CFA Level I · CFA Level I Exam · Analysis of Income Taxes
An analyst notes that a company's effective tax rate fell sharply this year because of a one-time deferred tax benefit from an enacted rate cut. When forecasting future earnings, the analyst should most appropriately:
The analyst should use an effective tax rate adjusted to exclude the one-time deferred tax benefit. The remeasurement gain from the rate cut will not recur, so extrapolating the depressed rate would overstate forecast earnings.
- Aextrapolate this year's lower effective rate into future periods
- Buse an effective rate adjusted to exclude the one-time benefitCorrect
- Capply the new statutory rate to deferred tax assets only
Explanation
A one-time remeasurement benefit does not recur, so projecting it would overstate future earnings. The analyst should normalize the effective rate by removing the non-recurring item and consider the new statutory rate and the sustainable reconciling items.
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