Liability or Contingency? Mertens, an online retailer, fulfills its online order

Question

Liability or Contingency? Mertens, an online retailer, fulfills its online orders by shipping products directly to customers in all 50 states. Mertens does not have brick-and-mortar stores, but does operate distribution centers in various states, including Texas. Consistent with its practice in all 50 states, Mertens does not collect or remit sales tax to Texas In recent court rulings, Texas argued that operating a distribution center within a state constitutes nexus and thus would subject that company to collect and remit sales tax on all sales within that state As of December 31, 2017, Mertens has operated its distribution center in Texas for five years and has never collected or remitted sales tax to Texas. Although the company considers the risk of detection to not be probable, Mertens has estimated the total amount of sales tax payable to the state for the past five years to be $50 million plus $6 million in interest and $4 million in penalties On March 15, 2018, the governor of Texas established a tax amnesty program. The program provides that any unregistered taxpayer who voluntarily registers to collect sales tax on a prospective basis will be forgiven (1) 50% of all unpaid sales tax and (2) all interest and penalties on unpaid taxes. Mertens management decides to take advantage of this program. On June 15, 2018, Mertens completes the necessary paperwork to participate in the program and pays Texas $25 million to settle its obligation through December 31, 201'7 2. Assume that Mertens decided to recognize a $60 million "Sales Taxes Payable" on December 31 2017. What effect, if any, does Mertens's decision to participate in the tax amnesty program have on the amount recognized as of March 31, 2018? Alternative 1: The outstanding liability should be reduced to $25 million-the amount that Mertens will ultimately settle its obligation for. The announcement of the amnesty program gives additional information and sets a precedent that should be taken into account when Mertens assesses its liability Alternative 2: The outstanding liability should not be adjusted and remains at $60 million, because the obligation is not yet settled with the state Choose the more appropriate alternative and justify your choice. Refer to relevant standard on how debtors should derecognize a liability

Explanation / Answer

As per the Fact described in the question, Mertens Operates a store at Texas from last five year and delivers its online products in Texas through that store. Although the Store is in Operation for 5 years, Mertens has not paid any sales tax to the Texas govt. The Assessed Amount which is Mertens Required to pay the Taxes of last 5 years was assessed at 60 Million(50 for Tax, 6 for Interest and 4 for Penalty). Mertens Make a Provision for 60Million in the Financial statement of 2017, but in 2018 as per Govt scheme the same is assesses at 25 Million. Mertens left with the issue that whether to readjust the provision to 25 Million or kept it at 60 Million.

As Per IAS-37, Provisions, Contingent Liabilities and Contingent Assets, An entity must recognize a provision if and only if:

i) A present obligation has arisen due to past events

ii) Payment is Probable(more Likely than not)

iii) The Amount can be Estimated Reliably.

In the Present case as According to as Scheme of Texas Govt where He Required to Pay only 25 Million and Mertens has applied for the Scheme, the Amount can be estimated reliably and the Payment is probable to Pay at 25 Million.

So, Mertens Should reduce its provision to 25 Million.

IAS-37 also states that the Provision should review and restate at each balance sheet date and if an outflow no longer required the same needs to be reversed.

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