Reminder About Setting Effective Tax Rates

Published on April 20, 2017

With companies once again setting their annual effective tax rates, we'd like to remind you of some basic principles. The tax provision for the year is the same whether a company prepares only annual financial statements or interim and annual statements. The tax expense for ordinary income in an interim period is measured using an estimated annual effective tax rate. At the end of each interim period, a company must make its best estimate of the annual effective rate for the full year and apply that rate to year-to-date ordinary income. The calculation can be affected by:

  • Operations in multiple jurisdictions

  • Expectations about whether current-year losses are realizable

  • The tax benefit of an operating loss carry-forward from a prior year that is realized because of current year ordinary income

  • Tax law changes enacted in the period that affect taxes payable or refundable for the current year. As a reminder, companies should monitor tax law changes in the US and other jurisdictions.

The effects of a change in tax laws or rates on deferred tax balances are recognized as a discrete event as of the enactment date and should not be allocated to subsequent interim periods by an adjustment to the estimated annual effective tax rate. Similarly, the effects of a change in tax laws or rates on taxes currently payable or refundable for a prior year should be recognized as of the enactment date. The effects of new tax legislation should not be recognized prior to enactment.

(Source: EY AccountingLink - Financial Reporting Briefs - March 2017)