Chapter 2: Current tax

Definitions

Current tax is defined as the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. It is the tax that the entity expects to pay (recover) in respect of a financial period.

Taxable profit (tax loss) is defined as the profit (loss) for a period, determined by the rules established by the tax authorities, upon which income taxes are payable (recoverable).

Recognition of current tax on items recognized in profit or loss

Current tax is generally recognized as income or an expense and is included in profit or loss, unless it arises from a transaction or event that is recognized (in the same or a different period), either in other comprehensive income or directly in equity.

Items recognized outside profit or loss

The principle is that the tax follows the recognition of the transaction. The current tax on items recognized, in the same or a different period, in other comprehensive income is recognized. The current tax on items recognized, in the same or a different period, directly in equity is recognized directly in equity.

It might be difficult to determine the amount of current tax attributable to the amounts recognized outside profit or loss, either in other comprehensive income or directly in equity. The attributable tax is calculated on a pro rata basis, or on another basis that is more appropriate in the circumstances.

Allocation of tax on exchange loss recognised outside profit or loss A parent entity made a trading profit of C1,500,000 during the year. The parent has a foreign currency loan receivable from a foreign subsidiary, which gave rise to a tax-deductible exchange loss of C500,000. The loan is regarded by the parent as part of its net investment in the foreign subsidiary; so the exchange loss is reported in the parent’s income statement under IAS 21. The tax rate for the year is 30%. Therefore, the parent’s tax charge for the year is C300,000 (profit before tax of C1,000,000 @ 30%). On consolidation, the exchange loss of C500,000 is transferred to a separate component in equity under IAS 21, and it is recognised in other comprehensive income. The total tax charge of C300,000, to be allocated between the income statement and other comprehensive income, is as follows: C’000 Tax on trading profit (C1.5m @ 30%) 450 Tax relief on exchange loss (C500,000 @ 30%) (150) Total tax charge 300 The income statement would include a tax charge of C450,000, with C150,000 of tax relief being recognised in other comprehensive income in the consolidated financial statements. (The subsidiary’s results have been ignored, to keep the example simple.)

Recognition of current tax liabilities and current tax assets

A liability is recognized, at the balance sheet date, for unpaid current tax expenses for the current and prior periods. If the amount paid for current and prior periods exceeds the amount due for those periods, the excess is recognized as an asset. The liability recognized is an estimate, and the actual amount payable when the tax for the year is finalized might differ from the tax liability recognized.

Adjustments for any differences are changes in accounting estimates unless the difference arises from a material error, and they are included in the tax expense of the period when the adjustment arises. Material adjustments resulting from a change in accounting estimate should be disclosed.

Advance payment notices Tax legislation in some jurisdictions might allow tax authorities to issue advance payment notices (APNs) for tax items where the tax position taken in the entity’s tax return is debatable. The serving of the APN does not prejudice, or otherwise change or influence, the outcome of the tax dispute. The tax return or appeal remains open until the disputed item is resolved (either by agreement, negotiated settlement or court ruling), and the APN is treated under tax statute as a ‘payment on account’. The issue has previously been discussed at the IC, which concluded that IAS 12 addresses the accounting for income taxes and is the relevant standard to apply, even where the amount of income tax is uncertain. Income taxes are specifically excluded from IAS 37’s scope, so it is not appropriate to apply the guidance in IAS 37 to income taxes. IAS 12 contains sufficient guidance to determine the appropriate accounting. IAS 12 requires a current tax asset to be recognised where the amount of tax paid exceeds the amount due; and the standard permits the recognition of a current tax asset where is it probable that the benefit will flow to the entity and the benefit can be reliably measured. IAS 12 requires current tax assets to be measured at the amount expected to be recovered. The amount expected to be recovered is the difference between the amounts paid in advance (a certain amount) less the amount expected to be paid (an uncertain amount). That guidance applies in determining the amount expected to be paid (that is, the uncertain amount). The serving of an APN does not (necessarily) require an entity to reconsider judgements of uncertain tax positions, because the APN does not prejudice, or otherwise change or influence, the outcome of the tax dispute. A current tax asset is recognised for any amount paid in excess of the amount expected to be payable to the tax authority. It is not appropriate to apply a ‘virtually certain’ threshold to the recognition of the current tax asset, since the contingent asset does not fall within the scope of IAS 37. IAS 12 requires the disclosures under IAS 37 to be made. Entities should disclose a brief description of the nature of the contingency and an estimate of its financial effect. IAS 12 allows current tax assets and current tax liabilities to be offset if there is a legally enforceable right to offset the recognised amounts and there is an intention to settle net/realise simultaneously. Offsetting would be permitted if the tax authority allows entities to net settle when the dispute is resolved by deducting the amount to be paid from the amount paid in advance.

