The Guidance is Clear: Uncertain Tax Positions and IFRS (IFRIC 23)
The Guidance is Clear: Uncertain Tax Positions and IFRS (IFRIC 23)

The Guidance is Clear: Uncertain Tax Positions and IFRS (IFRIC 23)

Tax law is subject to interpretation and it may be uncertain as to whether a tax treatment taken by a company will be sustained upon review by the taxing authorities. This uncertainty leads to questions about whether tax treatments taken, or to be taken, on tax returns should be reflected in the financial statements before they are finally resolved with the tax authorities.

 So, what could be an uncertain tax treatment? Well, basically anything that a taxing authority could challenge. This could include:

  • A decision to file (or not file) a tax return
  • Acceleration of a deduction that would be available in a later period
  • An allocation or shift of income between jurisdictions
  • The characterization of income or the decision to exclude taxable income from a return

Uncertainty with tax positions is not a new topic in the accounting world. In fact, we discussed the accounting treatment under U.S. GAAP in this blog post from 2016. So why are we bringing it up again in 2018? Well, while there has been definitive guidance on how to treat uncertainty in income tax positions under U.S. GAAP, the guidance under IAS 12, Income Taxes, was not clear on how to apply the recognition and measurement requirements when there was uncertainty over income tax treatments.

That all changed when the IASB released IFRIC 23, Uncertainty over Income Tax Treatments. This interpretation, issued in May 2017 and effective for all entities in 2019, clarifies how to apply the guidance in IAS 12 when there is uncertainty. Let’s explore how to apply that guidance by looking at an example.


So, should the same treatment (i.e. a full deduction of $5 million) be applied in Dunn’s financial statements?

Well, it depends on whether it is probable that the tax authority will accept the treatment in the tax return. If that answer is yes, then Dunn’s Adventure Co. should record the same amount in the financial statements as the tax return and consider making a disclosure about the uncertainty. If it is not probable that the tax authority will accept the treatment, then the amount recorded in the financial statements should differ to that in the tax return because its measurement reflects the uncertainty. If this were the case in this example, additional tax liability would need to be recorded because the measurement of this deduction would be less. This assessment does NOT change the entity’s tax return, rather, it changes how tax positions with uncertainty are reflected in the financial statements.

So, how do we determine if we need to adjust the amount recorded in the financial statements? And how do we determine what that amount is? Let’s take a look.


In assessing whether, and how, an uncertain tax treatment affects the determination of taxable profit or loss, the entity should assume that the taxing authority will examine the treatment and that it has full knowledge of all related information while performing that examination. In other words, if we look back to our example of Dunn’s Adventure Co., the fact that there was only a 10% chance that the taxing authority will examine the treatment does not matter! Dunn’s must assume that the authorities will examine the position AND that Dunn’s will provide them with all the information the taxing authorities need to make their determination.

If, based on this assessment, it is probable that the tax authority will accept the treatment, then the amount in the financial statement should be the same as in the tax return.

If, however, it is NOT probable that the tax authorities will accept the tax treatment, then the amount in the financial statements must differ from the tax return. In the Dunn’s example, Dunn’s would recognize less deduction and therefore more tax liability in its financial statements.

 According to IFRIC 23, if the uncertain tax treatment must be measured, then it should be measured using either:

  1. The most likely amount, or
  2. The expected value

Whichever method provides a better prediction of the resolution of the uncertainty.

Other Key Points 

Once the entity has made its initial assessment, it must reassess its judgments and estimates and make any adjustments necessary when there is a change in facts and circumstances. Some examples of a change in facts and circumstances include:

  • When there has been an examination or action by the taxing authorities
  • When the tax rules have changed
  • When the statute of limitations has expired on a tax return

Unlike U.S. GAAP, IFRIC 23 does not include any specific requirements related to interest and penalties associated with uncertain tax treatments and it does not introduce any new disclosures. However, it does reinforce the need to comply with existing disclosure requirements about:

  • Judgments made
  • Assumptions and other estimates used
  • The potential impact of uncertainties that are not reflected.

Remember, IFRIC 23 is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. Retrospective application is required. Want more information on other recent interpretations and pronouncements issued by the IASB? Ask us about our IFRS Update!

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This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.

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