In corporate financial reporting, income tax expense is allocated to which of the following items in the statement of profit and loss?

Introduction / Context:
Accounting standards require companies to present not only the total income tax expense for a period but also to allocate that tax charge to different components of profit such as continuing operations, discontinued operations and certain special items. This allocation helps users of financial statements understand how much tax relates to normal operations versus unusual or prior period items. The question asks which items can have income tax allocated to them, testing your understanding of basic corporate reporting principles.

Given Data / Assumptions:

• The focus is on income tax expense in corporate financial statements.
• Items listed include discontinued operations, prior period adjustments and extraordinary items.
• Accounting standards generally require disclosure of tax effects on these items.
• The question asks whether tax is allocated to any one of these items or to all of them.

Concept / Approach:
Under most accounting frameworks, including Indian standards and international standards, profit or loss from continuing operations is reported net of related income tax. When a company has a discontinued operation, such as a business segment that has been sold, the profit or loss from that operation is also shown net of tax, and the tax effect is disclosed. Similarly, prior period adjustments that correct earlier period errors or changes in accounting policies may be presented net of the related tax effect so that users can see the impact on retained earnings. Extraordinary items, where they are separately disclosed under older frameworks, also have their associated tax effects reported. Therefore, income tax expense is allocated across several components, and the correct answer is that all of the listed items can receive an allocation of income tax.

Step-by-Step Solution:
Step 1: Recall that the income statement distinguishes between profit from continuing operations and profit or loss from discontinued operations.Step 2: Recognise that standards require tax related to discontinued operations to be identified so that users can see the post tax effect.Step 3: Remember that prior period adjustments, when made, often require disclosure of the related tax effect because they affect equity and reported profit.Step 4: Note that extraordinary items, when separately disclosed, are also shown net of tax with a separate disclosure of the tax amount. This confirms that income tax is allocated to all these categories, making All of the above the correct answer.

Verification / Alternative check:
A practical way to verify this is to look at a typical published annual report of a company. You will see that the profit and loss section has a line for tax expense, and notes often show a reconciliation of tax between continuing operations and other items. Discontinued operations are explicitly presented net of tax. Notes on prior period items and extraordinary items will usually mention how much of the amount represents tax. This consistent practice supports the idea that tax is allocated across all these components, not confined to only one category.

Why Other Options Are Wrong:
Option A, limited to discontinued operations, is incomplete because it ignores tax allocation to prior period adjustments and extraordinary items. Option B focuses only on prior period adjustments, which is again incomplete. Option C, extraordinary items only, is also incomplete and does not reflect the broader requirement to show tax effects on all major components where separate disclosure is provided. Only option D, All of the above, recognises that income tax expense is allocated to discontinued operations, prior period adjustments and extraordinary items as appropriate.

Common Pitfalls:
Students sometimes think of tax as a single number that belongs only with ordinary profit. This can lead to underestimating the importance of tax allocation in financial reporting. Another common mistake is not distinguishing between gross amounts and net of tax amounts in the income statement. To avoid these issues, remember that transparent reporting requires companies to reveal how much tax relates to different parts of profit, so that analysts can better assess sustainable earnings and the impact of unusual or one time items.

Final Answer:
Income tax expense is allocated to discontinued operations, prior period adjustments and extraordinary items, so the correct choice is all of the above.