Income tax balances – Bringing certainty to uncertainty

By its very nature, income tax law is subject to a range of varied interpretations. As a result, reporting entities and their auditors may, in certain cases, be uncertain about whether a position adopted in the entity’s tax return would ultimately be sustained. Further, given the diverse risk profiles of companies, and in the absence of specific guidance on how to account for uncertain tax positions, significant disparity in how companies recognise and measure tax benefits recorded in their financial statements has arisen over a period of time. 

Bringing certainty to uncertainty 

In response to this widespread diversity in practice for the recognition and measurement of uncertain tax positions, IFRIC 23 Uncertainty over Income Tax Treatments (‘the Interpretation’) was issued in July 2017, and applies to annual reporting periods beginning on or after 1 January 2019.

The Interpretation brings new obligations with respect to the consideration of uncertain tax positions during financial statement audits. Companies if the USA have been subject to similar rules for a number of years by having to apply FIN 48.

What does IFRIC 23 require?

IFRIC 23 sets out the requirements for accounting for uncertain tax positions as follows:

  • If an entity concludes that it is probable the tax authorities will accept a tax position, no additional action is required. Tax balances will be calculated under the existing accounting standard, IAS 12 Income Taxes.
  • If an entity concludes that it is not probable the tax authorities will accept a tax position – it is required to use the ‘most likely amount’ or ‘expected value’ in determining its tax balances. Any variation between the ‘most likely amount/expected value’ and the amount recorded in the financial statements will also need to be recognised in the financial statements.
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

Please refer to our August 2017 Accounting Alert article for more information.

Assume that a tax audit will be conducted 

Most importantly, the Interpretation requires calculation of the current tax liability and deferred tax balances in the 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 your tax position. 

Accounting Alert July 2019

Common impact areas

The Interpretation is likely to have a significant impact on the quantum of income tax liabilities subject to judgemental areas, particularly in respect of any technical area where a position has been taken and the IRD has issued a Standard Practice Statement, a Revenue Alert, an Interpretation Statement,  an Operational Statement or a Public Ruling or any other guidance  that would characterise the position as high risk.

Accounting Alert July 2019

What can we expect? 

The Interpretation is not likely to be welcomed by preparers of financial statements because it will require the preparation of a register of uncertain tax positions, documentation of positions adopted and the recognition of higher current tax liabilities at an earlier date.


For more on the above, please contact your local BDO representative