Liabilities, Leases, Employee Benefits and Income Taxes

Introduction and context

Liabilities represent present obligations arising from past events that are expected to result in an outflow of economic resources. They are central to financial reporting because borrowing, supplier credit, leases, employee compensation, taxation and legal claims affect both solvency and performance. A company may report a profit while facing serious liquidity pressure if substantial obligations mature soon, and it may report modest liabilities while having significant lease commitments, pension deficits or contingent exposures.

This chapter applies the principal recognition, measurement, presentation and disclosure concepts relevant to liabilities under International Financial Reporting Standards (IFRS). The discussion is also useful for understanding broadly similar requirements under other national frameworks, although detailed rules may differ. The major standards considered are IFRS 9 for financial liabilities, IFRS 16 for leases, IAS 19 for employee benefits, IFRS 2 for share-based payment, IAS 37 for provisions and contingencies, and IAS 12 for income taxes.

Learning objectives

By the end of this chapter, a student should be able to:

1. Distinguish current from non-current liabilities and explain the accounting for debt.
2. Recognize and measure provisions, contingencies and commitments.
3. Explain lessee and lessor accounting under IFRS 16.
4. Describe defined-contribution and defined-benefit pension accounting.
5. Account conceptually for share-based payments.
6. Explain current tax, deferred tax and temporary differences.
7. Analyze covenant risk, liquidity risk and off-balance-sheet exposures.
8. Evaluate the ethical and professional judgments involved in liability reporting.

1. The nature and classification of liabilities

The Conceptual Framework defines a liability as a present obligation of an entity to transfer an economic resource as a result of past events. Three ideas are important:

• Present obligation: the entity has little or no practical ability to avoid the obligation.
• Past event: the obligation arises from an event that has already occurred.
• Transfer of an economic resource: settlement may involve cash, goods, services or another asset.

A liability is normally recognized when it is sufficiently certain that an obligation exists and its amount can be measured with sufficient reliability. Modern standards do not treat probability and reliable measurement as universal recognition tests in exactly the same way; the applicable standard determines the detailed treatment.

Current and non-current liabilities

A liability is generally current if it is expected to be settled in the normal operating cycle, held for trading, due within twelve months after the reporting date, or if the entity does not have, at the reporting date, a right to defer settlement for at least twelve months. Other liabilities are non-current. Classification depends on rights existing at the reporting date, not on management’s intention alone.

Examples of current liabilities include trade payables, accrued wages, short-term borrowings, current tax payable and the current portion of long-term debt. Non-current liabilities include long-term loans, bonds payable, long-term lease liabilities and pension obligations.

A refinancing completed after year-end generally does not change a liability’s classification at that reporting date unless the entity already had the relevant right to defer settlement. Breaches of loan covenants may cause a borrowing to become current, subject to specific requirements concerning waivers, cure periods and covenant tests.

2. Debt and financial liabilities

Debt includes bank loans, overdrafts, notes, bonds and other contractual obligations to deliver cash. Under IFRS 9, most financial liabilities are initially measured at fair value, adjusted for directly attributable transaction costs when the liability is not measured at fair value through profit or loss. Subsequently, many ordinary borrowings are measured at amortized cost using the effective interest method.

The effective interest method allocates interest expense over the relevant period so that the carrying amount equals the present value of estimated future cash payments discounted at the original effective interest rate. In general form:

Here, the effective interest rate is the rate that exactly discounts expected future cash flows to the initial carrying amount, and t identifies the accounting period. The method assumes that contractual terms and expected cash flows are appropriately estimated. Fees, premiums and discounts are incorporated into the effective yield rather than treated as immediate expense, unless a specific standard requires otherwise.

Worked example: bond issued at a discount

A company issues a three-year bond with a face value of $100,000 and annual coupon payments of $5,000. Investors pay $95,000. The approximate effective annual rate r satisfies:

The exact rate is approximately 6.96%. In year 1, interest expense is approximately:

The cash coupon is $5,000, so the carrying amount increases by approximately $1,612 to $96,612. The difference reflects amortization of the discount. Rounding may cause the final period’s amount to differ slightly; the bond should be fully accreted to $100,000 at maturity.

Debt covenants and analysis

A covenant is a contractual condition attached to borrowing. Common covenants require a minimum interest coverage ratio, maximum debt-to-equity ratio, minimum current ratio or minimum net worth. A covenant breach can trigger accelerated repayment, higher interest, renegotiation or default.

