IFRIC 23, issued in May 2017 by the IFRS Interpretations Committee and effective from 1 January 2019, provides clarity on how to account for income tax uncertainties under IAS 12. Its necessity stems from the widespread inconsistency in how entities previously assessed uncertain tax positions. With global operations becoming increasingly complex and tax environments more litigious, IFRIC 23 ensures that entities account for such uncertainties in a transparent, consistent, and reliable manner.
When an entity prepares its financial statements, it may encounter situations where it is uncertain whether the tax authority will accept a particular tax treatment. For instance, the inclusion or exclusion of income in a certain jurisdiction may be challenged later. IFRIC 23 provides a structured framework to deal with such scenarios. It requires entities to make judgments based on expected outcomes and to ensure these judgments are regularly reviewed and updated as new information arises.
Key Elements of IFRIC 23:
- The entity must assess whether to treat each uncertain tax treatment separately or combine it with others, depending on which approach better predicts resolution.
- Tax authorities are assumed to have full knowledge of all relevant information and the right to examine all aspects of a tax filing.
- Two methods are provided for measuring the tax impact under uncertainty:
- Most likely amount – used when the outcome is binary or focused on one primary possibility.
- Expected value – used when outcomes are distributed across a range of possibilities.
- These estimates must be consistent between current and deferred tax if both are affected.
Changes in facts or legal interpretations can significantly impact previously made judgments. IFRIC 23 requires reassessment in such cases. For example, if a tax authority begins an audit, issues new guidance, or if new case law emerges, an entity must re-evaluate the likelihood of its tax treatment being accepted. Such changes are accounted for under IAS 8 as changes in accounting estimates, and IAS 10 determines whether they are adjusting or non-adjusting events post-reporting.
Disclosure also plays a key role in IFRIC 23. Entities are required to disclose:
- The judgments and assumptions made in determining tax estimates;
- Changes in those assumptions over time;
- Potential tax-related contingencies where the treatment may still be uncertain but probable of acceptance.
Ultimately, IFRIC 23 improves the reliability and comparability of financial statements. It discourages overly aggressive tax planning from being obscured in financial reports and ensures that the economic substance of tax exposures is faithfully represented. By embedding consistent principles in handling uncertainty, the interpretation aligns tax reporting with broader IFRS objectives of transparency, comparability, and prudence.
