Tax at the estimated annual effective rate

Learning objectives

• Explain that the income tax expense of each interim period is based on the best estimate of the weighted average annual effective income tax rate expected for the full financial year, applied to the pre-tax income of the period.L2, L3
• Calculate the year-to-date tax expense as year-to-date pre-tax income multiplied by the estimated annual effective rate (case data) and derive the expense for the period.L2, L3
• Record the tax expense for the period by debiting tax expense and crediting tax payable.L2, L3

Normative references

• IAS 34 §30Illustrations of the same-criteria principle: (a) inventory write-downs, restructurings and impairments follow the same principles as at year-end, and a change in estimate in a later interim period results in an additional charge or a reversal; (b) a cost that does not meet the definition of an asset at the end of the interim period is not deferred in the statement of financial position, either to await future information or to smooth earnings; (c) the income tax expense of each interim period is based on the best estimate of the weighted average annual income tax rate expected for the full financial year, and amounts already recognised are adjusted if that estimate changes.
• IAS 34 §B12Interim period income tax expense is accrued at the rate that would apply to expected total annual earnings: the estimated average annual effective income tax rate, applied to the pre-tax income of the interim period.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• At 30 June, Lumet SA has a year-to-date profit before tax of {ytd_pretax_income}. It estimates that the weighted average annual effective tax rate for the year will be {estimated_annual_rate} (estimated rate: case data, not imposed by the Standard). In the first quarter, it recognised {tax_already_recognised} of income tax expense. Calculate the year-to-date income tax expense at 30 June and the income tax expense of the second quarter (deferred tax excluded: case convention).L2
• In the third quarter, Sorvil SA reports a profit before tax of {period_pretax_income}. Its estimated annual effective tax rate remains unchanged at {estimated_annual_rate} (case data, not imposed by the Standard). Case convention: deferred tax excluded; the expense has not yet been paid. Record the entry for the income tax expense of the period.L2
• Vallon SA has a statutory tax rate of 30%. It estimates that its weighted average annual effective tax rate for the year will be 26%, taking permanent items into account (case data). Its profit before tax for the half-year is EUR 1,500,000 and it recognised EUR 450,000 of income tax expense in the half-year (30% × EUR 1,500,000). What is the error?L2