Although IAS 12 requires one to take into account uncertainties when accounting for tax there is no specific guidance of the approach to be taken.
IFRIC 23 is being introduced to clarify the accounting approach that is required to be taken.
IFRIC 23 interpretation in assessing uncertainty
The IFRIC deals with 4 areas relevant for recognition and measurement
1. Whether tax treatments should be considered singly or collectively
In deciding whether a tax treatment should be considered independently or together with other tax treatments an entity will be required to take the approach that is considered to provide the best prediction of the resolution of the uncertainty.
2. Assumptions to be made regarding taxation authorities’ examinations
An entity is required to assume that a tax authority will examine those reported values which it has a right to examine and will have full knowledge of all relevant information.
3. Determination of taxable profit (tax loss), tax bases, unused tax losses and credits, and tax rates
In considering the treatments that an entity is using in tax filings, the entity must consider whether it is probable that the tax authority will accept a given tax treatment, or collectively a number of tax treatments considered together.
- If the entity judges that it is probable that the tax treatment will be accepted it will determine the taxable profit/loss, tax bases, unused tax losses and credits or tax rates consistently with that tax treatment as reflected in its tax returns.
- However, If the entity judges that a tax treatment is unlikely to be accepted then in calculating the taxable profit/loss, tax bases, unused tax losses and credits and tax rates it will have to use the most likely amount or the expected value of the tax treatment once resolved. The entity will use whichever method provides the best prediction of the expected outcome.
4. Effect of changes in facts and circumstances
Changes in facts and circumstances mean that the calculated values will have to be reassessed.
IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted.
The cumulative effect of initially applying these new rules will be reflected in retained earnings, or in other elements of equity, at the start of the accounting period in which the entity first applies the rules and without adjusting comparative information. Full retrospective application is also allowed if it can be done without using hindsight.
The US introduced a codified approach to this issue a number of years ago. The approach adopted in the IFRIC is not as prescriptive as the US approach but will introduce additional rigour to this area.
The assumption of prefect knowledge for the tax authority is likely to lead to more conservative positions being taken.
Interestingly the IFRIC does not add any new disclosure requirements although the requirements of IAS 1 and IAS 37 will continue to apply. We suspect that companies are likely to be encouraged by their auditors to increase the level of disclosure.