Scope and tax effects of retrospective adjustments

Learning objectives

• Identify the situations within the scope of IAS 8: selecting and applying accounting policies, changes in accounting policies, changes in accounting estimates and corrections of errors.L1, L2
• Calculate the tax effect of a retrospective adjustment under IAS 12 using the rate given in the case, and the net amount adjusted against opening equity.L2, L3

Normative references

• IAS 8 §3The standard applies to selecting and applying accounting policies, and to accounting for changes in accounting policies, changes in accounting estimates and corrections of prior period errors.
• IAS 8 §4The tax effects of corrections of prior period errors and of retrospective adjustments made to apply changes in accounting policies are accounted for and disclosed in accordance with IAS 12.

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

33 questions

• The correction of prior period errors falls within the scope of IAS 8.L1
• IAS 8 sets its own method for accounting for the tax effects of a retrospective restatement, independently of IAS 12.L1
• The initial selection of an accounting policy for a class of transactions falls under IAS 8, just like accounting for a later change in that policy.L2
• The Fairnelle group restates its accounts for a prior period error. Which of the following questions is not settled by IAS 8 itself?L1
• In 2025, Gastia corrects an error made in 2024 by retrospective restatement. How does it treat the tax consequence of this correction?L2
• Which of the following questions is settled by IAS 8?L1
• Which of the following topics fall within the scope of IAS 8?L1
• Which statements about the tax effects of retrospective adjustments are correct?L2
• Mirvia voluntarily changes its inventory cost formula. Retrospective application increases the carrying amount of opening inventories by {pre_tax_adjustment}, without changing their tax base (case data). The applicable tax rate is {tax_rate} (case data). Compute the tax effect and the net adjustment to opening equity.L2
• When finalising its 2025 accounts, Quoline discovers that a liability of {omitted_liability}, which arose in 2023, was never recognised; the related expense will be deductible when paid and the deferred tax asset is recoverable (case data), at a rate of {tax_rate}. Compute the tax effect and the net decrease in opening equity of the earliest period presented.L2
• A change in accounting policy at Sostia, applied retrospectively, increases opening inventories by {inventory_increase} and an opening provision by {provision_increase}. Tax bases do not change, at a rate of {tax_rate} (case data). Compute the net tax effect (liability) and the net adjustment to opening equity.L3
• In Truvian's notes, the retrospective adjustment to opening equity, net of tax, amounts to {net_adjustment}. The case tax rate is {tax_rate}. Work back to the pre-tax adjustment and the related tax effect.L3
• Nandane's published retained earnings at 1 January 2024 (opening of the earliest period presented) amount to {published_opening_re}. An asset overstated by {overstatement} since 2022 is discovered; the correction gives rise to a deferred tax asset at a rate of {tax_rate} (case data). Compute the restated opening retained earnings.L2
• Lyrelle presents 2025 and 2024. It discovers that depreciation of {depreciation_2023} for 2023 and of {depreciation_2024} for 2024 was not recognised; the correction gives rise to a deferred tax effect at a rate of {tax_rate} (case data). Compute the net decrease in equity at 1 January 2024 and in restated 2024 profit.L3
• Zétine applies a new inventory cost policy retrospectively: opening inventories of the earliest period presented increase by {inventory_adjustment}. The tax base does not change and the tax rate is {tax_rate} (case data). Record the entries adjusting the opening balances.L2
• Vadane discovers a supplier invoice of {omitted_liability} relating to 2023 that was never recognised, while 2024 is the earliest period presented. The expense will be deductible when paid, at a rate of {tax_rate}, and the deferred tax asset is recoverable (case data). Record the entries correcting the opening balances.L2
• A batch of goods worth {omitted_inventory} was left out of Kairia's inventory count at 31 December 2023; 2024 is the earliest period presented. The correction creates a taxable difference at a rate of {tax_rate} (case data). Record the entries correcting the 2024 opening balances.L3
• At 1 January 2024, the opening of the earliest period presented, Stainine's published retained earnings amount to {published_opening_re}. The cumulative pre-tax effect of the new policy on prior years is an increase of {pre_tax_effect}; deferred tax rate of {tax_rate} (case data). Compute restated opening retained earnings.L3
