Accounting Changes, Errors & Income Tax

This chapter is about the corrections and adjustments that sit between the bookkeeping and the reported result — and about one distinction that drives almost everything: is this a change in policy, a change in estimate, or an error? Get that wrong and the accounting goes the wrong way. A change in estimate is applied prospectively and nothing prior is touched. A change in policy and a prior-period error are applied retrospectively, restating comparatives and, when last year's books are already closed, going straight to retained earnings. It begins lower down, with the errors a trial balance can actually catch. A transposition throws the totals out by a predictable amount; a complete omission or a compensating error leaves a balanced trial balance that is still wrong. From there: correcting entries, corrected trial balances, suspense accounts, and the inventory errors that quietly reverse themselves over two periods. The final technical section is deferred tax under IAS 12, which is where these adjustments land once tax is considered — you will measure the temporary difference that accelerated tax depreciation creates, split a year's tax into its current and deferred parts, and remeasure a deferred tax asset on unused losses after an enacted rate cut. Integrated cases then combine policy changes, estimate revisions and error corrections in one set of books. An optional final section shows the US GAAP valuation allowance on a deferred tax asset.