Bryan Trucking Corporation began business on January 1, 2017, and consists of the parent entity, domiciled and operating in Country X, and a subsidiary operating in Country Y. Bryan is required, as a listed company in Country X, to prepare financial statements using IFRS.

Bryan is also listed on the New York Stock Exchange (NYSE). Therefore, Bryan is registered as a foreign private issuer with the U.S. Securities and Exchange Commission and must file financial statements with the SEC in accordance with SEC regulations for foreign private issuers. These regulations permit Bryan to file its IFRS financial statements with the SEC, but it has decided to prepare U.S. GAAP financial statements as well for the convenience of its U.S. shareholders.

With respect to the reconciliation of the statutory tax rate to the effective tax rate in the income tax note disclosure, SEC regulations for foreign private issuers permit them to reconcile to either the relevant statutory income tax rate in their country of domicile or to another applicable tax rate. Reconciling to the statutory income tax rate in its country of domicile would be comparable to a U.S. company reconciling to the U.S. federal tax rate.

Bryan carefully selected its accounting policies under IFRS and U.S. GAAP so that, in 2017, it reported the same pre-tax book income in both the U.S. GAAP and IFRS financial statements. Therefore, the only difference between the tax rate reconciliation in the U.S. GAAP financial statements and the IFRS financial statements is due to the use of a country-specific statutory tax rate (statutory tax rate in Country X) or a weighted-average statutory tax rate (another applicable tax rate) as the beginning point of the reconciliation.

The table below presents Bryans pre-tax book income and the applicable statutory tax rates in each country and permanent differences between taxable and book income in the two countries in which Bryan operates. Bryan has no temporary differences in 2017.

	Country X			Country Y			Total
Pre-tax book income	$	1,250,000		$	1,100,000		$	2,350,000
Permanent differences:
Tax-exempt income	$	40,000		$	60,000		$	100,000
Nondeductible expense	$	25,000		$	35,000		$	60,000
Applicable statutory tax rates in 2017		28	%		35	%

Both Country X and Country Y tax only profits earned within the country.

Required:

Prepare the portion of the income tax note that details the reconciliation of the statutory or other applicable tax rate to the effective tax rate as follows:

Assume Bryan uses the statutory tax rate in Country X for the tax rate reconciliation in its U.S. GAAP financial statements.

Assume Bryan uses a weighted-average statutory rate for the tax rate reconciliation in its IFRS financial statements.

Explanation

Calculations relevant to both reconciliations:

		Country X			Country Y			Total
Pre-tax book income	(1)	$	1,250,000		$	1,100,000		$	2,350,000
Adjustments
Tax-exempt income	(1)		(40,000	)		(60,000	)		(100,000	)
Non-deductible expense	(1)		25,000			35,000			60,000
Taxable income	(2)	$	1,235,000		$	1,075,000		$	2,310,000
Country-specific statutory tax rates	(1)		28.00	%		35.00	%
Tax on pre-tax book income at country-specific statutory rate	(3)	$	350,000		$	385,000		$	735,000
Weighted Average Statutory Rate	(4)								31.28	%
Tax Expense (Taxable income * country-specific statutory rate)	(5)	$	345,800		$	376,250		$	722,050
Effective Tax Rate (Tax Expense pre-tax book income)	(6)								30.73	%

(1) Given in problem. (2) Sum of pre-tax book income and adjustments. (3) Tax based on pre-tax book income: Individual country = country-specific tax rate country-specific pre-tax book income Total tax = sum of individual country-specific amounts (4) Weighted Average Statutory Rate = Sum of country-specific taxes based on pre-tax book income (3) Total pre-tax book income (5) Tax expense based on taxable income (There are no temporary differences.): Individual country = Country-specific tax rate country-specific taxable income Total tax expense = sum of individual country specific amounts

1. Amount: (1)0.28 pre-tax income = 0.28 $2,350,000 = $658,000 (2)Tax effect depends on relevant tax rate in country where income is tax-exempt:

Country X:	0.28 $40,000	=	$	11,200
Country Y:	0.35 $60,000	=		21,000
Total:			$	32,200

(3)Tax effect depends on relevant tax rate in country where expenses are not deductible:

Country X:	0.28 $25,000	=	$	7,000
Country Y:	0.35 $35,000	=		12,250
Total:			$	19,250

(4)Difference between sum of amounts (1), (2) and (3) and total income tax expense. It can also be calculated directly as follows:

Pre-tax book income in Country Y *

(Difference in tax rates between Country Y and Country X) = $1,100,000 (0.35 0.28) = $1,100,000 0.07 = $77,000

(5)See calculation of income tax expense in table above.

Rates: Adjustments to the statutory rate of 28% are calculated by dividing the amount of each adjustment by pre-tax book income.

2.

Amounts:

(1)See table above for calculation of total tax on pre-tax book income and weighted-average statutory tax rate.

(2)and (3) See computations (2) and (3) under Requirement 1.

(3)See calculation of income tax expense in table above.

(4)Note: No adjustment for differences in tax rates in different countries is required. Differences in tax rates are already included in the weighted-average statutory rate.

Rates: Adjustments to the weighted average statutory rate are calculated by dividing the amount of each adjustment by pre-tax book income.

Note that the only difference between the two reconciliations (Requirement 1 vs. Requirement 2) is that under IFRS the reconciliation begins with the tax at the weighted-average statutory rate ($735,000, Requirement 2), whereas under U.S. GAAP the reconciliation begins with the tax at the parent companys statutory rate. As a result, under U.S. GAAP there is an additional reconciling item to adjust the tax at the parents statutory rate to the tax at the weighted-average statutory rate (i.e., $658,000 + $77,000 = $735,000).