An entity might incur a tax loss for the current period that can be carried back to set against the profits of an earlier accounting period. Management should recognize the benefit of the tax loss in the period in which the tax loss occurs.

The asset is reliably measurable and recovery is probable. If the entity cannot carry back the tax loss, it might be able to carry it forward to set against income in a future period.

Tax arising on sale of treasury shares held by a subsidiary – example Company S (a subsidiary) holds 10 per cent of the ordinary shares of its parent (Company P). These shares are classified as treasury shares by the group. Company P buys back the shares from Company S. After the buy-back, the shares are cancelled, and the treasury shares in the consolidated financial statements are derecognised. In accordance with the law in the tax jurisdiction in which the group operates, an entity is liable for capital gains tax (CGT) if it sells an asset for more than its base cost. In the circumstances under consideration, Company S sells the shares for more than their base cost and, therefore, incurs CGT on the sale. The group therefore incurs CGT on the sale. In the consolidated financial statements, a transfer from one equity classification (the treasury share reserve) to another equity classification (share capital or another reserve as required by local law) is made to reflect the cancellation of shares. The CGT represents a transaction cost relating to the cancellation and should therefore be recognised directly in equity.

Uncertainty regarding the amount to be recognized outside profit or loss

If an entity cannot determine the amount of current tax that relates to items recognized outside of profit or loss (either in other comprehensive income or directly in equity), the amount may be based on a reasonable pro rata allocation, or some other method achieving a more appropriate allocation.

These circumstances are assumed to arise only rarely; such uncertainty could arise, for example, when 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.

Pro rata allocation of tax between profit or loss and other comprehensive income – example Entity A operates in a jurisdiction in which revaluations of property, plant and equipment are taxed when they are recognised for accounting purposes. In 20X1, Entity A recognises an accounting profit of CU1,000 and a revaluation gain in other comprehensive income of CU200. Total taxable profit is therefore CU1,200. Tax is charged at 20 per cent on the first CU600 of taxable profit and 30 per cent on any taxable profit above CU600. Total tax for the year: CU600 × 20% + CU600 × 30% = CU300 In this graduated tax regime, it is not possible to make a determination as to which component of total taxable profit was taxed at each particular rate. Entity A therefore needs to allocate the current tax liability of CU300 between profit or loss and other comprehensive income on a reasonable pro rata basis. Entity A’s overall average tax rate is 25 per cent (CU300 tax payable on CU1,200 taxable profit), and the entity could use this average rate to make a reasonable allocation. The journal entry to recognise the current tax liability for the year would be as follows. CU CU Dr Current income tax – profit or loss (CU1,000 × 25%) 250 Dr Current income tax – other comprehensive income (CU200 × 25%) 50 Cr Taxes payable – statement of financial position 300 To recognise the current tax liability for the year.

