CFA Level I · CFA Level I Exam · Analysis of Income Taxes
An analyst reviewing a company's income tax footnote wants to understand why the company's reported effective tax rate differs from the statutory rate. Which disclosure is most likely to provide this information?
The reconciliation of the statutory tax rate to the effective tax rate is the disclosure that explains the difference. It itemizes factors such as foreign operations taxed at different rates, non-deductible expenses, tax credits and changes in valuation allowances, which together move the effective rate away from the statutory rate.
- AThe reconciliation of statutory to effective tax rateCorrect
- BThe schedule of inventory cost formulas
- CThe segment revenue breakdown by product
Explanation
IFRS requires an explanation of the relationship between tax expense and accounting profit, often as a rate reconciliation. It shows items such as foreign rate differences, non-deductible expenses and tax credits. The other disclosures do not explain differences between the effective and statutory rates.
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