Imagine it’s June 2017. The UK is experiencing a heatwave and the London Underground’s Central Line is now hotter than the sun. Keeping with the theme, Baywatch was the 2nd highest grossing film in the first week of the month (I didn’t believe this either – apparently film choice was bad in 2017).
For those of us with a love of financial reporting, we braved the heat to get stuck into working through IFRS 9 and IFRS 15 (and if we were keen, IFRS 16). There was nothing better than an ice cream and an IFRS book.
Whilst most people were focused on sweating through these new standards, the IFRS Interpretations Committee (IFRIC) snuck in an interpretation relating to tax provisioning - IFRIC 23 Uncertainty over income tax treatments.
The aim of IFRIC 23 was to limit the diversity in reporting methods when the application of tax law is uncertain; and is effective for periods starting on or after 1 January 2019.
Although you could argue that IAS 12 already provided sufficient guidance on how to account for income taxes when uncertainty exists over tax treatments, if you have ever had to put a ‘tax hat’ on you would have spotted the practical challenges that others wouldn’t have.
Despite how meticulous tax authorities are in drafting relevant tax legislation (HMRC and its equivalents in other jurisdictions), companies always tend to come across situations when it is unclear on how to apply the legislation. Depending on a company’s unique tax strategy, each company may make a different decision on how to recognise current and deferred tax that has an element of uncertainty.
The fact that judgements are made in the calculation of tax provisions shouldn’t be a surprise to any of us as we must regularly make accounting judgments. Consistency in judgments also seems to make sense (and was the overall objective for bringing in IFRS 9, 15 and 16 – no further comment here…). But what do you need to know if you are putting on your tax hat to calculate your own tax provisions, or review someone else’s?
The four things you need to know
IFRIC 23 will help you answer the following four questions:
Should uncertain tax positions be considered separately?
What assumption should we make about the tax authority?
This depends on how the positions will be resolved: if resolved separately, the uncertain tax positions should be treated separately.
Consider how you prepare income tax filings, or how the tax authority will resolve the uncertainty.
Assume that the tax authority has the right to examine all available information and have full knowledge of all related information.
Don’t take into account the probability of the tax authority examining the information as part of your measurement. Assume they will look at everything and have no time limit to do so.
How should uncertainty be factored into the measurement of tax balances?
How should changes in facts and circumstances be handled?
If the tax authority’s decision is probable, take into account that decision.
If the tax authority’s decision is not probable, the uncertainty should be factored into the measurement using one of the following methods:
a) Most likely amount
b) Expected value
IFRS defines probable as “more likely than not”.
If there is a change in facts and circumstances, or new information comes to light, the relevant tax balances need to be reassessed as a change in estimate under IAS 8 Accounting policies, changes in accounting estimates and errors.
Make sure you assess the relevance and effect of the change in facts and circumstances before reassessing the tax balances.
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Financial Reporting Advisory Group Lead
Grant Thornton UK LLP