If the company concludes it is not probable, the company moves to step two for measurement. IFRIC 23 requires the use of one of the two following methods, and the company must use the method that better predicts the outcome or resolution of the uncertainty:
- Most likely amount method: The single most likely amount in a range of possible outcomes
- Expected value method: The sum of the probability-weighted amounts in a range of possible outcomes
In September 2017, the IFRIC clarified that companies do not have a choice with respect to the reporting for interest and penalties. Companies must consider whether amounts payable for interest and penalties meet the definition of income tax pursuant to International Accounting Standard (IAS) 12, “Income Taxes.” If yes, then IAS 12 applies, and the interest and penalties must be accounted for as income taxes. If no, the penalties and interest are handled pursuant to IAS 37, “Provisions, Contingent Liabilities and Contingent Assets.”
A company applies IFRIC 23 retrospectively on adoption and can choose whether to adjust opening equity without restating comparatives or to restate comparatives (if possible without using hindsight).
Observations
When assessing whether the probable test has been met, companies will need to evaluate the type and weight of tax authorities that apply in their tax jurisdiction. For example, in many jurisdictions outside of the U.S., proposed tax legislation carries significantly more authority than it does in the U.S. and therefore can be relied upon more heavily when assessing the probability under IFRS reporting.
One of the goals of ASC 740-10-25 and IFRIC 23 is to provide an objective methodology for identifying and recording uncertain tax positions. However, under both ASC 740-10-25 and IFRIC 23 a significant amount of subjectivity is involved with determining the most likely outcome or the probability-weighted amounts pursuant to the methods already noted.
Potential pitfalls
Prior to IFRIC 23, the IFRS did not have clear guidance with respect to the treatment of uncertain tax positions, and, as a result, companies adopted and used diverse views based on the general definitions for the measurement of tax assets and liabilities contained in IAS 12. While IFRIC 23 has many similarities to U.S. GAAP’s ASC 740-10-25, companies should carefully analyze the different approaches as potential differences might exist when converging to or from U.S. GAAP financials. For example, when converting U.S. GAAP-based financials to IFRS-based financials, differences might exist with respect to the measurement of uncertain tax positions, and therefore taxpayers should review carefully the different methodologies.
When ASC 740-10-25 originally was implemented, companies often invested significantly more time and resources than originally planned on identifying and documenting uncertain tax positions. As such, companies reporting IFRS-based financial statements also should expect significant time and resource investments when implementing IFRIC 23.
