- This topic has 1 reply, 2 voices, and was last updated 1 month ago by Stephen Widberg.
October 16, 2022 at 5:16 pm #668827akka17bakka
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Sir, I have a question regarding this paragraph from the question.
”The tax rate applicable to Holls for the year ended 30 November 20X7 is 22%. There is a
proposal in the local tax legislation that a new tax rate of 25% will apply from 1 January
20X8. In the country where Holls is domiciled, tax laws and rate changes are enacted when
the government approves the legislation. The government approved the legislation on
12 November 20X7. The current weighted average tax rate for the Group is 27%. Halls does
not currently disclose its opinion of how the tax rate may alter in the future but the
government is likely to change with the result that a new government will almost certainly
increase the corporate tax rate.”
”Most companies will reconcile the group’s annual tax expense to the statutory rote in the
country in which the parent is based. Hence the rote of 22% is used in the tax
”The local rate is different from the weighted average tax rate (27%) of the Group based on the different jurisdictions in which it operates. Investors may feel that using the weighted tax rate in the reconciliation gives a more meaningful number because it is a better estimate of the tax
rate the Group expects to pay over the long term. Investors will wish to understand the
company’s expected long-term sustainable tax rate so they can prepare their cash flow or profit forecasts”.
IAS 12 says, we should use the tax rate that is enacted by law at the reporting date. Here 25% was approved by the government on 12 November 20X7, so at the reporting date this tax percentage was enacted according to the standard. So why didn’t the answer used this rate?
And why did we use weighted tax rate when we are told to use the tax rate imposed by law?
Thank you.October 17, 2022 at 5:13 am #668924Stephen WidbergModerator
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In future please do not copy and paste whole questions. Just ask your question in your own words. 🙂
I would have used the current tax rate:
“explanation of the relationship between tax expense (income) and the tax that would be expected by applying the current tax rate to accounting profit or loss (this can be presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax)” Source – IASplus
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