rates, the effect on a deferred tax liability or asset is recognized as an adjustment as of the enactment date of the change. This is according to accounting principles and standards that require businesses to account for the effects of tax rate changes on their financial statements immediately upon enactment, not when they become effective or in a different period. Therefore, option 3) Recognized as an adjustment as of the enactment date of the change is the correct answer.