IFRIC has issued a draft interpretation, Uncertainty over Income Tax Treatments, with comments to be received by January 19, 2016
An uncertain tax treatment for purposes of the draft interpretation is one where uncertainty exists “over whether the taxation authority will accept a specific tax treatment under the tax law,” for example where the acceptability of a particular tax treatment under the tax law might depend on the decisions taken by a taxation authority or a court in future. IFRIC has observed diversity in practice in the accounting for income tax in these circumstances, given the absence of any specific guidance in IAS 12, and has developed the draft interpretation to address this diversity. These are the key points:
- An entity determines whether it should consider each uncertain tax treatment separately, or whether it should consider some uncertain tax treatments together as a group, based on which approach provides better predictions of the resolution of the uncertainty. For example, it would consider uncertain tax treatments together as a group when this better reflects the manner in which it prepares and supports tax treatments or when collective assessment is consistent with the approach that it expects the taxation authority to take during an examination, or both.
- In assessing whether and how an uncertain tax treatment affects the determination of taxable profit or tax loss, tax bases, unused tax losses, unused tax credits and tax rates, an entity assumes that a taxation authority with the right to examine amounts reported to it will examine those amounts and will have full knowledge of all relevant information when it makes those examinations.
- If an entity concludes it’s probable that the taxation authority will accept an uncertain tax treatment, or group of uncertain tax treatments, it determines the taxable profit (tax loss), tax bases and so on consistently with the tax treatment it used or plans to use in its income tax filings.
- If an entity concludes it’s not probable that the taxation authority will accept an uncertain tax treatment, or group of uncertain tax treatments, it reflects the effect of uncertainty in determining the related taxable profit etc. by using the one of the following methods that it concludes will provide the better prediction of its resolution:
- (a) The most likely amount—the single most likely amount in a range of possible outcomes. This may provide the better prediction if the possible outcomes are binary or are concentrated on one value.
- (b) The expected value—the sum of the probability-weighted amounts in a range of possible amounts. This may provide the better prediction if the possible outcomes are widely dispersed.
- If an uncertain tax treatment affects both deferred tax and current tax, an entity makes consistent estimates and judgements for both.
- If facts and circumstances change, an entity reassesses the judgements and estimates it made. This might be a change in tax treatments, or in its estimates of the effect of uncertainty, or both.
- The entity looks to IAS 1 in determining whether it should disclose significant judgements, estimates and assumptions made in applying its accounting policy in this area.
IFRIC currently envisages that the interpretation, once effective, would be applied either without adjusting comparative information, recognizing the cumulative effect of initial application in (usually) the opening balance of retained earnings of the annual reporting period that includes the date of initial application; or else retrospectively to each prior reporting period presented in accordance with IAS 8, if the entity has the information necessary to do so and this information is available without the use of hindsight.
So, that’s easy enough to summarize, but it’s harder to know how big the impact on current practice would be. Prior to adopting IFRS, Canadian entities reporting under old Canadian GAAP generally looked to the explicit guidance set out in US GAAP (which isn’t the same as that set out in the draft interpretation) in accounting for uncertain tax positions. During the period of transition to IFRS, Canadian commentators often highlighted the fact that the US GAAP methodology didn’t conform to anything set out in IFRS, pointing to the principles of IAS 37 as being relevant in developing an IFRS-compliant accounting policy. However, Canadian practice has never coalesced around a single defined approach, and it’s difficult to comment in detail on all the methodologies that might exist, or on their relative frequency. In June 2013, the Canadian IFRS Discussion Group reaffirmed that “With the lack of guidance in IFRSs, a number of methodologies for accounting for uncertain tax positions exist in practice.”
Little transparency usually exists regarding the approach applied by any particular entity. One recent accounting policy disclosure reads as follows: “The Company maintains provisions for uncertain tax positions that it believes appropriately reflect its risk. These provisions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period.” Although hardly voluminous, this is still a relatively explicit disclosure compared to what you often see, but it certainly doesn’t necessarily indicate the exact methodology set out above. Some entities briefly refer to uncertain tax positions in their disclosures (for example in the context of reconciling the tax rate) without providing any information on the methodology applied to such positions.
So, in other words, there’s plenty of reason to think the interpretation, if implemented in its current form, would have a fairly widespread impact…
The opinions expressed are solely those of the author