How are tax rates applied in measuring deferred tax liabilities?

In measuring deferred tax liabilities, tax rates are applied based on the enacted tax rate expected to be in effect at the time the temporary differences are anticipated to reverse. This approach is aligned with the matching principle and ensures that the measurement of deferred tax liabilities accurately reflects the future tax consequences of current transactions.

When a company recognizes a deferred tax liability, it essentially denotes the taxes that are expected to be payable in the future due to temporary differences between the accounting income and taxable income. Therefore, it is crucial to consider the tax rate that will be applicable at that future point in time when the reversal will occur. This enables companies to reflect the correct tax implications in their financial statements, ensuring both accuracy and compliance with accounting standards.

The other methods of applying tax rates, such as using historical rates, lowest applicable rates, or average rates across periods, do not provide a realistic or compliant measurement of deferred tax liabilities. Each of these alternatives fails to consider the future tax landscape that affects the timing of income tax payments related to those temporary differences. Hence, only the enacted rate effective upon reversal accurately captures the expected tax obligation when the timing differences clear.