Analysts should examine:

• maturity dates and refinancing dependence;
• secured versus unsecured borrowing;
• variable-rate exposure;
• covenant headroom;
• cross-default clauses;
• collateral pledged;
• restrictions on dividends or additional borrowing; and
• management’s ability to generate operating cash flow.

Useful analytical measures include:

These are analytical ratios rather than recognition rules. They must be interpreted alongside industry conditions, seasonality, accounting policies and the quality of earnings. A high current ratio may coexist with weak liquidity if current assets are slow-moving or difficult to convert into cash.

3. Provisions, contingencies and commitments

IAS 37 distinguishes provisions from contingent liabilities and contingent assets. A provision is recognized when all three conditions apply:

1. the entity has a present legal or constructive obligation from a past event;
2. an outflow of resources embodying economic benefits is probable; and
3. a reliable estimate can be made.

A constructive obligation arises from established past practice, published policies or sufficiently specific statements that create a valid expectation among affected parties.

A provision is measured at the best estimate of the expenditure required to settle the present obligation at the reporting date. For a large population of similar items, expected value may be appropriate. For a single obligation, the most likely outcome may be the best estimate, adjusted for other possible outcomes where appropriate. If the time value of money is material, the provision is discounted using a pre-tax rate reflecting current market assessments of that time value and risks specific to the liability, without double-counting risks already reflected in cash flows.

Example: warranty provision

A manufacturer sells 10,000 products. Based on experience, 2% will require minor repairs costing $30 each and 1% will require major repairs costing $200 each. The expected warranty cost is:

If the obligation relates to sales made before year-end and the outflow is probable, the entity recognizes a $26,000 provision, subject to updating the estimate for current evidence.

A provision is not recognized for future operating losses because no present obligation exists merely from expecting losses. A restructuring provision is recognized only when a detailed formal plan has created a valid expectation in those affected, usually through implementation or announcement of the plan.

Contingent liabilities and assets

A contingent liability is either a possible obligation confirmed by uncertain future events or a present obligation not recognized because settlement is not probable or cannot be measured reliably. It is generally disclosed unless the possibility of outflow is remote. A contingent asset is a possible asset arising from uncertain future events. It is disclosed when an inflow is probable and recognized only when realization is virtually certain.

Commitments, such as approved capital expenditure, purchase obligations and undrawn lending facilities, may not meet the definition of a liability at the reporting date. Nevertheless, they can materially affect future cash flows and should be disclosed when required or when necessary for users to understand financial position.

4. Leases

A lease exists when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control requires both the right to obtain substantially all economic benefits from use and the right to direct how and for what purpose the asset is used.

Lessee accounting under IFRS 16

At commencement, a lessee generally recognizes:

• a right-of-use (ROU) asset; and
• a lease liability.

The initial lease liability is the present value of lease payments not paid at commencement. The general present-value relationship is:

where Payment_t is the lease payment in period t, r is the periodic discount rate, and t is the number of periods. The discount rate is the interest rate implicit in the lease if readily determinable; otherwise, the lessee uses its incremental borrowing rate. The calculation must use consistent periods and rates, such as annual payments with an annual rate or monthly payments with an effective monthly rate.

The ROU asset initially includes the lease liability, payments made at or before commencement less incentives received, initial direct costs and an estimate of dismantling, removal or restoration costs when applicable. Subsequently, the lease liability increases for interest and decreases for payments. The ROU asset is generally depreciated over the shorter of the lease term and the useful life of the underlying asset, unless ownership transfers or a purchase option is reasonably certain to be exercised.

For a lease with annual payments of $12,000 for three years, paid at year-end, and an annual discount rate of 5%, the initial liability is approximately:

Year 1 interest is $1,635, calculated as $32,697 × 5%. After the $12,000 payment, the closing liability is approximately $22,332. The ROU asset is then depreciated according to the applicable lease term and conditions.

IFRS 16 provides recognition exemptions for short-term leases and leases of low-value assets, provided the relevant conditions are met. Payments for exempt leases are generally recognized as an expense on a systematic basis.

Lessor accounting

A lessor classifies a lease as a finance lease when it transfers substantially all risks and rewards incidental to ownership. Indicators include transfer of ownership, a bargain purchase option, a lease term for a major part of the asset’s economic life, present value of payments amounting to substantially all of fair value, or a specialized asset with little alternative use.

