IAS 12: Income Taxes sets out guidance for dealing with under provision and over provision of income taxes by reporting entities.
During the year ended 31 March 2019, Dansoman Ltd finalised and paid its liability for corporate tax on profit for year ended 31 March 2018, at an amount of GH¢21 million. It had previously made an estimated provision for corporation tax of GH¢25 million in the financial statements for year ended 31 March 2018. The directors estimate the liability for year ended 31 March 2019 at GH¢24.5 million.
Required:
Explain the treatment of the above transactions in the financial statements of Dansoman Ltd for the year ended 31 March 2019 in respect of taxation. (4 marks)
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- An amount of GH¢4 million was overprovided for in the previous year.
- Hence the provision for the current year should be reduced by that amount. Hence an expected liability of GH¢24.5 million requires a provision of GH¢20.5 million.
- The liability is still GH¢24.5 million as this is the amount expected to be paid.
- Basically, the provision moves from the existing figure of GH¢4 million credit to the required level of GH¢24.5 million credit.