Reclassification from equity to profit or loss of current tax effects of gains and losses previously recognised in other comprehensive income As discussed, IAS 12requires that current tax or deferred tax relating to items that are recognised, in the same or a different period, outside of profit or loss should be recognised outside of profit or loss. In some cases, IFRS Standards require that gains or losses initially recognised in other comprehensive income be subsequently reclassified to profit or loss. For example: specified gains and losses arising on cash flow hedges and net investment hedges previously recognised in other comprehensive income are reclassified from equity to profit or loss (subject to the conditions in IFRS 9 or, for entities that have not yet adopted IFRS 9, IAS 39); for entities that have adopted IFRS 9, gains and losses arising on debt instruments measured at fair value through other comprehensive income previously recognised in other comprehensive income are reclassified from equity to profit and loss when the asset is disposed of; for entities that have not yet adopted IFRS 9, gains or losses arising on available-for-sale financial assets previously recognised in other comprehensive income are reclassified from equity to profit or loss when the asset is disposed of or is determined to be impaired; and on disposal or partial disposal of a foreign operation (other than a partial disposal of a subsidiary when control is retained), all or a portion of the foreign currency translation reserve is reclassified from equity to profit or loss as part of the gain or loss on disposal. Whether such gains and losses are included in the determination of taxable profit in the period in which they are initially recognised in other comprehensive income depends on the rules in the particular tax jurisdiction. If such gains and losses are subject to current tax when they are recognised in other comprehensive income, the question arises as to whether that current tax (initially recognised in other comprehensive income in accordance with IAS 12) should be subsequently reclassified to profit or loss when the related gains and losses are reclassified. The most appropriate treatment is that any current tax expense or benefit relating to the gains or losses reclassified should also be reclassified to profit or loss. Even though IAS 12 makes no reference to reclassification of the current tax effects previously recognised in other comprehensive income, the principle in IAS 12 is clear that the tax effects of a transaction (if any) should be reported in a consistent manner with the gains or losses to which they relate. This principle is applied when the gains and losses are initially recognised in other comprehensive income, and equally can be applied when the gains and losses are subsequently reclassified to profit or loss. Note that, in the example, there is no impact on the effective tax rate of the entity, because both the realised loss and the related tax are recognised in profit or loss.

Reclassification from equity to profit or loss of current tax effects of gains and losses previously recognised in other comprehensive income – example Company Y has a portfolio of debt instruments classified as at fair value through other comprehensive income (FVTOCI) under IFRS 9. Accordingly, for financial reporting purposes, unrealised gains and losses on the assets are recognised in other comprehensive income; in accordance with IAS 12, any tax consequences are also recognised in other comprehensive income (OCI). Under local tax laws, unrealised gains and losses on investment portfolios are included in the determination of taxable income or loss; consequently, the movement in the value of financial assets each year affects the current taxes payable. In 20X1, the unrealised loss on the assets is CU5 million. There is no movement in the market value of the assets during 20X2. On the last day of 20X2, Company Y sells the assets, thereby crystallising the previously recognised pre-tax loss of CU5 million. The tax rate for 20X1 and 20X2 is 30 per cent. Company Y has net taxable income in 20X1. The journal entries for 20X1 are as follows. CU‘000 CU‘000 Dr Unrealised loss on investments (other comprehensive income) 5,000 Cr Investment portfolio 5,000 To recognise the unrealised loss on the investments at FVTOCI. Dr Current tax liability 1,500 Cr Current tax benefit (other comprehensive income) 1,500 To recognise the tax consequences of the unrealised losses – computed based on mark-to-market accounting under local tax law (CU5 million × 30%). The journal entries for 20X2 are as follows. CU‘000 CU‘000 Dr Loss on sale (profit or loss) 5,000 Cr Unrealised loss on investments (other comprehensive income) 5,000 To recognise the reclassification from equity to profit or loss of the pre-tax loss on sale of the asset portfolio in 20X2. CU‘000 CU‘000 Dr Current tax expense (other comprehensive income) 1,500 Cr Current tax benefit (profit or loss) 1,500 To recognise the reclassification from equity to profit or loss of the tax consequences of the realised loss on sale of the assets in 20X2. For entities that have not yet adopted IFRS 9, this example applies to an entity that has a portfolio of financial assets classified as available for sale in accordance with IAS 39.

Measurement of current tax liabilities and assets

Enacted and substantively enacted tax rates and laws

Current tax liabilities and assets are measured at the amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Substantive enactment occurs when any future steps in the enactment process will not change the outcome. This underlying principle should be used to determine if a rate is substantively enacted in a particular territory.

For example, governments might announce changes in tax rates and laws at or before the balance sheet date, but the formalities are not finalized. Management should consider whether the announcement has the effect of substantive enactment.