A finance lessor recognizes a net investment in the lease and recognizes finance income over time. An operating lessor retains the underlying asset, recognizes rental income generally on a straight-line basis, and depreciates the asset. Classification is based on the substance of the transaction rather than its legal form.

Lease analysis

Lease capitalization improves visibility of obligations but affects ratios and performance measures. Recognizing an ROU asset and lease liability usually increases reported assets and liabilities, while replacing rent expense with depreciation and interest can increase EBITDA. Analysts should therefore understand whether performance comparisons use reported EBITDA, adjusted EBITDA or covenant-specific definitions. Sale-and-leaseback transactions require careful examination because an apparent sale may not qualify as a sale under revenue-recognition principles.

5. Employee benefits

Employee benefits include wages, bonuses, paid leave, pensions, termination benefits and share-based compensation. IAS 19 classifies benefits according to the timing and uncertainty of settlement.

Short-term benefits

Short-term benefits, such as salaries, annual leave and bonuses expected to be settled within twelve months, are recognized as employees render service. An expense and a liability are recorded for unpaid amounts. Bonus recognition also requires a present obligation and a reliable estimate of the amount.

Defined-contribution plans

Under a defined-contribution plan, the employer pays fixed contributions to a separate fund and has no further legal or constructive obligation if the fund lacks sufficient assets. The employer recognizes contribution expense as service is received. Unpaid contributions are recorded as a liability. The employer does not recognize the employee’s future investment or longevity risk.

Defined-benefit plans

Under a defined-benefit plan, the employer promises a specified benefit, such as a pension based on final salary and years of service. The employer bears actuarial and investment risks. The net defined-benefit liability or asset is generally:

The obligation is estimated using the projected unit credit method. Actuarial assumptions include discount rates, salary growth, employee turnover, mortality and retirement patterns. The discount rate is based on high-quality corporate bond yields of appropriate currency and term, or a government bond market where no deep corporate bond market exists.

Profit or loss normally includes current service cost, past service cost and net interest on the net defined-benefit liability or asset. Remeasurements, including actuarial gains and losses and the return on plan assets excluding amounts included in net interest, are recognized in other comprehensive income and are not subsequently reclassified to profit or loss.

The accounting is judgment-intensive. Small changes in discount rates or mortality assumptions can materially change the reported obligation. Users should examine sensitivity disclosures and funding arrangements rather than focusing only on the net balance sheet amount.

Termination benefits

Termination benefits are recognized at the earlier of when the entity can no longer withdraw the offer and when it recognizes costs for a restructuring involving the benefits. The timing prevents an entity from delaying recognition while employees continue to provide service under a retention arrangement.

6. Share-based payment

IFRS 2 applies when an entity receives goods or services in exchange for equity instruments or amounts based on the value of its shares. Equity-settled awards are generally measured at the grant-date fair value of the equity instruments and recognized over the vesting period, based on expected satisfaction of service and non-market performance conditions.

For market conditions, such as achieving a specified share price, grant-date fair value incorporates the condition; the expense is generally not reversed merely because the market condition is not achieved, provided service conditions are satisfied. Non-market vesting conditions affect the number of awards expected to vest, and estimates are revised during the vesting period.

Cash-settled awards are remeasured at fair value at each reporting date, with changes recognized in profit or loss until settlement. The distinction is important because cash-settled awards create continuing liability volatility, whereas equity-settled awards usually create an equity credit without subsequent remeasurement after vesting.

Share-based payment can influence reported expenses, diluted earnings per share, employee incentives and governance. Boards should ensure that award design does not encourage excessive short-term risk-taking or manipulation of performance targets.

7. Income taxes and deferred tax

Current tax is the amount payable or recoverable for taxable profit or loss for the period, based on tax rates enacted or substantively enacted at the reporting date. Accounting profit is not necessarily taxable profit because tax law may differ from financial reporting rules.

A central distinction is between temporary differences and permanent differences. A temporary difference is the difference between the carrying amount of an asset or liability in the statement of financial position and its tax base. It will reverse in a future period. Permanent differences affect accounting profit or taxable profit but do not reverse; they do not create deferred tax.

Deferred tax is generally measured using the tax rates expected to apply when the asset is recovered or the liability is settled. The basic relationships are:

These simplified formulas assume a single relevant tax rate and no valuation adjustments. A deferred tax asset is recognized only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, unused tax losses and credits can be utilized.

