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information about disputes for other entities’ similar transactions), that it is not probable that this tax treatment
will be accepted. Entity B estimates that the most likely deduction that the tax authority will accept for Year 1
is £10, and that the most likely amount better predicts the resolution of the tax uncertainty. Accordingly, at the
end of Year 1, Entity B recognises and measures a deferred tax liability based on the amount of the temporary
difference between the carrying amount of the intangible asset in its financial statements and the most likely
amount of the tax base (i.e. the difference between £100 and £90).
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Entity B also concludes that it should make similar judgements in estimating the most likely amount for its current
tax for Year 1, because this uncertain tax treatment also affects the taxable profit. Entity B recognises and measures
its current tax liability, based on the taxable profit that includes £90, in addition to the amount in its tax filing. (This is because Entity B deducted £100 from taxable income for Year 1, whereas the most likely amount is now estimated
to be £10. Entity B concluded that it is not probable that the tax treatment used in its filing will be accepted.)
Where the uncertain tax treatment affects both current tax and deferred tax, an entity
is required to make estimates and judgements on a consistent basis. [IFRIC 23.12].
9.5
Consideration of changes in facts and circumstances
An entity is required to reassess its judgements about the acceptability of tax treatments
or its estimates of the effect of uncertainty, or both, if facts and circumstances change or
if new information becomes available. [IFRIC 23.13]. In such a situation, the entity reflects
the effect as a change in accounting estimate, applying the requirements of IAS 8 to its
measure of the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits
and tax rates. Where circumstances change or new information becomes available after
the end of the reporting period, the entity should apply the guidance in IAS 10 to
determine whether the change is an adjusting or non-adjusting event. [IFRIC 23.14].
The Application Guidance in Appendix A to the Interpretation provides some examples
of changes that can result in the reassessment of judgements or estimates previously
made by the entity. [IFRIC 23.A2].
(a) The results of examinations or actions taken by a taxation authority. For example:
(i) agreement or disagreement by the taxation authority with the tax treatment
or a similar tax treatment used by the entity;
(ii) information that the taxation authority has agreed or disagreed with a similar
tax treatment used by another entity; and
(iii) information about the amount received or paid to settle a similar tax treatment.
(b) changes in rules established by the taxation authority; and
(c) the expiry of a taxation authority’s right to examine or re-examine tax treatment.
An uncertain tax treatment is resolved when the treatment is accepted or rejected by the
taxation authorities. The Interpretation does not discuss the manner of acceptance (i.e.
implicit or explicit) of an uncertain tax treatment by the taxation authorities. In practice,
a taxation authority might accept a tax return without commenting explicitly on any
particular treatment in it. Alternatively, it might raise some questions in an examination
of a tax return. Unless such clearance is provided explicitly, it is not always clear if a
taxation authority has accepted an uncertain tax treatment.
An entity may consider the following to determine whether a taxation authority has
implicitly or explicitly accepted an uncertain tax treatment:
• the tax treatment is explicitly mentioned in a report issued by the taxation
authorities following an examination;
• the treatment was specifically discussed with the taxation authorities (e.g. during an on-
site examination) and the taxation authorities verbally agreed with the approach; or
• the treatment was specifically highlighted in the income tax filings, but not
subsequently queried by the taxation authorities in their examination.
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The Application Guidance goes on to say that the absence of agreement or
disagreement by a taxation authority with a tax treatment, in isolation, is unlikely to
constitute a change in facts and circumstances or new information that affects the
judgements and estimates required by the Interpretation. [IFRIC 23.A3]. In such situations,
an entity has to consider other available facts and circumstances before concluding that
a reassessment of the judgements and estimates is required.
9.6
Disclosures relating to uncertain tax treatments
IFRIC 23 does not propose any new disclosures. Instead the Application Guidance
requires entities to consider whether the following existing disclosure requirements are
relevant in these circumstances:
• to disclose judgements made in the process of applying the entity’s accounting
policies in accordance with paragraph 122 of IAS 1 [IFRIC 23.A4(a)] (see Chapter 3
at 5.1.1.B). Such judgements might include the decision to consider uncertain tax
treatments separately or together (see 9.2 above); the determination as to whether
acceptance by the taxation authorities is probable; or the decision to apply the ‘most
likely amount’ or ‘expected value’ method to reflect uncertainty (see 9.4 above); and
• to disclose information about the assumptions and estimates made in determining
taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates
in accordance with paragraphs 125 to 129 of IAS 1 regarding the sources of
significant estimation uncertainty, [IFRIC 23.A4(b)], (see Chapter 3 at 5.2.1).