In some tax jurisdictions, such announcements have the effect of substantive enactment; so the announcement of new tax rates and laws should be reflected in measurement.

Income and expenses subject to non-standard rates of tax

Entities sometimes enter into transactions that give rise to income or expenses that are not subject to the standard rate of tax. Examples include some leasing transactions and some investments made by financial institutions.

In some situations, this transaction might result in a pre-tax loss and a post-tax profit. In our view, no adjustment should be made to reflect a notional amount of tax that would have been paid or received if the transaction had been taxable, or deductible for tax purposes, on a different basis.

Income from investment taxed at a different rate A financial institution borrows C10 million that bears interest at 9% per annum. The proceeds are immediately invested in an instrument that yields 8% per annum, but the income is taxable at 20%. The standard rate of tax is 33%. The entity makes a pre-tax loss of C100,000, but the transaction is profitable, after tax effects are taken into account, as shown below: Income statement C’000 C’000 Investment income @ 8% 800 Less: interest expense (900) Pre-tax loss (100) Taxation: On income @ 20% (160) Tax relief on interest @ 33% 297 Tax credit 137 Post-tax profit 37 Banks and other institutions enter into such transactions because they are profitable after tax. Some might argue that the presentation above makes it difficult to interpret the income statement and inhibits comparison between different entities, especially since pre-tax profits are an important measure of performance. They might prefer that income subject to the non-standard rate of tax should be presented on a grossed-up basis. This would eliminate the distortion between pre- and post-tax profits, by reporting tax at the standard rate. In our view, no adjustment should be made to reflect a notional amount of tax that would have been paid or relieved in respect of the transaction if it had been taxable, or allowable for tax purposes, on a different basis. Grossing is notional and fails to report the transaction’s true nature. The transaction results in a pre-tax loss and a tax benefit and, therefore, it should be reported as such to achieve a faithful representation. Entities whose results are significantly affected by transactions not at a standard rate of tax should disclose the full effects of such transactions in their financial statements.

Balance sheet liability approach The balance sheet liability method focuses on temporary differences. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. This method differs from the income statement method, in that the income statement method focuses on timing differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. An asset recognised in the financial statements is realised, at least for its carrying amount, in the form of future economic benefits that flow to the entity in future periods; this is the basis for the balance sheet liability method used by IAS 12. The benefits that flow to the entity give rise to amounts that might form a part of taxable profits. The asset’s tax base can be deducted in determining taxable profits in either the same or a different period. The amount of the future taxable economic benefits is greater than the amount allowed as a deduction for tax purposes where the asset’s carrying amount is greater than its tax base. This gives rise to a deferred tax liability in respect of taxes payable in future periods. The principle extends to the tax consequences of recovering the reporting group’s investments in subsidiaries, branches, associates and joint ventures, where the reporting group has control over that recovery and expects such recovery to occur in the foreseeable future. The balance sheet liability method can be viewed as a valuation adjustment approach. Management provides for deferred tax to ensure that other assets are not valued at more than their economic (that is, post-tax) values to the business. This reflects the fact that the economic value to the business of an asset is not the market value of, say, C150. Rather, it is the market value of C150 less the present value of the tax that would be payable on selling the asset for C150. In theory, the appropriate method for recognising deferred tax, provided for as a valuation adjustment rather than as a liability, might be to net the tax provision against the asset’s carrying amount. However, an entity’s results and position are more clearly communicated if tax effects are shown separately from the items or transactions to which they relate.

Discounting of current tax assets and liabilities

Entities might have tax refunds due from, or tax liabilities due to, the tax authorities that are receivable or payable more than 12 months from the balance sheet date but are interest-bearing. This might occur, for example, where the entity has negotiated to pay a substantial tax settlement over several years.

Deferred tax assets and liabilities cannot be discounted, but the standard is silent on discounting current tax balances. In our view, long-term current tax balances can, but are not required to, be discounted.

This is an accounting policy choice that should be applied consistently. The impact of unwinding any discount would be presented as finance income or expense.

