IAS 12: Income Taxes specifies how to account for current and deferred tax, but not how to reflect the effects of uncertainty. Therefore, the IASB has issued ‘IFRIC 23: Uncertainty over income tax treatments’. It takes effect for accounting periods beginning on or after 1 Jan 2019 although entities may find it helpful adopt the new interpretation earlier where tax uncertainties arise from Brexit.
Where it is unclear how tax law applies to a particular transaction or circumstance, or whether a taxation authority will accept a company’s tax treatment, IFRIC 23 provides requirements that add to the requirements in IAS 12 as follows:
- Should you consider uncertain tax treatments separately or together
IFRIC 23 requires that the approach used should be based on whichever better predicts the resolution of the uncertainty.
- Examination of tax treatments by taxation authorities
IFRIC 23 requires an entity to assume that the taxation authorities will examine all amounts it has a right to examine and will have full knowledge of all related information when making those examinations.
- Determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates
Entities must consider the probability that the tax authorities will accept or reject an uncertain tax treatment, with the accounting treatment being driven by the conclusion of that assessment.
- Considering changes in facts and circumstances
IFRIC 23 requires an entity to re-assess judgements or estimates required if the facts and circumstances on which the judgement or estimate was based change or as a result of new information that affects the judgement or estimate. Any such re-assessment should be accounted for prospectively in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors. In such cases, entities must apply IAS 10: Events after the Reporting Period to determine whether a change that occurs after the reporting period is an adjusting or non-adjusting event.
An entity may apply IFRIC 23 on a fully retrospective basis, or retrospectively with the cumulative effect of initially applying the interpretation recognised at the date of initial application rather than through the restatement of comparatives.
Uncertainty over income tax treatments may also drive disclosures under IAS 1.122 and 1.125’s significant estimates and judgements requirements and the strategic report’s principal risks and uncertainties requirements. The Financial Reporting Council has also published a Thematic Review of tax disclosures which set out their expectations in respect of an entity’s policies and position.
If Brexit triggers tax uncertainties for your businesses, the IFRIC 23 interpretation may provide useful guidance on how to account for it so you may wish to consider the issues and interpretations raised in the guidance.
For help and advice on accounting for uncertain tax treatments please get in touch with your usual BDO contact or Richard Matthews.
Business Edge Index