As discussed at 9.4 above, if an entity determines that it is probable that a taxation
authority will accept the tax treatment used or planned to be used in its tax filings, it
determines its tax position on that basis. [IFRIC 23.10]. Nevertheless, the entity should still
consider whether to disclose the potential effect of the uncertainty as a tax-related
contingency applying paragraph 88 of IAS 12. [IFRIC 23.A5].
As noted above, uncertain tax treatments generally relate to the estimate of the entity’s
liability for current tax. Any amount recognised for an uncertain current tax treatment should
therefore normally be classified as current tax, and presented (or disclosed) as current or
non-current in accordance with the general requirements of IAS 1 (see Chapter 3 at 3.1.1).
However, there are circumstances where an uncertain tax treatment affects the tax base
of an asset or liability and therefore relates to deferred tax, as illustrated in Example 29.36
above. For example, there might be doubt as to the amount of tax depreciation that can
be deducted in respect of a particular asset, which in turn would lead to doubt as to the
tax base of the asset. There may sometimes be an equal and opposite uncertainty relating
to current and deferred tax. For example, there might be uncertainty as to whether a
particular item of income is taxable, but – if it is – any tax payable will be reduced to zero
by a loss carried forward from a prior period. As discussed at 13.1.1.C below, it is not
appropriate to offset current and deferred tax items.
9.7
Recognition of an asset for payments on account
IAS 12 requires that the liability for current tax is recorded after deducting payments
made, and states that if the amount already paid exceeds the tax liability for current and
past periods, an asset is recognised for the excess. [IAS 12.12].
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In some jurisdictions, entities are required to make payments to the tax authorities
before an uncertain tax treatment is resolved. If an entity considers its liability to be
lower than the assessment made by the tax authorities, it would record an asset for a
payment in excess of its estimated liability for current tax, but recovery of that excess
would be contingent upon the successful resolution of the uncertainty.
In these circumstances, some had argued that the ‘virtually certain’ threshold in IAS 37
should be applied before allowing recognition of such a ‘contingent’ asset. [IAS 37.35].
Others argued that the requirement in IAS 12 to measure current tax assets at the
amount expected to be recovered from the tax authorities requires only a ‘probable’
assessment of recovery to be sufficient for recognising an asset. [IAS 12.46]. As a result,
there had been diversity in the approach used to determine whether an asset should be
recognised for the amount potentially recoverable from the tax authority.
In 2014, the Interpretations Committee considered a request to clarify the criteria under
which a tax asset would be recognised in these circumstances. In the situation described
by the submitter, the entity expects, but is not certain, to recover some, or all, of the
amount paid. The Interpretations Committee noted that:
a)
paragraph 12 of IAS 12 provides guidance on the recognition of current tax assets
and current tax liabilities. In particular, it states that:
i)
current tax for current and prior periods shall, to the extent unpaid, be
recognised as a liability; and
ii)
if the amount already paid in respect of current and prior periods exceeds the
amount due for those periods, the excess shall be recognised as an asset.
b)
in the specific fact pattern described in the submission, an asset is recognised if the
amount of cash paid (which is a certain amount) exceeds the amount of tax
expected to be due (which is an uncertain amount); and
c)
the timing of payment should not affect the amount of current tax expense recognised.
The Interpretations Committee acknowledged that the reference to IAS 37 in paragraph 88
of IAS 12 in respect of tax-related contingent liabilities and contingent assets may have been
understood by some to mean that IAS 37 applied to the recognition of such items. However,
the Interpretations Committee noted that this paragraph provides guidance only on
disclosures required for such items. Accordingly, the Interpretations Committee
determined that IAS 12, not IAS 37, provides the relevant guidance on recognition.34 It was
this determination that led to the development of IFRIC 23, discussed above. [IFRIC 23.BC4].
During 2018, the Committee came to a similar conclusion regarding the recoverability
of payments relating to uncertain tax treatments that are outside the scope of IAS 12
(i.e. payments on account for taxes other than income tax). It concluded that, on making
the payment, the entity has the right to receive future economic benefits either in the
form of a cash refund or by using the payment to settle the tax liability. As such, an asset
exists as defined in the Conceptual Framework, as opposed to a contingent asset as
defined in IAS 37, and it is recognised when the payment is made to the tax authority.35
This agenda decision is discussed at 6.8.4 in Chapter 27.
