Revising the estimated rate during the year

Learning objectives

• Calculate the adjustment when the estimated annual effective rate is revised: year-to-date expense at the new rate less the expense already recognised in previous periods.L3
• Record the adjustment in the period in which the estimated rate changes, without changing periods already reported.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.

2 questions

• In the first quarter, Ostelle SA (financial year = calendar year) earned a profit before tax of EUR 900,000 and recognised {tax_already_recognised} of income tax expense, at the estimated annual effective rate of 23% (case data). At 30 June, year-to-date profit before tax is {ytd_pretax_income} and management revises the estimated annual effective rate to {revised_rate} (case data, judgement). Calculate the year-to-date income tax expense at the revised rate and the income tax expense to be recognised in the second quarter (deferred tax excluded: case convention).L3
• At the end of the second quarter, Fenwick SA had recognised {tax_already_recognised} of income tax expense (26% of EUR 2,000,000 of year-to-date profit before tax). In the third quarter, it records a loss before tax of EUR 300,000, so that year-to-date profit before tax at 30 September is {ytd_pretax_income}, and it revises the estimated annual effective rate to {revised_rate} (case data, judgement). Case convention: deferred tax excluded. Record the entry for the income tax expense of the third quarter.L3