• After restatement, Stomence's retained earnings at 1 January 2024 amount to {restated_opening_re}. Published 2024 profit is {published_profit_2024}; the new policy increases it by {pre_tax_effect_2024} before tax (rate of {tax_rate}, case data). Dividends of {dividends_2024} were paid in 2024. Compute restated 2024 profit and restated retained earnings at 31 December 2024.L3
• Paulouël's restatement table (comparative year 2024, published amounts): inventories at 31 December {published_inventory}, retained earnings at 31 December {published_re}, profit {published_profit}. The new policy increases inventories by {opening_difference} at 1 January 2024 and by {closing_difference} at 31 December 2024; deferred tax rate {tax_rate} (case data). Compute the three restated amounts.L4
• Jeulbence's published deferred tax liability at 31 December 2024 is {published_dtl}. The new policy, applied retrospectively, increases inventories at that date by {inventory_increase}, without changing their tax base; rate of {tax_rate} (case data). What deferred tax liability should be presented as the comparative?L2
• For Grélal, retrospective application of a new policy for including production overheads increases inventories at 1 January 2024 by {inventory_increase}. The tax base of inventories does not change; rate of {tax_rate} (case data). Record the opening entries, including the tax effect.L3
• Chovore's new policy leads to recognising, at 1 January 2024 (opening of the earliest period presented), a liability of {liability_increase} that was not recognised under the old policy. The expense will be deductible when paid, at a rate of {tax_rate}, and the deferred tax asset is recoverable (case data). Record the opening entries.L3
• The new cost formula adopted by Kailbian reduces inventories at 1 January 2024, the opening of the earliest period presented, by {inventory_decrease}. The tax base does not change; rate of {tax_rate}; the deferred tax asset is recoverable (case data). Record the entries.L2
• The Quodac group applies a new policy retrospectively that increases assets whose tax base does not change (case data). The draft restatement table adjusts the asset line items and retained earnings, but neither deferred tax nor comparative profit. How should it be assessed?L4
• For Kirvore, the earliest practicable period is the current period. At the beginning of that period, the new policy increases carrying amounts by {pre_tax_adjustment}, without changing tax bases; rate of {tax_rate} (case data). Compute the net adjustment to opening equity.L4
• Lindane's published 2024 profit is {published_profit_2024}. A 2024 expense of {omitted_expense_2024} was omitted; its correction gives rise to a deferred tax effect at a rate of {tax_rate} (case data). What 2024 profit should be presented as the comparative?L2
• Malvane overstated its 2023 revenue by {revenue_overstatement_2023} (sale recognised early). It presents 2025 and 2024; its published retained earnings at 1 January 2024 are {published_re_1_jan_2024}. The correction gives rise to a tax effect at a rate of {tax_rate} (case data). Compute restated retained earnings at 1 January 2024.L3
• At 31 December 2024, Draivane's assets are overstated by {cumulative_overstatement} because of an error concerning 2023 and 2024. Its published retained earnings at that date are {published_re_31_dec_2024}; the correction gives rise to a deferred tax asset at a rate of {tax_rate} (case data). What retained earnings should be presented at 31 December 2024 as the comparative?L3
• Velvorne never recognised a provision that should have amounted to {provision_31_dec_2023} at the end of 2023 and {provision_31_dec_2024} at the end of 2024. It presents 2025 and 2024; the correction gives rise to a deferred tax asset at a rate of {tax_rate} (case data). Compute, net of tax, the 2024 opening correction, the decrease in 2024 profit and the decrease in equity at 31 December 2024.L4
• To correct a provision of 100,000 omitted in 2023, Silbane reduces its opening retained earnings by 100,000. The expense will be deductible when paid and the deferred tax asset is recoverable at a rate of 25% (case data). What is the error?L3
• A litigation provision of {omitted_provision}, required as early as the end of 2023 given the information available, was omitted by Grenvale; the earliest period presented is 2024. The expense will be deductible when paid and the deferred tax asset is recoverable at a rate of {tax_rate} (case data). Record the opening entries.L3
• At the end of 2023, Kirvelle's inventories were overstated by {inventory_overstatement} through a unit price error; the earliest period presented is 2024. The correction creates a deductible difference at a rate of {tax_rate}, the deferred tax asset being recoverable (case data). Record the opening entries.L3