Reconciliation of tax expense and accounting profit

Learning objectives

• Calculate the theoretical tax at the applicable rate and the average effective tax rate.L2
• Prepare the numerical reconciliation between theoretical tax and tax expense (permanent differences, rate differences, unrecognised losses, prior-period adjustments).L3, L4
• Analyse an unusual effective tax rate and explain the factors behind it.L3, L4

Normative references

• IAS 12 §81Disclosures required separately include in particular: the income tax relating to each component of other comprehensive income; an explanation of the relationship between tax expense (income) and accounting profit, in the form of a numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate(s), or between the average effective tax rate and the applicable tax rate, disclosing the basis on which the applicable rate is computed; an explanation of changes in the applicable tax rate(s) compared with the previous period; the amount of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised; the aggregate amount of temporary differences associated with investments for which no deferred tax liability is recognised; for each type of temporary difference and of unused tax losses and credits, the deferred tax assets and liabilities recognised and the deferred tax recognised in profit or loss; the income tax consequences of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a liability.
• IAS 12 §84The disclosures in para. 81(c) enable users to understand whether the relationship between tax expense and accounting profit is unusual and the significant factors that could affect it in the future, such as revenue that is exempt from taxation, expenses that are not deductible or tax losses.
• IAS 12 §85In explaining the relationship between tax expense (income) and accounting profit, the entity uses the applicable tax rate that gives users the most meaningful information; often this is the domestic rate in its country of domicile, combining the rate of the national tax with the rates of any local taxes charged on a substantially similar level of taxable profit. For an entity operating in several jurisdictions, it may be more meaningful to aggregate separate reconciliations prepared using the domestic rate of each jurisdiction.
• IAS 12The average effective tax rate is the tax expense (income) divided by the accounting profit.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

19 questions

• The explanation of the relationship between tax expense and accounting profit may take the form of a numerical reconciliation in amounts or of a reconciliation between the average effective tax rate and the applicable rate.L2
• Once the numerical reconciliation is presented, the entity need not disclose how the applicable tax rate used was determined.L2
• When the applicable tax rate moves from 28% to 25% from one year to the next, the entity explains that change.L3
• For its numerical reconciliation, to what amount does Morliandre apply the applicable tax rate?L2
• What is the purpose of explaining the relationship between tax expense and accounting profit?L3
• Nimbrage (applicable rate stable over the period) prepares its numerical reconciliation. Which of these items are reconciling items between expected tax and tax expense?L3
• Orsavel earns accounting profit before tax of {accounting_profit}; the applicable tax rate it has used (case data) is {applicable_rate}%. Compute the expected tax, the starting point of its numerical reconciliation.L2
• Pruvenza's profit before tax expense amounts to {accounting_profit}. It uses as applicable rate the domestic rate of {applicable_rate}% (case data). What expected tax does it show at the top of its reconciliation?L2
• Quorvane (accounting profit {accounting_profit}, applicable rate {applicable_rate}%) recognised non-deductible fines of {non_deductible_fines} and received exempt dividends of {exempt_dividends}; additional tax of {prior_year_adjustment} for the previous year is recognised in profit or loss. Its temporary differences are all covered by deferred tax at the same rate. Compute the tax expense expected at the end of the reconciliation.L3
• The Rastelle group reports consolidated accounting profit of {group_profit}; applicable rate used {applicable_rate}% (the parent's domestic rate, case data). This profit includes: {foreign_profit} earned by a subsidiary taxed at {foreign_rate}%; a tax loss of {unrecognised_loss} of another subsidiary (same rate as the parent), with no deferred tax asset; non-deductible expenses of {non_deductible}. Compute the consolidated tax expense resulting from the reconciliation.L4
• Silvadore's draft reconciliation shows: expected tax {expected_tax}; effect of non-deductible expenses +{non_deductible_effect}; effect of exempt income −{exempt_income_effect}. The tax expense recognised is {reported_tax_expense}. What difference remains to be explained before the reconciliation is published?L3
• Review of the Trelmont group's reconciliation: accounting profit {accounting_profit}, applicable rate {applicable_rate}%; research tax credit −{tax_credit}; effect of foreign rates −{rate_differential}; release of excess tax for the prior year −{prior_year_release}. Tax expense recognised: {reported_tax_expense}. Compute the unexplained difference.L4
• Uvrelac's reconciliation (applicable rate 25%, unchanged) includes a line 'accelerated tax depreciation: −80,000', whereas the related deferred tax is recognised at the same rate. Where is the error?L3
• Valquessa (profit before tax 2,000,000, tax expense 500,000, applicable rate 25%) opens its reconciliation with 'expected tax: 1,500,000 × 25% = 375,000' and presents an 'other' item of 125,000. Where is the error?L3
• The Wenlandor group's 20X5 reconciliation (expected tax 3,000,000, expense 4,100,000) includes: non-deductible expenses +150,000; exempt income −50,000; current-year losses of subsidiaries with no deferred tax asset +1,000,000. Management expects these subsidiaries to remain loss-making for two years. Which explanation should the note highlight?L4
• Yspala, headquartered in country H, uses an applicable rate of 27%: 22% national income tax plus 5% local tax levied on a comparable taxable profit (case data). What must its note contain?L3
• On what criterion does the entity choose the applicable rate for its reconciliation?L3
• Calvidra (accounting profit {accounting_profit}, applicable rate {applicable_rate}%) remeasured its opening deferred tax liability following a rate cut enacted for future years: deferred tax income of {rate_change_effect} (case data). It also has non-deductible expenses of {non_deductible}. Compute the tax expense resulting from the numerical reconciliation.L3
• After moving its headquarters from country R (rate 30%) to country S (rate 25%) in 20X5, the Dorvenne group now uses 25% as the applicable rate in its reconciliation, against 30% in 20X4. What does it disclose?L4