Under-provision of income tax
An under-provision of income tax arises when the previous period’s estimated current tax charge was lower than the amount subsequently determined. The shortfall normally increases the current period’s tax expense when the earlier amount was a reasonable estimate. This adjustment is separate from the estimate of tax on the current period’s profits. A material prior-period error is a different issue.
Worked example
Last year’s tax liability was estimated at $9,000 but is settled at $10,000. The under-provision is $1,000. If current-year tax is estimated at $12,000, the tax expense is $13,000, assuming no other tax adjustments.
Common mistake
Do not add the prior-year tax payment itself to the current-year expense; add only the under-provision. Distinguish the expense from the closing tax liability.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | FR | Direct | Official assessment-window verification pending |
| ACCA | K1 | Direct | July 2027–August 2028 |
| CIMA | F2 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |
Related terms
Also called: tax under-provision