Dividends

In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity.

In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.

The income tax consequences of dividends are recognized when the dividend is recognized. The income tax recognized of dividends is more directly linked to past transactions or events than to distributions to owners.

Therefore, the income tax consequences of dividends are recognized in profit or loss, other comprehensive income, or equity according to where the entity origin recognized those past transactions or events.

In December 2017, the Board issued amendments to IAS 12 as part of Annual Improvements to IFRS Standards: 2015 – 2017 Cycle which deleted paragraph 52B of the Standard (considered to be unclear as to its scope) and replaced it with IAS 12.

The amendments clarify that an entity recognizes all income tax consequences of dividends in profit or loss, other comprehensive income, or equity according to where the entity recognized the past transactions or events that generated the distributable profits.

This requirement applies irrespective of why the dividends have resulted in income tax consequences (and it is not restricted to the circumstances referred to in IAS 12 when different tax rates apply for distributed and undistributed profits).

Therefore, if an entity recognizes the transactions or events that generated distributable profits in profit or loss, the entity recognizes the tax consequences of the related dividends in profit or loss. This will be the case even if, about financial instruments classified as equity, the dividends themselves are recognized as equity.

Equally, if the entity recognizes the transactions or events that generated distributable profits outside profit or loss (e.g. directly in equity or other comprehensive income), then the entity recognizes the tax consequences of the related dividends outside profit or loss.

Note that IAS 12 does not necessarily apply to all payments on financial instruments classified as equity; it applies only concerning payments on such instruments that are determined to be distributions of profits (i.e. dividends). An entity may need to apply judgment in making this determination.

The December 2017 amendments to IAS 12 are effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted. If an entity applies the amendments in a period beginning before 1 January 2019, it is required to disclose that fact.

The amended requirements should be applied to the income tax consequences of dividends recognized on or after the beginning of the earliest comparative period presented in the period of the first application.

Current tax arising from business combinations

Current tax arising from a business combination (other than the acquisition by an investment entity as defined in IFRS 10 of a subsidiary that is required to be measured at fair value through profit or loss) should not be recognized in profit or loss.

Current tax adjustments arising from a business combination IAS 12 does not specifically address the appropriate treatment in the consolidated financial statements of the acquirer for adjustments arising when a business combination has direct current tax consequences for the acquiree. However, it can be assumed that adjustments to current tax should be treated consistently with adjustments to deferred tax; therefore, adjustments to current tax should also be accounted for as part of the initial accounting for the business combination. For example, a change of ownership may result in a change in tax rate or loss of tax incentives. When those consequences result in an adjustment to current tax assets or liabilities, the remeasured current tax assets or liabilities should be included in the identifiable net assets recognised for the acquiree, and the adjustment will therefore affect the amount of the goodwill or the bargain purchase gain recognised in the consolidated financial statements. The appropriate accounting in the financial statements of the acquiree will be determined in accordance with SIC-25.

Measurement of current tax assets and liabilities

Measurement of current tax assets and liabilities – general

Current tax assets and liabilities for both the current and prior periods are measured at the amounts that are expected to be paid to (recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Discounting current tax payable When current tax amounts fall due to be paid in future periods, the current tax should be recognised at a discounted amount if the effect of discounting is material. This may be contrasted with the accounting for deferred tax which, as required under IAS 12, is never discounted. For example, Entity A is a start-up entity. The local tax authority has granted a five-year partial deferral of tax payments to new businesses in the jurisdiction, for which Entity A is eligible. Under this arrangement, Entity A must pay 60 per cent of its current year tax bill at the end of the tax year, and 40 per cent is deferred until the end of the tax year five years later. When measuring its liability for current tax, if the effect is material, Entity A should discount the amount deferred for five years. Entity A should recognise a current tax liability of 60 per cent of the total current tax bill, plus 40 per cent of the total current tax bill discounted for five years as a non-current tax liability. The unwinding of the discount in subsequent periods should be presented as a finance cost, because it does not meet the definition of income tax expense in IAS 12.

