Portage La Prairie Company is currently being audited by the tax authorities with respect to a deduction they claimed two years ago.If they are reassessed, the amount they will owe could be as high as $2,000,000.Neither their accountant nor their attorney has been able to tell them how likely it will be that they will owe the additional taxes.How should Portage La Prairie Company report the situation?

Question

Quizplus · Accepted Answer

Portage La Prairie Company should disclose the potential liability in the notes to the financial statements. This will provide transparency to stakeholders and alert them to the potential risk the company is facing. Restating the income statement from two years ago is not necessary unless there was an error in the original statement. Accruing a liability this period may not be appropriate as the likelihood of owing additional taxes is uncertain. Doing nothing could potentially mislead stakeholders and put the company at risk for legal and reputational issues.

Portage La Prairie Company Is Currently Being Audited by the Tax