Tax issues rank as one of the largest causes for financial restatements, and an analysis by PwC reveals that 22% of 2017 SEC income tax comment letters originated from the effective tax rate (ETR) reconciliation. Tax practitioners know the importance of the income tax disclosures—and the potential costs if a company is required to restate its financial statements because of a Topic 740 error—but many students enter the accounting profession without studying or preparing this important component of the financial statements.
This article explains current and deferred tax expense as a bridge to ultimately preparing the rate reconciliation, as well as showing how valuation allowances, tax credits and differences in tax rates across time affect the ETR.