ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes
At 31 December 20X5, Rento Co's financial statements showed a current tax liability estimate of $420,000 for the year. In 20X6 the tax authority's final assessment for 20X5 was $465,000, and Rento paid it. No other taxes are involved. How should Rento treat the $45,000 difference?
The $45,000 shortfall is charged to 20X6 current tax expense in profit or loss. It arises from a change in estimate, not an error, so prior-year statements are not restated and the amount is not taken to retained earnings.
- ARestate the 20X5 financial statements as a prior period error
- BCharge it to current tax expense in the 20X6 statement of profit or loss as a change in estimateCorrect
- CRecognise it directly in retained earnings in 20X6
- DCapitalise it as part of the cost of the related assets
Explanation
IAS 12 requires current tax for prior periods to be measured at the amount expected to be paid. A difference between estimate and final assessment is a change in estimate, recognised in the period it is determined (20X6) through tax expense. Restating would only be correct if the original estimate was a material error, not a normal estimation difference.
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