IFRIC 23 Uncertainty Over Income Tax Treatments

Uncertain tax treatments – background

Entities are required to calculate and pay income taxes by applicable tax law in each relevant tax jurisdiction. However, no tax legislation can clearly articulate the tax consequences of every possible transaction. Accordingly, the application of tax rules to complex transactions is sometimes open to interpretation, both by the preparers of financial statements (and the tax return) and by the tax authorities.

The tax authorities may challenge positions taken by an entity in determining its current income tax expense and either require further payments or disallow tax losses or other tax attributes. IAS 12 provides that “current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities“.

IFRIC 23 Uncertainty over Income Tax Treatments clarifies the accounting when there is uncertainty about income tax treatments.

IFRIC 23 – scope and definitions

IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. The Interpretation addresses the following specific issues:

• whether an entity should consider uncertain tax treatments separately;
• the assumptions to be made about the examination of tax treatments by taxation authorities;
• how to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates); and
• consideration of changes in facts and circumstances.

IFRIC 23 applies to the recognition and measurement of both current tax assets and liabilities and deferred tax assets and liabilities.

The Interpretation applies only to income taxes falling within the scope of IAS 12. It does not apply to taxes or levies outside the scope of IAS 12 and it applies to interest and penalties to the extent that they are considered to be an income tax.

IFRIC 23 provides the following definitions for terms used in the Interpretation.

• Tax treatments are defined as “treatments used by an entity or that it plans to use in its income tax filings”.
• The taxation authority is defined as “the body or bodies that decide whether tax treatments are acceptable under tax law. This might include a court”.
• An uncertain tax treatment is defined as “a tax treatment for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under law. For example, an entity’s decision not to submit any income tax filing in a tax jurisdiction, or not to include particular income in taxable profit, is an uncertain tax treatment if its acceptability is uncertain under tax law”.

Considering uncertain tax treatments separately or together

An entity should consider each uncertain tax treatment either separately, or together with one or more other uncertain tax treatments, based on whichever approach better predicts the resolution of the uncertainty. To make this determination, an entity might consider, for example:

• how it prepares its income tax filings and supports tax treatments; or
• how it expects the taxation authority to make its examination and resolve issues that might arise from that examination.

If an entity concludes that more than one uncertain tax treatment should be considered together, any references in IFRIC 23 to an ‘uncertain tax treatment’ should be read as referring to the group of uncertain tax treatments considered together.

Assumptions regarding examination by taxation authorities

When assessing whether and how an uncertain tax treatment should be recognized and measured, an entity should assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when it is making its examinations.

Therefore, an entity still needs to assess an uncertain tax treatment even when it considers that the probability of an examination taking place is low.

Reflecting on the effects of uncertainty

An entity should consider whether it is probable that a taxation authority will accept an uncertain tax treatment.

The threshold for reflecting the effects of uncertainty is whether it is probable that the taxation authority will accept an uncertain tax treatment rather than being based on the likelihood that a taxation authority will examine the tax treatment (examination by the tax authorities is presumed to take place and, consequently, does not form part of the probability assessment).

If it is considered probable that a taxation authority will accept an uncertain tax treatment, the entity should determine the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, or tax rates consistently with the tax treatment used or planned to be used in its income tax filings.

If an entity concludes that it is not probable that a taxation authority will accept an uncertain tax treatment, the entity should reflect the effect of the uncertainty in determining the related tax balances. The effect of the uncertainty should be reflected by using one of the following methods, depending on which is expected to better predict the resolution of the uncertainty:

• the most likely amount – this is the single most likely amount in a range of possible outcomes. The most likely amount may better predict the resolution of the uncertainty if the possible outcomes are binary or are concentrated on one value or
• the expected value – this is the sum of the probability-weighted amounts in a range of possible outcomes. The expected value may better predict the resolution of the uncertainty if there is a range of possible outcomes that are neither binary nor concentrated on one value.