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9.8
Transition to IFRIC 23
The Interpretation is mandatory for annual reporting periods beginning on or after
1 January 2019, with earlier application permitted provided that this is disclosed.
[IFRIC 23.B1]. On initial application, entities can choose either to apply the Interpretation
with full retrospective effect, in accordance with IAS 8, or by recognising its cumulative
effect as an adjustment to the opening balance of equity at the beginning of the first annual
reporting period of application and without restating comparative information.
[IFRIC 23.B2]. The Committee decided that full retrospective application in accordance with
IAS 8 can only be applied if that is possible without the use of hindsight. [IFRIC 23.BC25].
Accordingly, entities will have to apply judgement in determining the extent to which
the estimation processes described at 9.4 above involve the use of hindsight at the time
when the Interpretation is first applied.
9.8.1 First-time
adopters
The Interpretation includes a consequential amendment to IFRS 1 – First-time
Adoption of International Financial Reporting Standards – that provides relief for first-
time adopters whose date of transition to IFRSs is before 1 July 2017, such that they do
not have to present in their first IFRS financial statements comparative information that
reflects IFRIC 23. In this case, the entity would recognise the cumulative effect of
applying IFRIC 23 as an adjustment to the opening balance of equity at the beginning
of its first IFRS reporting period. [IFRS 1.E8, 39AF].
10
ALLOCATION OF TAX CHARGE OR CREDIT
Current and deferred tax is normally recognised as income or an expense in the profit
or loss for the period, except to the extent that it arises from:
• an item that has been recognised directly outside profit or loss, whether in the
same period or in a different period (see 10.1 to 10.7 below);
• a share-based payment transaction (see 10.8 below); or
• a business combination (see 12 below). [IAS 12.57, 58, 68A-68C].
Where a deferred tax asset or liability is remeasured subsequent to its initial recognition,
the change should be accounted for in profit or loss, unless it relates to an item originally
recognised outside profit or loss, in which case the change should also be accounted for
outside profit or loss. Such remeasurement might result from:
• a change in tax law;
• a re-assessment of the recoverability of deferred tax assets (see 7.4 above); or
• a change in the expected manner of recovery of an asset or settlement of a liability
(see 8.4.11 above). [IAS 12.60].
Whilst IAS 12 as drafted refers only to remeasurement of ‘deferred’ tax, it seems clear
that these principles should also be applied to any remeasurement of current tax.
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Any current tax or deferred tax on items recognised outside profit or loss, whether in
the same period or a different period, is also recognised directly outside profit or loss.
Such items include:
• revaluations of property, plant and equipment under IAS 16 (see 10.1 below);
• retrospective restatements or retrospective applications arising from corrections
of errors and changes in accounting policy under IAS 8 (see 10.2 below);
• exchange differences arising on translation of the financial statement
s of a foreign
operation under IAS 21 (see 7.5 above); and
• amounts taken to equity on initial recognition of a compound financial instrument by
its issuer (so-called ‘split accounting’) under IAS 32 (see 7.2.8 above). [IAS 12.61A, 62, 62A].
IAS 12 acknowledges that, in exceptional circumstances, it may be difficult to determine
the amount of tax that relates to items recognised in other comprehensive income
and/or equity. In these cases a reasonable pro-rata method, or another method that
achieves a more appropriate allocation in the circumstances, may be used. IAS 12 gives
the following examples of situations where such an approach may be appropriate:
• there are graduated rates of income tax and it is impossible to determine the rate
at which a specific component of taxable profit (tax loss) has been taxed;
• a change in the tax rate or other tax rules affects a deferred tax asset or liability relating
(in whole or in part) to an item that was previously recognised outside profit or loss; or
• an entity determines that a deferred tax asset should be recognised, or should no
longer be recognised in full, and the deferred tax asset relates (in whole or in part)
to an item that was previously recognised outside profit or loss. [IAS 12.63].
IAS 12 requires tax relating to items not accounted for in profit or loss, whether in the
same period or a different period, to be recognised:
• in other comprehensive income, if it relates to an item accounted for in other
comprehensive income; and
• directly in equity, if it relates to an item accounted for directly in equity. [IAS 12.61A].
This requirement to have regard to the previous history of a transaction in accounting
for its tax effects is commonly referred to as ‘backward tracing’.
10.1 Revalued and rebased assets
Where an entity depreciates a revalued item of PP&E, it may choose to transfer the
depreciation in excess of the amount that would have arisen on a historical cost basis from
revaluation surplus to retained earnings. In such cases, the relevant portion of any deferred
tax liability recognised on the revaluation should also be transferred to retained earnings.
A similar treatment should be adopted by an entity which has a policy of transferring
revaluation gains to retained earnings on disposal of a previously revalued asset. [IAS 12.64].