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In this month’s column, PwC authors answer technical questions on changes in tax rates in interim disclosures, and on segment reporting in current economic conditions

This article was first published in the July 2012 International edition of Accounting and Business magazine.

Q

ABC plc in the UK is preparing interim financial statements under IAS 34, Interim Financial Reporting, for the six-month period ended 31 March 20x1. The government has announced that it plans to change the main rate of corporation tax applicable to ABC plc from 30% to 25%. This change is expected to be substantively enacted and come into effect in the second half of ABC plc’s current financial year. Should ABC plc take into account this change when preparing its six-month results?

A

A company’s tax charge cannot be properly determined until the end of the financial or tax year, when all allowances and taxable items are known. IAS 34 therefore requires, in interim periods, an effective tax rate to be calculated based on an estimate of the tax charge for the full year and applied to the results of the interim period. Consistent with IAS 12, Income Taxes, this estimate should use the tax rates (and tax laws) that have been substantively enacted by the end of the interim reporting period. It should not take into account changes in tax rates that have not been substantively enacted.

So ABC plc should use the tax rate of 30% in its estimate of the tax charge (making the required adjustments for tax allowances, non-deductible items, etc) at the end of the interim period. If the impact of the announced change in tax rates is material to ABC plc, it should be disclosed in the notes to the interim financial statements.

Q

Most multinational companies have recently changed their internal reporting to highlight increased country risks in Europe. What is the impact of the change on the financial reporting?

A

ABC is a global manufacturing group with operations in three main territories, the US, China and Europe. The group’s executive committee is the chief operating decision-maker (CODM) as defined by IFRS 8, Operating Segments. The CODM monitors revenue and operating profit measures on a territory-by-territory basis and so has three operating segments. In recent years, the group’s operation in China has accounted for around half of the total revenues and operating profits consistently, followed by the US with some 20% share of each measure. The remaining 30% is shared by the group’s European operations mainly in the eurozone. The group therefore reported these three territories as reporting segments in their financial statements.

Given the ongoing turmoil in the eurozone, the CODM requested changes to the internal management reporting to show each European country’s performance separately.

The determination of operating segments under IFRS 8 is based on how the CODM reviews performance and allocates resources. As a result of the alteration to the internal management reporting, the group’s operating segments have now changed.

Management assessed which countries meet the definition of reporting segments. It concluded that China and the US would exceed the quantitative thresholds as described in IFRS 8, para 13 and therefore required separate disclosure.

In respect of the European operating segments, although the requirement for segments to have similar economic characteristics might be difficult to overcome when combining individual countries, management was comfortable with the aggregation of operations in Germany and the Netherlands on the basis that these countries have similar economic conditions, exchange control regulations and underlying currency.

On the other hand, they concluded that it would not be appropriate to aggregate the operations of Greece, Spain and Hungary because of their differing economic situations. Management has also restated the comparative information.

This month’s solutions were compiled by Imre Guba, Richard Tattershall and Iain Selfridge of PwC’s Accounting Consulting Services

 

Last updated: 21 Mar 2014