Example The expected value method is used to reflect the effect of uncertainty for tax treatments considered together In this example, as required by IFRIC 23, the entity has assumed that the taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations. Entity A’s income tax filing in a jurisdiction includes deductions related to transfer pricing. The taxation authority may challenge those tax treatments. In the context of applying IAS 12, the uncertain tax treatments affect only the determination of taxable profit for the current period. Entity A notes that the taxation authority’s decision on one transfer pricing matter would affect, or be affected by, the other transfer pricing matters. Applying IFRIC 23, Entity A concludes that considering the tax treatments of all transfer pricing matters in the jurisdiction together better predicts the resolution of the uncertainty. Entity A also concludes it is not probable that the taxation authority will accept the tax treatments. Consequently, Entity A reflects the effect of the uncertainty in determining its taxable profit applying. Entity A estimates the probabilities of the possible additional amounts that might be added to its taxable profit, as follows: Estimated additional amount Probability Estimate of expected value CU(a) % CU Outcome 1 – 5% – Outcome 2 200 5% 10 Outcome 3 400 20% 80 Outcome 4 600 20% 120 Outcome 5 800 30% 240 Outcome 6 1,000  20% 200 100% 650 (a) In these Illustrative Examples, currency amounts are denominated in ‘currency units’. Outcome 5 is the most likely outcome. However, Entity A observes that there is a range of possible outcomes that are neither binary nor concentrated on one value. Consequently, Entity A concludes that the expected value of CU650 better predicts the resolution of the uncertainty. Accordingly, Entity A recognises and measures its current tax liability applying IAS 12 based on taxable profit that includes CU650 to reflect the effect of the uncertainty. The amount of CU650 is in addition to the amount of taxable profit reported in its income tax filing.

Example The most likely amount method is used to reflect the effect of uncertainty when recognising and measuring deferred tax and current tax In this example, as required by IFRIC 23, the entity has assumed that the taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations. Entity B acquires for CU100 a separately identifiable intangible asset that has an indefinite life and, therefore, is not amortised applying IAS 38 Intangible Assets. The tax law specifies that the full cost of the intangible asset is deductible for tax purposes, but the timing of deductibility is uncertain. Applying IFRIC 23, Entity B concludes that considering this tax treatment separately better predicts the resolution of the uncertainty. Entity B deducts CU100 (the cost of the intangible asset) in calculating taxable profit for Year 1 in its income tax filing. At the end of Year 1, Entity B concludes it is not probable that the taxation authority will accept the tax treatment. Consequently, Entity B reflects the effect of the uncertainty in determining its taxable profit and the tax base of the intangible asset applying IFRIC 23. Entity B concludes the most likely amount that the taxation authority will accept as a deductible amount for Year 1 is CU10 and that the most likely amount better predicts the resolution of the uncertainty. Accordingly, in recognising and measuring its deferred tax liability applying IAS 12 at the end of Year 1, Entity B calculates a taxable temporary difference based on the most likely amount of the tax base of CU90 (CU100 – CU10) to reflect the effect of the uncertainty, instead of the tax base calculated based on Entity B’s income tax filing (CU0). Similarly, as required by IFRIC 23, Entity B reflects the effect of the uncertainty in determining taxable profit for Year 1 using judgements and estimates that are consistent with those used to calculate the deferred tax liability. Entity B recognises and measures its current tax liability applying IAS 12 based on taxable profit that includes CU90 (CU100 – CU10). The amount of CU90 is in addition to the amount of taxable profit included in its income tax filing. This is because Entity B deducted CU100 in calculating taxable profit for Year 1, whereas the most likely amount of the deduction is CU10.

If an uncertain tax treatment affects both current tax and deferred tax (for example, if it affects both taxable profit used to determine current tax and tax bases used to determine deferred tax), consistent judgments and estimates should be used for both.

Changes in facts and circumstances

A judgment or estimate made in the application of IFRIC 23 should be reassessed if the facts and circumstances on which the judgment or estimate was based change, or if new information becomes available.

For example, a change in facts and circumstances might change an entity’s conclusions regarding the acceptability of a tax treatment the estimate of the effect of uncertainty, or both.

The relevance and effect of a change in facts and circumstances or of new information should be determined in the context of applicable tax laws.

For example, a particular event might result in the reassessment of a judgment or estimate made for one tax treatment, but not another, if those tax treatments are subject to different tax laws.

