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Uncertain tax treatments - do you need to change how you account for them?

04 June 2019

As tax legislation can be difficult and judgemental to apply, uncertainties over tax are common. In the absence of specific guidance, there has been diversity in how companies account for uncertainties over income tax treatments. A new interpretation, IFRIC 23, clarifies the requirements and is likely to result in changes for some companies.

IFRIC Interpretation 23 Uncertainty over Income Tax Treatments (IFRIC 23) is effective for periods beginning on or after 1 January 2019. Companies should, therefore, be considering what action they need to take to review their accounting for uncertain tax treatments in advance of any interim or annual reporting.

When does IFRIC 23 apply?

The Interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. It applies to both current and deferred income taxes within the scope of IAS 12, and any situations where there is uncertainty over whether a particular approach adopted will be accepted by the tax authority.

Since IAS 12 does not specifically address uncertainties relating to tax, many companies have previously applied the guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, instead of IAS 12, when recognising and measuring provisions and in disclosing contingent liabilities relating to uncertain tax treatments. This will no longer be appropriate.  

What is changing under IFRIC 23?

IFRIC 23 addresses four specific issues:

  1. Whether an entity considers uncertain tax treatments separately

IFRIC 23 requires an entity to treat uncertain tax treatments separately or together depending on which method better predicts the resolution of the uncertainty. Factors that an entity might consider in determining the most appropriate approach include:

  • How it prepares its income tax filings; and
  • How it is expected the taxation authority will investigate and resolve issues.
  1. The assumptions an entity should make about the examination of tax treatments by taxation authorities

When measuring current and deferred income tax assets and liabilities IFRIC 23 requires an entity to assume that a taxation authority will examine amounts that it has a right to examine and have full knowledge of all related information when making those examinations. It is not appropriate to consider detection risk.

  1. How an entity determines taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates

IFRIC 23 requires an entity to make an assessment of whether it is probable a taxation authority will accept an uncertain tax treatment. If it is probable the treatment will be accepted, then taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rate should be consistent with the treatment used or planned to be used in its income tax filings. If it is not probable the position will be accepted, then an entity reflects that uncertainty in one of two ways depending on which method better predicts the resolution of the uncertainty:

  • An expected value approach. For example, an entity might have claimed deductions in its taxation filing related to transfer pricing and conclude it is not probable the taxation authority will accept the deductions claimed. If the entity expects the taxation authority’s decision on one transfer pricing matter would affect, or be affected by, the other transfer pricing matters, then it would calculate a probability-weighted average of the possible outcomes arising from an investigation by the tax authorities in measuring income tax assets and liabilities.
  • The most likely approach. For example, an entity may have acquired an intangible asset for CU 100 for which it is certain it will obtain a tax deduction, but for which the timing of the deductibility could be either 100% of cost in the year of purchase, or 20% of cost in each of the next 5 years. If the entity has claimed a current tax deduction of 100%, but expects the taxation authority to accept only a 20% deduction in each of the next five years, the entity would measure its current tax position in the year of purchase based on a current tax deduction equal to only 20% of cost. Its deferred tax position would assume a tax base of the asset equal to 80% of cost and not 0%.
  1. How an entity considers changes in facts and circumstances

IFRIC 23 requires the estimates and judgements made about whether the relevant taxation authority will accept the position taken by the entity in its tax filings to be reassessed if the facts and circumstances on which those estimates and judgements are based change, or as a result of new information that affects the estimates and judgements. The effects of such changes should be reflected by applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. In addition, IAS 10 Events after the Reporting Date should be applied to determine whether such a change that occurs after the reporting period is an adjusting or non-adjusting event.

Disclosure requirements

IFRIC 23 does not introduce any new disclosure requirements, but reminds companies that when there is uncertainty over income tax treatments there are existing IFRS requirements to disclose:

  • Judgements made in determining taxable profit or loss in accordance with paragraph 122 of IAS 1 Presentation of Financial Statements
  • Information about the assumptions and estimates made in accordance with paragraphs 125-129 of IAS 1, and
  • If it is probable that a taxation authority will accept an uncertain tax treatment, there may be a need to disclose the potential effect of that uncertainty as a tax-related contingency in accordance with paragraph 88 of IAS 12 Income Taxes.


On initial application, an entity may apply IFRIC 23:

  • Retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors if that is possible without the use of hindsight, or
  • Retrospectively with the cumulative effect recognised by adjusting the opening balance of retained earnings on the date of initial application (i.e. the start of the accounting period in which IFRIC 23 is first applied). In this case comparatives would not be restated.

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