Example: depreciation difference

An asset has a carrying amount of $80,000 and a tax base of $50,000. The tax rate is 25%. The taxable temporary difference is $30,000, so the deferred tax liability is:

When the asset is recovered, the temporary difference is expected to reverse and generate taxable amounts. The liability therefore reflects future tax consequences already created by the difference between accounting and tax depreciation.

Common sources of deferred tax include different depreciation rates, development costs capitalized for accounting but deducted for tax, provisions deductible only when paid, lease accounting differences and unused tax losses. Initial recognition exceptions and exceptions relating to investments in subsidiaries, associates and joint arrangements require careful application of IAS 12; they should not be reduced to a mechanical multiplication exercise.

Tax expense in profit or loss can be reconciled as:

This relationship excludes tax recognized directly in other comprehensive income or equity, which is presented consistently with the underlying transaction. A tax reconciliation should explain differences between the statutory tax rate and the effective tax rate, including nondeductible expenses, tax incentives, different tax jurisdictions and changes in deferred tax balances.

8. Integrated case study: Northstar Manufacturing Ltd.

The following is an illustrative case, not a report on an actual company.

Background

Northstar manufactures medical equipment. At 31 December, it has a $6 million bank loan, a five-year factory lease, a defined-benefit pension plan and a product warranty program. Its accounting profit is $4 million, but taxable profit is higher because some expenses are not yet deductible for tax purposes.

Problem

Management wants to present strong liquidity and stable profit. The finance team must determine whether liabilities are properly classified and recognized, whether covenant headroom is adequate, and whether the tax note explains the difference between accounting and taxable income.

Analysis and approach

First, the loan agreement is examined. A covenant requires interest coverage of at least 3.0 times. Northstar’s earnings before interest and tax are $2.4 million and finance costs are $0.8 million:

The company is exactly at the threshold, leaving no practical headroom. Management must disclose the risk of covenant breach if forecasts are uncertain and should assess whether refinancing is necessary.

Second, the factory lease is assessed under IFRS 16. The identified factory is controlled by Northstar, so an ROU asset and lease liability are recognized unless an exemption applies. Omitting the lease would understate liabilities and distort comparisons with companies that own factories financed by debt.

Third, historical warranty data indicate expected claims of $420,000. Because sales before year-end create a present obligation and claims are probable, Northstar records a provision. A possible lawsuit involving a former distributor has only a 30% estimated chance of loss and cannot be reliably measured. It is disclosed as a contingent liability rather than recognized, assuming the outflow is not probable under the applicable facts.

Fourth, the pension actuary reports a defined-benefit obligation of $9.5 million and plan assets of $8.7 million. Northstar recognizes a net liability of $0.8 million, subject to the asset ceiling and required presentation of service cost, net interest and remeasurements.

Finally, tax records show a $1.2 million deductible temporary difference arising from provisions deductible only when paid. At a 25% rate, the potential deferred tax asset is $300,000. Recognition depends on the probability of sufficient future taxable profits. If evidence supports recognition, the asset is recorded; otherwise, the amount is disclosed but not recognized.

Outcome

The revised financial statements show greater liabilities than management’s initial draft, but they provide a more faithful representation of obligations. The covenant analysis reveals material refinancing risk despite a technically compliant ratio. The tax note explains that accounting profit and taxable profit differ because recognition and deduction occur in different periods.

Learning points

1. Legal form does not determine the accounting treatment of leases or provisions.
2. A ratio at the covenant threshold may represent substantial economic risk.
3. Pension obligations depend on assumptions and should be analyzed through sensitivity information.
4. Deferred tax reflects future reversal of temporary differences, not merely current tax payable.
5. Transparent disclosure is essential when estimates and uncertainty are material.

9. Analysis, governance and professional judgment

Liability accounting combines measurement with judgment. Management may be tempted to delay provisions, classify debt as non-current, use optimistic pension assumptions or avoid recognizing deferred tax assets that would reduce volatility. Professional accountants must resist earnings management and apply standards consistently.

Effective governance practices include independent review of significant estimates, documented covenant monitoring, periodic actuarial review, reconciliation of tax computations to accounting records, and audit committee attention to unrecognized commitments. Disclosures should be specific: users need information about timing, uncertainty, sensitivity and potential cash consequences, not generic statements that risks exist.