Examples of changes in facts and circumstances or new information that may result in the reassessment of a judgment or estimate include, but are not limited to:

• examinations or actions by a taxation authority.

For example:

• • agreement or disagreement by the taxation authority with the tax treatment or a similar tax treatment used by the entity;
  • information that the taxation authority has agreed or disagreed with a similar tax treatment used by another entity; and
  • information about the amount received or paid to settle a similar tax treatment;
• changes in rules established by a taxation authority; and
• the expiry of a taxation authority’s right to examine or re-examine a tax treatment.

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 judgments and estimates required by IFRIC 23.

A change in facts and circumstances, or new information becoming available, should be reflected as a change of estimate by IAS 8. IAS 10 should be considered to determine whether a change that occurs after the reporting period is an adjusting or a non-adjusting event.

Recognition of an asset in relation to a tax deposit – example Entity X is involved in a dispute with its local taxation authority over a sum of CU100 and has, as required by local law, made a payment of that amount. This money will be held in escrow by the taxation authority pending resolution of the dispute, at which point it will either be returned to Entity X or used to settle any tax liability arising from the dispute. Entity X believes that it is probable that the taxation authorities will ultimately accept its tax treatment and, consequently, it has not recognised any obligation in this regard. Entity X should recognise the tax deposit of CU100 as an asset. This asset is not a contingent asset as defined in IAS 37 because, although the outcome of the uncertain future event (i.e. the resolution of the tax dispute) will confirm the means of recovery, there is no uncertainty regarding the ‘existence’ of the asset. The deposit will either be recovered in the form of a cash refund from the taxation authority or it will be used to settle the tax liability that may arise on resolution of the dispute. Entity X should continue to monitor the underlying uncertain tax treatment. If the entity no longer believes that it is probable that the tax authorities will accept its tax treatment (i.e. it now expects some or all of the CU100 will be retained by the taxation authority to settle any tax liability arising from the dispute), it should recognise an income tax expense to reflect its current expectation of the resolution of the uncertainty.

 Presentation and disclosures regarding uncertain tax treatments

Rather than introducing new disclosure requirements with IFRIC 23, the IFRS Interpretations Committee decided to highlight the existing requirements in IAS 1 and IAS 12 that may be relevant when there is uncertainty over income tax treatments.

When there is uncertainty over income tax treatments, an entity should consider disclosing:

• judgments made in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates (applying IAS 1); and
• information about the assumptions and estimates made in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates (applying IAS 1).

If an entity concludes that it is probable that a taxation authority will accept an uncertain tax treatment, it should consider disclosing the potential effect of the uncertainty as a tax-related contingency by IAS 12.

Presentation of uncertain tax liabilities or assets IFRIC 23 applies to the recognition and measurement of both current tax assets and liabilities, and deferred tax assets and liabilities. Therefore, uncertain tax liabilities or assets recognised applying IFRIC 23 are also current or deferred tax liabilities (or assets) as defined in IAS 12. In the absence of any specific requirements on the presentation of uncertain tax liabilities or assets in IAS 12 or IFRIC 23, the requirements of IAS 1 apply. IAS 1 requires an entity to present separately items of a dissimilar nature or function unless they are immaterial. As noted in IAS 1, the items identified in IAS 1 (that include assets and liabilities for current tax and deferred tax assets and liabilities) are sufficiently different in nature or function to warrant separate presentation in the statement of financial position. Therefore, an entity should present: uncertain tax liabilities as current tax liabilities (IAS 1) or deferred tax liabilities; and uncertain tax assets as current tax assets (IAS 1) or deferred tax assets. This conclusion was confirmed by the IFRS Interpretations Committee in the September 2019 IFRIC Update. Similarly, the effect of uncertain tax treatments on profit or loss or other comprehensive income (depending on the nature of the uncertain tax treatment) should be included in the same line item as tax expense (income).

Changes in the tax status of an entity or its shareholders

SIC-25 deals with the appropriate accounting for the consequences of such changes. SIC-25, which applies equally to current and deferred taxes.