Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
Exhibit 4.13: Reconciliation of tax expenses
(b) Factors affecting the tax charge for the year
The effective rate of corporation tax for the year of 25.9% (2002 – 28.0%) is lower
than the standard rate of corporation tax in the UK of 30.0%. The differences are
explained below:
2003 2002
% %
Standard rate of corporation tax 30.0 30.0
Effects of:
Expenses not deductible for tax purposes
(primarily goodwill amortisation and non-qualifying
depreciation) 3.9 3.4
Capital allowances for the year in excess of
depreciation on qualifying assets (3.3) (2.8)
Differences in overseas taxation rates (0.8) (0.4)
Losses on property disposals not available for
current tax relief – 0.3
Prior year items (4.4) (2.4)
Other items 0.5 (0.1)
Effective rate of corporation tax for the year 25.9 28.0
(c) Factors that may affect future tax charges
Deferred tax assets of £16m in respect of tax losses carried forward have not been
recognised due to insufficient certainty over their recoverability.
Source: Tesco plc Annual Report and Financial Statements 2003
This note is often referred to in the accountancy profession as a tax reconciliation
as it ties in the reported profit before tax multiplied by the statutory tax rate in the
country of the holding company with the actual tax charge in the income statement.
Starting with the UK statutory rate the major points of comment are as follows:
Differences in overseas tax rates simply refers to other countries in which the
group has operations having different statutory rates.
Non-deductibility of goodwill and other expenses increases the tax rate as profit
is smaller after goodwill is deducted but tax is unchanged. This therefore
increases the apparent tax rate. This is why we generally use a pre-goodwill
earnings number for our effective calculations.
Capital allowances in excess of depreciation – this is a reference to timing
differences. If tax depreciation is higher than the accounting equivalent the
effective rate will be lower.
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