Technology can improve control. Lease-management systems can track contracts, renewals, index-linked payments and discount rates. Data analytics can compare warranty claims with recorded provisions, identify unusual journal entries near year-end and reconcile payroll liabilities. Artificial intelligence may assist contract extraction, but it cannot replace professional judgment about control of an identified asset, constructive obligations, probability or the credibility of forecasts. Human review, audit trails and data governance remain necessary.

Contemporary reporting increasingly emphasizes connectivity between financial statements, risk disclosures and sustainability information. For example, climate-related commitments may affect asset useful lives, provisions, restoration obligations, insurance costs and impairment assessments. Such effects should be recognized only when they meet applicable accounting requirements, but material assumptions and uncertainties should not be concealed.

Challenges and limitations

Several limitations complicate analysis:

• Different jurisdictions may use different tax rates, pension rules and presentation requirements.
• Estimates of probabilities, discount rates and future cash flows are inherently uncertain.
• Covenant definitions may differ from IFRS measures and may use adjusted EBITDA.
• Lease liabilities may omit variable payments or renewal periods that are not sufficiently certain at commencement.
• Deferred tax assets depend on forecasts that can be affected by cyclical performance.
• Aggregated disclosures may obscure significant individual exposures.

Accordingly, users should read the notes, accounting policies, sensitivity analyses, maturity analyses and cash-flow statement together with the primary statements.

Best-practice checklist

A robust liability-reporting process should:

1. Maintain a complete contract and obligation register.
2. Reconcile debt balances to lender confirmations and amortization schedules.
3. Test current/non-current classification using rights existing at reporting date.
4. Review covenant compliance monthly and model downside scenarios.
5. Update provisions using current evidence and documented probability assessments.
6. Reassess lease terms, modifications and discount rates when required.
7. Obtain independent actuarial valuations for material defined-benefit plans.
8. Reconcile accounting profit, taxable profit and temporary differences.
9. Assess deferred tax asset recoverability using supportable forecasts.
10. Provide clear disclosures about uncertainty, maturity, security and liquidity risk.

Chapter Summary

Liabilities are present obligations arising from past events and are classified according to settlement expectations and rights existing at the reporting date. Debt is commonly measured using amortized cost and the effective interest method, while covenant analysis is essential to understanding liquidity and default risk. Provisions are recognized for probable, measurable present obligations; contingent liabilities and assets are generally disclosed rather than recognized unless recognition thresholds are met.

Under IFRS 16, most lessees recognize a right-of-use asset and lease liability, making lease commitments more visible. Employee-benefit accounting distinguishes short-term benefits, defined-contribution plans, defined-benefit plans and termination benefits. Defined-benefit measurement is especially sensitive to actuarial assumptions. Share-based payments are measured differently depending on whether they are equity-settled or cash-settled.

Income-tax accounting separates current tax from deferred tax. Deferred tax is based on temporary differences between carrying amounts and tax bases, while permanent differences do not create deferred tax. Across all topics, reliable reporting depends on careful estimates, covenant monitoring, transparent disclosures, sound governance and ethical professional judgment.

Key Terms

Liability: A present obligation to transfer an economic resource as a result of past events.

Current liability: A liability expected to be settled within the operating cycle or twelve months, or one for which the entity lacks a right to defer settlement.

Amortized cost: The initial amount adjusted for principal repayments and cumulative effective-interest amortization.

Effective interest method: A method allocating interest so the carrying amount reflects the original effective yield.

Covenant: A contractual condition imposed by a lender.

Provision: A recognized liability of uncertain timing or amount.

Contingent liability: A possible obligation or an unrecognized present obligation dependent on uncertainty.

Contingent asset: A possible asset arising from uncertain future events.

Lease liability: A lessee’s present obligation to make lease payments.

Right-of-use asset: A lessee’s asset representing the right to use an underlying asset.

Defined-contribution plan: A plan in which the employer’s obligation is limited to agreed contributions.

Defined-benefit plan: A plan in which the employer promises specified benefits and bears actuarial risk.

Actuarial gain or loss: A remeasurement arising from changes in actuarial assumptions or experience.

Share-based payment: A transaction in which goods or services are received for equity instruments or share-price-based amounts.

Tax base: The amount attributed to an asset or liability for tax purposes.

Temporary difference: A difference between carrying amount and tax base that reverses in the future.

Deferred tax liability: Tax expected to be payable on future reversal of taxable temporary differences.

