The International Accounting Standards Board (IASB) has issued IFRIC Interpretation 23, which clarifies how to apply the recognition and measurement requirements in IAS 12. It has been issued because the IASB has observed that entities apply diverse reporting methods when the application of tax law is uncertain. (This is the IASB’s equivalent of the US GAAP interpretation ASC 740-10 (formerly FIN 48). The IFRIC was issued in June 2017 and is applicable for reporting periods beginning on or after 1 January 2019, although early adoption is permitted.
IFRIC 23 addresses the following key areas:
- Whether an entity considers uncertain tax treatments separately
An entity shall determine whether to consider each uncertain tax treatment separately or together with one or more uncertain tax treatments, based on which approach better predicts the resolution of the uncertainty.
- The assumptions an entity makes about the examination of tax treatments by taxation authorities.
An entity shall assume 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.
- How an entity determines taxable profit/(loss), tax bases, unused tax losses, unused tax credits and tax rates.
This is a two-stage test. If it is probable that a tax authority will accept an uncertain tax treatment, then the tax position recorded in the entity’s accounts should be consistent with what is or will be used in its tax returns. However, if it is not probable that a tax authority will accept a particular uncertain tax treatment, then an entity must use either the most likely amount or the expected value, depending on which method it expects to better predict the resolution of the uncertainty. The appendix to IFRIC 23 has a number of examples of how to apply this.
- How an entity considers changes in facts and circumstances.
If the facts and circumstances change, an entity shall reassess the judgments and estimates required.
No new disclosures have been reintroduced. However, the current disclosure requirements have been restated i.e. reinforced.
Either of the following two approaches should be adopted
- Retrospective application by amending comparatives; or
- Retrospective application with the cumulative effect adjusting retained earnings with no comparatives being restated.
It is recommended that companies consider the impact of this IFRIC before the mandatory adoption date, because for those companies that are significantly impacted by this IFRIC it could impact tax data gathering processes and internal tax controls as well as the financial statements. These all take time to update.
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