IFRIC 23 - Uncertainty Over Income Tax Treatments
On 7 June, the IASB published IFRIC 23, an interpretation of IAS 12 focusing on uncertainty over income tax treatments. Here, we summarise the key points of the interpretation.
Keywords: Mazars, Thailand, IFRS, IASB, IFRIC 23, IAS 12, IAS 1, Uncertainty Over Income Tax Payments
16 August 2017
1. Scope: when does this interpretation apply?
IFRIC 23 applies to any situation in which there is uncertainty as to whether an income tax treatment is acceptable under tax law. It is not limited to actual ongoing disputes. Thus, in some circumstances, an entity may need to reflect uncertainty over an income tax treatment in its accounts, even if it has not received any notification or been subject to an examination.
The scope of the Interpretation includes all taxes covered by IAS 12, i.e. both current tax and deferred tax. However, it does not apply to uncertainty relating to taxes covered by other standards.
The accounting treatment of interest and penalties is also excluded from the scope of the Interpretation (as noted in the Basis for Conclusions). Entities must therefore make use of judgement to determine whether or not interest and penalties are considered to be income tax falling within the scope of IAS 12 (and thus IFRIC 23).
2. Recognition/measurement of uncertainty: what approach should be used?
The Interpretation states that an entity shall assume that the taxation authorities:
- will examine the amounts declared; and
- will have full knowledge of all relevant information when making those examinations.
In other words, the “risk of detection” shall be assumed to be 100%. With this in mind, an entity shall consider whether it is probable that the taxation authorities will accept the tax treatment used or planned to be used in its income tax filings.
The effect of uncertainty shall only be taken into account in determining income taxes if the entity concludes it is not probable that the taxation authorities will accept the tax treatment in question.
In the converse scenario, the entity shall determine income taxes in line with the tax treatment used (or planned to be used) in its income tax filings.
If the entity concludes it is probable that the tax authorities will reject the tax treatment, the entity shall measure the effect of the uncertainty using whichever of the following methods it expects to better predict the resolution of the uncertainty:
- either the most likely amount;
- or the expected value, which is the weighted average of the various possible outcomes (this approach is directly inspired by the rules set out under IFRS 15 for estimating variable consideration).
Uncertainty shall be taken into account when calculating income tax recognised, rather than recording a separate provision.
When uncertainty over an income tax treatment affects both current tax and deferred tax, the entity must ensure that its estimates and judgements are consistent. These estimates may be made:
- either for each uncertainty separately;
- or considered together, if the resolution of one uncertainty would affect, or be affected by, another uncertainty.
Thus, the entity must use judgement to determine the unit of account that it believes will best predict the resolution of the uncertainty.
The Interpretation also states that an entity shall revise its judgements and estimates if a change in facts and circumstances occurs subsequently.
3. Disclosures in the notes: are any changes required?
The Interpretation does not introduce any new disclosure requirements but simply makes reference to the existing requirements, notably:
- IAS 1 (§122 and 125-129) relating to significant assumptions and judgements; and
- IAS 12 (§88, which refers back to IAS 37) relating to contingent assets and liabilities.
4. What are the transition requirements?
IFRIC 23 becomes operative for financial periods commencing on or after 1 January 2019. Early application is permitted, subject to adoption by the EU (which is scheduled for 2018). On transition, the Interpretation shall be applied retrospectively, either in accordance with IAS 8 (restating all comparative information) if this can be done without the benefit of hindsight, or by recognising the cumulative effect of the change in accounting method as an adjustment to the opening balance of retained earnings at the beginning of the period in which the entity first applies the Interpretation (i.e. 2019, unless the entity opts for early application). If this second approach is chosen, comparative information is not restated.
Key points to remember:
1. IFRIC 23 applies to any situation in which there is uncertainty as to whether an income tax treatment is acceptable under tax law;
2. The effect of uncertainty over income tax treatments shall be taken into account in determining income taxes if the entity concludes it is not probable that the taxation authorities will accept the tax treatment in question. IFRIC 23 requires entities to assume that the taxation authorities would examine this particular point, i.e. a 100% “risk of detection”;
3. The effect of the uncertainty shall be measured using whichever of the following methods will better predict the resolution of the uncertainty: either the most likely amount, or the weighted average of the various possible outcomes (the expected value);
4. Estimates may be made either for each uncertainty separately, or for a group of uncertainties considered together, depending on whether there are interactions between different types of uncertainties;
5. IFRIC 23 becomes mandatory for financial periods commencing on or after 1 January 2019, and early application is permitted, subject to adoption by the EU;
6. The transition requirements offer a choice between full retrospective application or modified retrospective application (recognising the cumulative effect of the change in accounting method as an adjustment to the opening balance of retained earnings at the start of the period in which the entity first applies the Interpretation, without restating comparative information).