Deferred tax asset: Future tax benefit from deductible temporary differences, losses or credits, subject to recognition conditions.

Liquidity risk: The risk that an entity cannot meet obligations when due.

Off-balance-sheet commitment: A future contractual or possible obligation not recognized as a liability at the reporting date.

Review Questions

Short Answer Questions

1. What characteristics must exist for an item to meet the definition of a liability?
2. Why does the effective interest method differ from simply recording the cash coupon on a bond?
3. State the three principal recognition conditions for a provision under IAS 37.
4. What are the two primary items recognized by a lessee at lease commencement under IFRS 16?
5. Distinguish a temporary difference from a permanent difference for income-tax purposes.

Long Answer Questions

1. Explain the accounting and analytical significance of classifying debt as current or non-current.
2. Compare defined-contribution and defined-benefit pension plans, including risk allocation and financial-statement effects.
3. Explain how a lessee measures and subsequently accounts for a lease liability and right-of-use asset.
4. Discuss the recognition, measurement and disclosure differences among provisions, contingent liabilities and commitments.
5. Explain how deferred tax accounting reconciles accounting profit with future tax consequences.

Analytical / Application Questions

1. A company has a $500,000 loan due in eight months. Before year-end, the lender grants a two-year waiver of a covenant breach. Analyze the classification issue, identifying the importance of the rights existing at the reporting date and the applicable facts.
2. A company has a lease with annual payments of $20,000 for four years, payable at year-end, discounted at 6%. Calculate the initial lease liability using the present-value formula and explain two subsequent accounting effects.
3. An entity has a carrying amount of $150,000 and a tax base of $110,000 for an asset. If the applicable tax rate is 25%, calculate the potential deferred tax balance and explain why recognition and presentation require more analysis than the calculation alone.

Multiple Choice Questions with Answers

Question 1

Which condition is required for recognition of a provision under IAS 37?

A. A possible obligation with a remote outflow

B. A present obligation, probable outflow and reliable estimate

C. Any management forecast of a future operating loss

D. A possible asset with a probable inflow

Correct Answer: B. A present obligation, probable outflow and reliable estimate

Question 2

A bond has a carrying amount of $95,000 and an effective annual interest rate of 6.96%. What is approximate year-one interest expense?

A. $5,000

B. $6,612

C. $95,000

D. $100,000

Correct Answer: B. $6,612

Question 3

What does a lessee generally recognize at the commencement of a lease under IFRS 16?

A. Only rental expense

B. Only a contingent liability

C. A right-of-use asset and a lease liability

D. Only the fair value of the underlying asset

Correct Answer: C. A right-of-use asset and a lease liability

Question 4

Which risk is primarily borne by the employer in a defined-benefit plan?

A. No investment or actuarial risk

B. Only the employee’s salary risk

C. Actuarial and investment risk

D. Only the supplier’s credit risk

Correct Answer: C. Actuarial and investment risk

Question 5

A deductible temporary difference is $1,200,000 and the tax rate is 25%. What is the potential deferred tax asset before assessing recoverability?

A. $30,000

B. $300,000

C. $480,000

D. $1,500,000

Correct Answer: B. $300,000

Question 6

Which item generally does not create deferred tax?

A. A provision deductible only when paid

B. Different accounting and tax depreciation rates

C. A permanent difference that will never reverse

D. Unused tax losses subject to future utilization

Correct Answer: C. A permanent difference that will never reverse

Question 7

What is the principal purpose of a debt covenant?

A. To determine an asset’s useful life

B. To impose contractual conditions protecting the lender

C. To calculate employee leave entitlement

D. To establish the tax base of inventory

Correct Answer: B. To impose contractual conditions protecting the lender

Question 8

A contingent asset is normally recognized when its related inflow is:

A. Possible

B. Remote

C. Virtually certain

D. Never measurable

Correct Answer: C. Virtually certain

Question 9

For an equity-settled share-based payment, the award is generally measured at:

A. Grant-date fair value

B. Settlement-date fair value only

C. Historical cost of the employee’s labor

D. The entity’s tax base

Correct Answer: A. Grant-date fair value

Question 10

If a liability’s carrying amount differs from its tax base and the difference will reverse in the future, the difference is called a:

A. Permanent difference

B. Temporary difference

C. Covenant adjustment

D. Contingent asset

Correct Answer: B. Temporary difference