ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes
At 31 December 20X5 Delta Co's financial statements showed a current tax liability estimate of $240,000 for the year. In 20X6 the tax authority finalised the 20X5 assessment at $255,000. Delta had made a reasonable estimate using information available when the 20X5 statements were authorised. How should the $15,000 difference be treated under IAS 12 and IAS 8?
The $15,000 shortfall is recognised as additional tax expense in the 20X6 profit or loss. It is a change in accounting estimate, because the 20X5 figure was a reasonable estimate. Retrospective restatement applies only to prior period errors, not to normal estimate revisions.
- ARestate the 20X5 comparatives as a prior period error
- BRecognise $15,000 as additional tax expense in the 20X6 profit or loss as a change in estimateCorrect
- CCharge $15,000 directly to retained earnings at 1 January 20X6
- DDisclose the $15,000 as a contingent liability only
Explanation
IAS 12 requires current tax for prior periods to be measured at the amount expected to be paid. A difference arising from the settlement of a reasonable estimate is a change in estimate under IAS 8 and is recognised in the period of settlement, 20X6. Restating would only apply if the original figure were a material error, such as ignoring available information.
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