Clunker Car Corporation reported a $3 million contingent liability on its 2015 financial statements from a lawsuit over faulty ignition switches. The tax rate for 2015 is 40%; however the enacted tax rates for the following three years is 37%, 35%, and 33% respectively.

How will the deferred tax asset be measured if the case is resolved in 2016?
How will it be measured if the case is resolved in 2018?
What accounts for this difference?

What will be an ideal response?

Answer: If the case is resolved in 2016 it will be measured at $1,110,000 ($3 million × 37%).
If the case is resolved in 2018 it will be measured at $990,000 ($3 million × 33%).
The difference is due to the fact that the deferred tax asset needs to be recorded as the book-tax basis difference in the contingent liability times the tax rate that will be in effect at the time of the reversal.