Finally, certainty on uncertain tax treatments with release of IFRIC 23

Entities to disclose income tax balances assuming a tax audit will take place

For annual reporting periods beginning on or after 1 January 2019, IFRIC 23 Uncertainty over Income Tax Treatments will require entities to calculate the current tax liability in their financial statements as if the tax authorities were going to perform a tax audit, and the tax authorities knew all the facts and circumstances about the entity’s tax position.

This could prove a fortuitous development for the ATO, with entities having to disclose key estimates and judgements regarding the determination of uncertain tax positions.

The International Accounting Standards Board (IASB) finally issued IFRIC 23 in June 2017 to clarify when and how the liability for uncertain tax treatments should be accounted for by entities applying IFRS. US companies have been subject to these rules for a number of years by having to apply FIN 48.

This interpretation is not likely to be welcomed by preparers of financial statements because it will likely result in higher current tax liabilities being recognised at an earlier date for uncertain tax positions. Currently there is divergent practice, with many entities taking an optimistic view and factoring in the probability having a tax audit, as well as the outcome, rather than accounting for the ‘worst case’ scenario.

Although currently IAS 12 Income Taxes sets out the requirements for recognising and measuring income tax expense and tax assets/liabilities based on applicable tax laws, in many cases the application of tax laws may not be clear cut, with entities required to make an estimate prior to these uncertain positions being accepted by the tax authority. Disputes and tax audits could therefore have a significant impact on amounts recognised for the income tax expense and current and deferred tax assets and liabilities.

IFRIC 23 therefore clarifies how these uncertain tax positions are to be measured in the financial statements.

Which entities are likely to be most impacted by IFRIC 23?

IFRIC 23 is likely to have a significant impact on the quantum of income tax liabilities for entities subject to judgemental tax areas such as transfer pricing.

Are uncertain tax treatments considered separately?

The consensus in IFRIC 23 is that entities should consider uncertain tax treatments using the approach that better predicts the resolution of the uncertainty, taking into account:

  • How it prepares its income tax returns and support for income tax treatments, and
  • How the entity expects the tax authority to examine and resolve issues relating to the uncertain tax treatment.

In some cases, uncertain tax treatments would be considered individually and in other cases on an aggregate basis with other uncertain treatments. This could be complicated in practice if uncertain tax treatments are interdependent.

Assume a tax audit will be conducted

When determining how uncertain tax treatments are likely to affect the entity’s income tax expense and current and deferred tax assets and liabilities, IFRIC 23 requires entities to assume that the relevant tax authorities will perform a tax audit, and that the tax authorities will have full knowledge of all the facts and circumstances about the entity’s tax position. Therefore, the entity ignores the probability of having a tax audit when calculating the amount of tax owing where the tax treatment is uncertain.

When is the effect of the uncertain tax position NOT reflected in tax calculations?

If it is probable (more than a 50 per cent chance) that the tax authority will accept the uncertain tax position, income tax amounts are measured consistently with the tax treatments to be used when the tax return is prepared after the financial statements are authorised for issue.

When is the effect of the uncertain tax position reflected in tax calculations?

Entities will only reflect the effect of uncertain tax positions when measuring income tax expense and current and deferred tax assets and liabilities if it is not probable that the tax authority will accept the uncertain tax position.
In such cases, one of the following measurement methods are to be used:

Most likely amount   Expected value
The single most likely amount in a range of possible outcomes   The sum of the probability-weighted amounts in a range of possible outcomes

Changes in facts and circumstances

Entities will need to reassess judgements and estimates made regarding the uncertain tax treatment if facts and circumstances change, or as a result of new information that becomes available. This could occur, for example, when:

  • The tax authority has taken a particular course of action, such as agreeing or disagreeing with the uncertain tax treatment or similar tax treatments by the entity or another entity
  • Information becomes available about the amount received or paid to settle a similar tax treatment
  • There have been changes in rules established by the tax authority, or
  • The tax authority’s right to examine or re-examine a tax treatment has expired.

However, where the tax authority has neither agreed nor disagreed with the tax treatment, this is unlikely to be considered a change in facts and circumstances that would warrant a change in estimate of tax balances.

Changes to amounts recognised for income tax expense and current and deferred tax assets and liabilities are then recognised prospectively as changes in estimates under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Entities will also consider IAS 10 Events after the Reporting Period to determine if changes in estimates are adjusted at reporting date, or treated as non-adjusting with the effect of the change merely disclosed in the financial statements.


Where there are uncertain tax treatments, entities must determine whether disclosure about significant judgements and estimates is required under IAS 1 Presentation of Financial Statements.

If it is probable that the tax authority will accept an uncertain tax treatment (i.e. measurement adjustments are not made to tax balances), entities will also need to consider whether to disclose the potential effect of the tax-related contingency under IAS 12, paragraph 88.

Effective date and transition

The interpretation applies to annual reporting periods beginning on or after 1 January 2019 and can be adopted early once approved by the Australian Accounting Standards Board.

On first time adoption, entities can choose to apply this interpretation either:

  • Retrospectively (restating comparatives) by applying IAS 8, or
  • Retrospectively by adjusting the impact via retained earnings at date of initial application (1 January 2019 or 1 July 2019) with comparatives not being restated.

Implications for preparers, audit committees and boards

The new, clarified measurement rules may prove challenging for preparers, audit committees and boards responsible for ensuring financial reports comply with Accounting Standards. You will need to ensure an extensive tax review is conducted, firstly identifying all uncertain tax positions, and then assessing the correct tax treatment, based on notional rulings from the ATO.

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