Uncertain tax positions – coming soon: a kind of certainty!

IFRIC has issued IFRIC 23, Uncertainty over Income Tax Treatments.

It took a while – I wrote about the draft version over a year and a half ago. An uncertain tax treatment for purposes of the interpretation is one “for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under tax law,” for example because the acceptability of the treatment won’t be known until the relevant tax authority or a court makes a decision on it in the future.  IAS 12 doesn’t specify how to reflect such uncertainty, and so IFRIC had observed diverse reporting methods in practice. These are the key points of IFRIC 23:

  • An entity determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments based on which approach better predicts the resolution of the uncertainty (taking into account, for instance, how the entity expects the taxation authority to make its examination).
  • In assessing whether and how an uncertain tax treatment affects the determination of taxable profit or loss, tax bases etc., an entity assumes that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.
  • An entity considers whether it is probable that a taxation authority will accept an uncertain tax treatment. If an entity concludes it is probable, it determines taxable profit/loss, tax bases etc. consistently with the tax treatment used or planned to be used in its income tax filings.
  • If an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, then it reflects the effect of uncertainty by using either of the following methods, depending on which method it expects to better predict the resolution:
    • the most likely amount—the single most likely amount in a range of possible outcomes (perhaps more suitable if the possible outcomes are binary or are concentrated on one value).
    • the expected value—the sum of the probability-weighted amounts in a range of possible outcomes (perhaps more suitable if there exists a range of possible outcomes that are neither binary nor concentrated on one value.
  • The entity reassesses this judgement or estimate if the facts and circumstances on which it was based change, or as a result of new information that affects the judgement or estimate, reflecting the effect as a change in accounting estimate.

The interpretation is effective for annual periods beginning on or after January 1, 2019, to be applied either by retrospectively applying IAS 8, if that’s possible without the use of hindsight; or else retrospectively with the cumulative effect of initially applying the interpretation recognized at the date of initial application.

So, that’s easy enough to summarize, but it’s harder to know how widespread the impact on current practice will 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 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 accounting policy disclosure I cited in my original post 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 tell you what the company actually did, not even vaguely. 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.

There’s plenty of reason then to think the new interpretation could often have an impact on how issuers work through these matters. It’s unclear how transparent this impact will be in all cases though, given that IFRIC hasn’t set out any specific disclosure requirements (instead, the interpretation simply refers to the existing requirements of IAS 1 for disclosing significant judgments, assumptions and estimates). And of course, it’s unlikely that many situations exist where an investment decision would have changed because of a different methodology being applied for this area. Or, it sometimes seems, for any aspect of income tax accounting (but I’ll get to that next time)…

The opinions expressed are solely those of the author

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