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Prior period errors and changes in accounting principles

Applies
FY2024 onwards
Reviewed
Rule
P2-PPE-2024.1
By

How are prior period errors treated under Pillar Two?

Opening equity changes from correcting an error or changing accounting policy count in the current year, unless a recalculation of the earlier year applies.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.1(h), Prior Period Errors and Changes in Accounting Principles

A Constituent Entity's Financial Accounting Net Income or Loss is adjusted for Prior Period Errors and Changes in Accounting Principles: all changes in the opening equity at the beginning of the Fiscal Year attributable to a correction of an error in the determination of Financial Accounting Net Income in a previous Fiscal Year that affected the income or expenses includible in the computation of GloBE Income or Loss for that year, except to the extent the correction resulted in a material decrease to a liability for Covered Taxes subject to Article 4.6; or to a change in accounting principle or policy that affects income or expenses includible in the computation of GloBE Income or Loss.

Income that reaches the accounts only through opening equity is neither lost nor counted twice. An increase in equity is additional income; a decrease is an additional deduction.

Three things take a restatement out

It must affect GloBE Income

Only a change attributable to income or expenses that were, or would have been, includible in the computation of GloBE Income or Loss is adjusted for.

Pre-GloBE years are excluded

To the extent the change relates to Fiscal Years before the GloBE Rules applied to the Constituent Entity, it affected no GloBE computation and is left out. How much relates to those years is decided on all the facts and circumstances.

An error that goes to Article 4.6.1

Where an error correction results in a material decrease to a liability for Covered Taxes for a previous Fiscal Year, that year is recalculated under Article 4.6.1 and the income adjustment is made there. This carve-out is for error corrections only, not for a change in accounting principle.

Group errors that cancel still count

An error between two Group Entities that left the Consolidated Financial Statements unaffected still changes each entity's opening equity, and each adjusts.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    Whether the change affects GloBE Income or Loss

    Income or expenses includible in the computation.

  3. 3

    An error correction subject to Article 4.6

    A material decrease in Covered Taxes for a previous year takes the correction to Article 4.6.1.

  4. 4

    Fiscal Years before the GloBE Rules applied

    The part relating to them is excluded.

  5. 5

    The change in opening equity

    The adjustment follows its direction.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Revenue left out of last year

An error correction increasing opening equity by EUR 800,000, all relating to a year within the GloBE Rules.

Computed

An adjustment of EUR 800,000 is made to Financial Accounting Net Income or Loss as computed (Article 3.2.1(h)), increasing income as additional income would: the correction of a prior period error changed opening equity by EUR 800,000, of which EUR 0 relates to Fiscal Years before the GloBE Rules applied and is left out. The adjustment is made in the year the equity is restated. Based on the figures you supplied.

Workings

Change in opening equityArticle 10.1 — as supplied; a correction of a prior period error
EUR 800,000
Portion relating to pre-GloBE Fiscal YearsCommentary to Article 3.2.1, paragraphs 81 and 83 — excluded; it affected no GloBE computation
EUR 0
Adjustment to Financial Accounting Net Income or LossArticle 3.2.1(h) — in the direction of the change in equity
EUR 800,000

Decided by the change in opening equity

A change of accounting policy

A new policy reduces opening equity by EUR 5 million, of which EUR 3.5 million relates to years before the Rules applied.

Computed

An adjustment of (EUR 1,500,000) is made to Financial Accounting Net Income or Loss as computed (Article 3.2.1(h)), reducing income as an additional deduction would: the change in accounting principle or policy changed opening equity by (EUR 5,000,000), of which (EUR 3,500,000) relates to Fiscal Years before the GloBE Rules applied and is left out. The adjustment is made in the year the equity is restated. Based on the figures you supplied.

Workings

Change in opening equityArticle 10.1 — as supplied; a change in accounting principle or policy
(EUR 5,000,000)
Portion relating to pre-GloBE Fiscal YearsCommentary to Article 3.2.1, paragraphs 81 and 83 — excluded; it affected no GloBE computation
EUR 3,500,000
Adjustment to Financial Accounting Net Income or LossArticle 3.2.1(h) — in the direction of the change in equity
(EUR 1,500,000)

Decided by the change in opening equity

An error that reduces an earlier year's tax

A correction that materially decreases the Covered Taxes of a previous year.

Computed

No adjustment is made under Article 3.2.1(h) as computed: the error correction results in a material decrease to a liability for Covered Taxes for a previous Fiscal Year, which paragraph (a) of the definition carves out. The Effective Tax Rate and Top-up Tax of that year are recalculated under Article 4.6.1 and the adjustment to income is made in that recalculation, not in the current year. Based on what you supplied.

Decided by the an error correction subject to article 4.6

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

2 inputs still need your determination:

  • Is the change in opening equity a correction of a prior period error, or a change in accounting principle or policy?
  • Is the change attributable to income or expenses that are, or would have been, includible in the computation of GloBE Income or Loss?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader