IFRIC 23 Uncertainty Over Income Tax Treatments: Recognition and Measurement
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Sai Manikanta Pedamallu
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IFRIC 23 Uncertainty Over Income Tax Treatments: Recognition and Measurement
By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)
Lead Instructor, Global Fin X | www.globalfinx.in/manikanta
A company claims a deduction in its tax return. Its advisers think the position is defensible. The tax authority may or may not agree, and if it disagrees the matter will take years to resolve.
What number goes in the financial statements?
Before IFRIC 23, practice diverged. Some entities recognised a provision under IAS 37. Others reflected the uncertainty within the tax balances. Some considered the likelihood of the position being examined at all. IFRIC 23, effective from 1 January 2019, settled the framework.
Its central discipline is a single assumption that removes an entire category of argument: the entity must assume the tax authority will examine the position and will have full knowledge of everything relevant.
IAS 12 Governs, Not IAS 37
The first thing IFRIC 23 establishes is which standard applies.
Uncertain income tax treatments fall under IAS 12, not IAS 37.
This is not a technicality. The consequence is that the uncertainty is reflected within the current and deferred tax balances themselves, not as a separate provision sitting alongside them.
An entity does not recognise a tax liability of Rs. 100 crore and a separate provision of Rs. 30 crore for the uncertain portion. It recognises a current tax liability of Rs. 130 crore, measured to reflect the uncertainty.
The presentational difference matters for how users read the balance sheet, and it removes the temptation to characterise a tax exposure as a provision that might be measured under IAS 37's more permissive recognition threshold.
Scope
IFRIC 23 applies to income taxes within the scope of IAS 12, covering both current and deferred tax.
Within scope: taxable profit or loss, tax bases of assets and liabilities, unused tax losses, unused tax credits, and tax rates. Withholding taxes that meet the IAS 12 definition of an income tax are included.
Outside scope: value added tax, employment taxes, customs and excise duties, and other levies that are not income taxes. IFRIC 21, covered in Post 45, governs levies.
Also outside scope: interest and penalties associated with uncertain tax treatments. The Basis for Conclusions confirms the interpretation does not address them, which means entities must determine their own policy for interest and penalties, typically applying either IAS 12 or IAS 37 consistently and disclosing the approach.
Not limited to active disputes. This is frequently misunderstood. IFRIC 23 applies to any situation where there is uncertainty as to whether a tax treatment is acceptable under tax law. An entity may need to reflect uncertainty in its accounts even where it has received no notice, no query, and no examination. The trigger is uncertainty about acceptability, not the existence of a dispute.
The Detection Risk Assumption
Uncertain tax treatments are assessed on the assumption that the taxation authority will examine amounts it has a right to examine, and will have full knowledge of all related information when making those examinations.
Detection risk is ignored entirely.
An entity cannot reduce its measurement of an uncertain position on the basis that the authority is unlikely to look at that item, that the amount is small enough to escape attention, or that the relevant facts are buried in a return the authority will not scrutinise. The assumption is one hundred per cent examination with full information.
This is the assumption that gives the interpretation its force. Without it, the assessment would collapse into a probability of getting caught rather than a probability of being right, and the two are entirely different questions.
The Recognition Test
Is it probable that the taxation authority will accept the uncertain tax treatment?
Probable means more likely than not, the same threshold used elsewhere in IFRS.
If yes, the entity determines taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates consistently with the tax treatment used or planned to be used in its income tax filings. The financial statements and the tax return agree.
If no, the entity reflects the effect of the uncertainty in determining those amounts. The financial statements and the tax return diverge.
The test is applied to the treatment the entity has adopted or plans to adopt, and it is applied position by position or group by group, as discussed next.
The Unit of Account
An entity determines whether to consider each uncertain tax treatment separately, or a number of them together, based on which approach better predicts the resolution of the uncertainty.
The judgment turns on interdependence. Where the resolution of one matter would affect, or be affected by, the resolution of another, considering them together is likely to predict the outcome better.
The interpretation's own illustrative example uses transfer pricing. An entity with several transfer pricing positions in one jurisdiction, where the authority's decision on one would affect the others, concludes that considering all of them together better predicts the resolution.
Where positions are genuinely independent, such as a depreciation claim in one year and an unrelated characterisation question in another, they are assessed separately.
Measurement: Two Methods
Where acceptance is not probable, the entity reflects the uncertainty using whichever of two methods it expects to better predict the resolution of the uncertainty.
The most likely amount. The single most likely amount in a range of possible outcomes. This may better predict resolution where the possible outcomes are binary, meaning the position is either accepted in full or rejected in full, or are concentrated on one value.
The expected value. The sum of the probability-weighted amounts across a range of possible outcomes. This may better predict resolution where there is a range of possible outcomes that are neither binary nor concentrated on one value.
The choice is not free. It is driven by the shape of the distribution of possible outcomes, and the entity must be able to explain why the method selected better predicts resolution in the specific circumstances.
Why There Is No Third Method
US GAAP uses a cumulative probability approach, recognising the largest amount of benefit that is more than fifty per cent likely to be realised.
The Interpretations Committee considered whether to permit or require such a method and decided against it, for two reasons. Including a third method would have complicated the judgements required, because an entity would have had to assess which of three methods best predicts resolution. And IFRS Standards do not otherwise use a cumulative probability approach, whereas both the expected value and the most likely amount are already used elsewhere, notably in IFRS 15's variable consideration framework covered in Post 13.
The practical consequence is that a group reporting under both IFRS and US GAAP can arrive at different measurements of the same uncertain position, and the difference is methodological rather than judgmental.
Worked Example One: Most Likely Amount
An Indian company claims a deduction of Rs. 100 crore in its tax return in respect of a payment it has characterised as a business expense. The tax authority's established position, and recent tribunal decisions on comparable facts, indicate that only Rs. 10 crore is likely to be allowed.
The entity concludes that it is not probable that the authority will accept the full deduction. The outcome is effectively concentrated on one value: the authority will allow Rs. 10 crore.
Applying the most likely amount method, the entity determines taxable profit on the basis of a Rs. 10 crore deduction rather than Rs. 100 crore.
Rs. 90 crore is added to taxable profit relative to the amount reflected in the tax filing, and the current tax liability is measured accordingly. Assuming an effective rate of 25.17 per cent, the additional current tax liability is approximately Rs. 22.65 crore.
The financial statements and the tax return now differ by design, and that difference is the effect of the uncertainty.
Worked Example Two: Expected Value
An Indian company has multiple transfer pricing positions in one jurisdiction. The authority's decision on any one would affect the others, so the entity assesses them together as a single unit of account.
The entity concludes it is not probable that the authority will accept the treatments as filed, and estimates the following possible additional amounts that might be added to taxable profit:
| Possible additional taxable profit (Rs. crore) | Probability | Probability-weighted (Rs. crore) |
|---|---|---|
| Nil | 5% | Nil |
| 200 | 5% | 10 |
| 400 | 20% | 80 |
| 600 | 20% | 120 |
| 800 | 30% | 240 |
| 1,000 | 20% | 200 |
| Expected value | 650 |
Outcome five, at Rs. 800 crore, is the single most likely outcome at thirty per cent. However, the range is neither binary nor concentrated on one value; it is genuinely dispersed across six possible outcomes.
The entity concludes that the expected value of Rs. 650 crore better predicts the resolution of the uncertainty, and recognises and measures its current tax liability on the basis of taxable profit including that additional Rs. 650 crore.
Note that the answer is neither the most likely single outcome nor the worst case. It is the probability-weighted amount, and it deliberately falls between them.
Current Tax and Deferred Tax Together
Some uncertainties affect only current tax. Many affect both, and the interpretation requires consistent judgements and estimates across the two.
The clearest illustration is a timing dispute.
An entity claims a current tax deduction of one hundred per cent of the cost of an intangible asset in the year of purchase. It expects the tax authority to allow only ten per cent per year over ten years.
Current tax. Measured on the basis of a deduction equal to ten per cent of cost in the year of purchase, not one hundred per cent.
Deferred tax. The tax base of the asset is assumed to be ninety per cent of cost, not nil. Because the entity's accounting position now assumes ninety per cent of the cost remains available as a future deduction, a deductible temporary difference arises and is recognised accordingly under the framework in Post 63.
Treating the current tax position as uncertain while leaving the deferred tax position on the original filing basis produces an internally inconsistent set of tax balances, and it is one of the more common errors in applying the interpretation.
Reassessment
An entity reassesses a judgement or estimate if the facts and circumstances on which it was based change, or as a result of new information that affects the judgement or estimate.
Relevant changes include examinations or actions by a tax authority, changes in tax rules, the expiry of the authority's right to examine a particular treatment, and decisions of tribunals or courts on comparable facts.
The absence of agreement or disagreement by a taxation authority is unlikely, in isolation, to constitute a change in facts and circumstances. Silence is not acceptance, and the passage of time alone does not resolve an uncertainty.
The effect of a change in facts and circumstances or of new information is accounted for as a change in accounting estimate under IAS 8, recognised prospectively. It is not an error correction, unless the original judgement failed to reflect information that was available at the time.
Where a change occurs after the reporting period, IAS 10 determines whether it is an adjusting or a non-adjusting event.
Disclosure
IFRIC 23 does not introduce a standalone disclosure section. It directs the entity to existing requirements, and the combination produces a meaningful disclosure package.
Judgements made. Under IAS 1, the judgements made in determining taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates, including the judgement on whether acceptance is probable and the choice of measurement method.
Estimation uncertainty. Under IAS 1, information about the assumptions and estimates made, where there is a significant risk of a material adjustment within the next financial year.
Tax-related contingencies. Where the entity concludes that acceptance is probable, it considers whether to disclose the potential effect of the uncertainty as a tax-related contingency under IAS 12.
That final requirement is worth emphasising. Concluding that a position is probably acceptable does not end the disclosure question. Where the exposure is material, contingency disclosure remains appropriate.
The Indian Application
India is one of the more contested tax jurisdictions in the world, which makes IFRIC 23, incorporated as an appendix to Ind AS 12, unusually significant in Indian financial reporting.
The disputes are long-running. An Indian tax position moves through assessment, the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal, the High Court, and potentially the Supreme Court. A decade of litigation on a single position is unremarkable, and entities carry uncertain positions across many open assessment years simultaneously.
Transfer pricing is the dominant category. Indian transfer pricing adjustments are frequent and substantial, particularly for IT services, pharmaceutical, and captive service arrangements with overseas parents. The interpretation's own illustrative example on grouping transfer pricing matters maps directly onto Indian practice, where a single year's transfer pricing order typically covers multiple international transactions whose outcomes are interdependent.
Other recurring categories include characterisation of payments as royalty or fees for technical services, permanent establishment assertions in respect of foreign group entities, disallowances under specific provisions, deduction claims under incentive regimes, and the applicability of general anti-avoidance provisions.
The contingent liability note is where this becomes visible. Indian listed company annual reports routinely disclose tax matters under dispute running to hundreds or thousands of crores in the contingent liability note, on the basis that the entity has concluded acceptance of its position is probable and no liability is recognised.
IFRIC 23 imposes discipline on that conclusion. The assessment must be made position by position or group by group, must assume full examination with full information, and must be reassessed at each reporting date. A position carried in contingent liabilities for eight years without reassessment, on the basis that nothing has happened, does not meet the requirement, since the absence of action by the authority is not in itself a change in facts and circumstances.
The interaction with the Income-tax Act, 2025 noted in Post 62 adds a further dimension. Where the new legislation changes the interpretation of a provision on which an uncertain position rests, that is a change in facts and circumstances requiring reassessment.
What Big 4 Auditors Focus On
Completeness of identified uncertain tax treatments. Auditors test whether the entity has identified all positions where acceptability is uncertain, not only those where the authority has already raised a query. Positions taken in the current year's return that have not yet been examined are within scope.
The detection risk assumption. Auditors test that the assessment assumes examination with full knowledge, and challenge any measurement that appears to reflect a view about whether the authority will notice.
The probable assessment and its support. For material positions, auditors examine legal and tax opinions, the strength of the technical position, the treatment of comparable matters by tribunals and courts, and the entity's own history on similar positions. A conclusion that acceptance is probable, across a portfolio of positions where the entity has historically lost comparable disputes, is challenged.
Consistency between current and deferred tax. Auditors verify that where a position affects both, the same judgement and estimate has been applied to each, and that the tax base used for deferred tax reflects the uncertain position rather than the filing position.
Method selection. Auditors test whether the most likely amount or expected value has been selected by reference to the shape of the outcome distribution, and whether the entity can articulate why the chosen method better predicts resolution.
Reassessment discipline. Auditors test whether positions carried forward from prior years have been genuinely reassessed, particularly where tribunal or court decisions on comparable facts have been issued during the period.
Presentation. Auditors verify that the uncertainty is reflected within the tax balances rather than as a separate provision.
Dip IFRS Exam Angle
IFRIC 23 produces clean, testable scenarios combining a recognition judgement with a measurement calculation.
Most tested areas:
Applying the detection risk assumption: assume examination with full knowledge, regardless of the likelihood of the position being reviewed.
Applying the probable test and determining whether the financial statements follow the tax filing or diverge from it.
Selecting between the most likely amount and the expected value by reference to whether outcomes are binary, concentrated, or dispersed.
Calculating the expected value from a probability distribution.
Recognising that the uncertainty is reflected within the tax balances, not as a separate provision.
Common traps:
Applying IAS 37 to an uncertain income tax position. IAS 12 governs.
Recognising a separate provision alongside the tax liability. The uncertainty is reflected in the tax balances themselves.
Reducing the measurement because the authority is unlikely to examine the position. Detection risk is ignored.
Using the most likely amount where outcomes are dispersed across a range. The expected value is likely to better predict resolution.
Using the cumulative probability approach from US GAAP. IFRIC 23 permits only two methods.
Applying the uncertainty to current tax while leaving deferred tax on the filing basis. Judgements must be consistent across both.
Treating the passage of time without action by the authority as a change in facts and circumstances. It is not.
FAQ
Does IFRIC 23 apply only where the tax authority has raised a query?
No. It applies wherever there is uncertainty about whether a treatment is acceptable under tax law, including positions that have never been examined and may never be. The trigger is uncertainty about acceptability, not the existence of a dispute.
Can an entity take into account the chance that the tax authority will not notice a position?
No. The entity must assume the authority will examine amounts it has a right to examine and will have full knowledge of all related information. Detection risk is ignored entirely.
Is an uncertain tax position recognised as a provision?
No. IAS 12 applies, not IAS 37, and the effect of the uncertainty is reflected within the current and deferred tax balances rather than as a separate provision.
How is the measurement method chosen?
By reference to which better predicts the resolution of the uncertainty. The most likely amount suits binary outcomes or outcomes concentrated on one value; the expected value suits a range of outcomes that is neither binary nor concentrated.
Why does IFRS not use the US GAAP cumulative probability approach?
The Interpretations Committee concluded that a third method would complicate the judgement required, since entities would have to assess which of three methods best predicts resolution, and noted that IFRS does not otherwise use a cumulative probability approach while both permitted methods are already used elsewhere in IFRS.
Does a long-running dispute with no developments require reassessment?
The judgement must be reassessed at each reporting date, but the absence of agreement or disagreement by the authority is unlikely, in isolation, to constitute a change in facts and circumstances. What triggers reassessment is new information: a tribunal decision on comparable facts, a change in tax rules, an examination, or the expiry of the authority's right to examine.
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This is Post 88 of the Global Fin X IFRS Series. Previous: IFRIC 22 Foreign Currency Transactions and Advance Consideration. Next: Post 89: SIC 32 Intangible Assets: Website Costs and Capitalisation Logic.