SBR IAS 12 INCOME TAXES

Sir, i am finding difficult to solve this question of kaplan exam kit (q #32). Kindly guide me.

Holls Group is preparing its financial statements for the year ended 30 November
20X7. The directors of Holls have been asked by an investor to explain the accounting
for taxation in the financial statements.

The Group operates in several tax jurisdictions and is subject to annual tax audits
which can result in amendments to the amount of tax to be paid.

The profit from continuing operations was $300 million in the year to 30 November
20X7 and the reported tax charge was $87 million. The investor was confused as to
why the tax charge was not the tax rate multiplied by the profit from continuing
operations. The directors have prepared a reconciliation of the notional tax charge
on profits as compared with the actual tax charge for the period.

Profit from continuing operations before taxation 300
––––
Notional charge at local corporation tax rate of 22% 66
Differences in overseas tax rates 10
Tax relating to non-taxable gains on disposals of businesses (12)
Tax relating to the impairment of brands 9
Other tax adjustments 14
––––
Tax charge for the year 87

The amount of income taxes paid as shown in the statement of cash flows is
$95 million but there is no current explanation of the tax effects of the above items
in the financial statements.

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%. Holls 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.

At 30 November 20X7, Holls has deductible temporary differences of $4.5 million
which are expected to reverse in the next year. In addition, Holls also has taxable
temporary differences of $5 million which relate to the same taxable company and
the tax authority. Holls expects $3 million of those taxable temporary differences to
reverse in 20X8 and the remaining $2 million to reverse in 20X9. Prior to the current
year, Holls had made significant losses.

Required:
With reference to the above information, explain to the investor, the nature of
accounting for taxation in financial statements