ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes
Kestrel Co concludes that it is NOT probable that the tax authority will accept a deduction of $400,000 claimed in its return. The tax rate is 25%. Two outcomes are possible: the deduction is fully disallowed (probability 70%) or fully allowed (30%). Applying IFRIC 23, what additional current tax amount should Kestrel reflect in respect of this treatment, relative to the filed return?
The additional current tax is $100,000. With only two possible outcomes, the most likely amount method is used, and full disallowance is most likely at 70%. The $400,000 deduction is therefore reversed and taxed at 25%, rather than using a probability-weighted figure of $70,000.
- A$30,000
- B$70,000
- C$100,000Correct
- D$120,000
Explanation
There are two outcomes, so the most likely amount method is the better predictor. The most likely outcome is full disallowance (70%), so the $400,000 is added back to taxable profit. Extra tax is 400,000 x 25% = $100,000. The expected value method would give $70,000 (a 70% weighting), which is the weighted figure and not the most likely amount.
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