Uncertainty over income tax treatments: IFRIC 23 brings change

IFRIC 23 clarifies how to account for income tax when it is unclear whether the taxing authority will accept the company’s tax treatment.

From the IFRS Institute - November 2017

Effective in 2019, IFRIC 231 clarifies how to account for income tax when it is unclear whether the taxing authority will accept the company’s tax treatment. While some requirements in IFRIC 23 are similar to US GAAP2, the measurement of tax uncertainties, among other things, may differ.

Uncertain tax treatment

An uncertain tax treatment is any tax treatment applied by a company when it is unclear whether that treatment will be accepted by the tax authorities. Examples include tax deductibility of certain expenses, tax-exemption of certain income, and transfer pricing rules to allocate income between jurisdictions.

What’s new in IFRIC 23?

Current IFRS does not explicitly address the accounting for tax uncertainties. The IFRS Interpretations Committee (IFRS IC) observed that entities applied diverse accounting methods when the application of tax laws has been uncertain.

In June 2017, IFRIC 23 was issued. IFRIC 23 applies to all aspects of income tax accounting when there is uncertainty about the income tax treatment of an item, including taxable profit or loss, the tax basis of assets and liabilities, tax losses and credits, and tax rates.


IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. 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).

Detection risk

IFRIC 23 clarifies that, similar to US GAAP, when a company considers the uncertainty, it must assume that the taxing authorities have full knowledge of all relevant information in assessing the proposed tax treatment. Said differently, detection risk is ignored when assessing tax uncertainties.

Recognition and measurement

Under IFRIC 23, the key test is whether it is probable (i.e. more likely than not) that the taxing authority will accept the company’s tax treatment as reported in the income tax filing. If yes, the company records the same amount in the financial statements as submitted (or planned to be submitted) in the income tax return.

If no, the company reflects the effect of the tax uncertainty following the method that it expects will better predict the resolution of the uncertainty:

  • Most likely amount method. The single most likely amount in a range of possible outcomes; or
  • Expected value method. The sum of the probability-weighted amounts in a range of possible outcomes.

Under US GAAP, a company only includes the income tax effects of its tax position in the financial statements when it is more likely than not that the position will be sustained based on its technical merits if the taxpayer takes the dispute to the court of last resort. The possibility of negotiation with the taxing authority is not considered in this first step. If the more-likely-than-not threshold is not met, then no tax benefit is recognized.

In a second step, the company measures the tax effects of positions that meet the recognition threshold using the largest amount that is more than 50 percent likely of being realized upon settlement with the taxing authority (the cumulative-probability approach).


ABC Corp. takes a $100 deduction on its federal income tax return. However, ABC expects that it is not probable that the deduction will be accepted by the IRS. ABC estimates the following.

Likelihood Tax deduction accepted by the IRS
30% $25
30% $60
40% $100

Under IFRS

Using the most likely amount method, the tax deduction used in computing the financial statement tax benefit would be $100, because this outcome has the highest likelihood of all scenarios.

However, the spread of probabilities shows three large percentage probabilities that are fairly close; this makes it difficult to conclude that a single outcome is most likely. Therefore, in this fact pattern, we believe that the expected value method better predicts the resolution of the uncertainty. Using the expected value method, the tax deduction used in computing the financial statement tax benefit would be $66.a

Assuming a tax rate of 35%, ABC records the following entry to adjust the current income tax expense initially recorded on the basis of the tax return.

  Debit Credit
Income tax expenseb 12  
Tax payable   12


It is more likely than not that some level of tax benefit will be sustained. Accordingly, ABC concludes that the recognition threshold is met, and measures the tax benefit at $60c using the cumulative-probability approach.

Applying the tax rate of 35%, ABC records the following entry to reflect the tax uncertainty.

  Debit Credit
Income tax expensed 14  
Tax payable   14

a. ($25 × 30%) + ($60 × 30%) + ($100 × 40%) = $66 (rounded) 
b. ($100 - $66) × 35% = $12 (rounded)
c. 40% + 30% = 70% > 50%
d. ($100 - $60) × 35% = $14

Other aspects of IFRIC 23

Under IFRIC 23, similar to US GAAP, the estimates and assumptions are reassessed if facts and circumstances change or new information emerges – e.g. a new tax rule is enacted, a tax examination is launched or the time limit for a tax audit lapses. When there is a change in estimate, the effect is accounted for on a prospective basis in the period of the change.

IFRIC 23 brings no new disclosure requirements. However, existing disclosures in IAS 13 and IAS 124 encompass judgments made in determining tax treatments or uncertain tax positions for which no liability is recognized in the financial statements. Companies also need to disclose the effects of applying IFRIC 23 before it is adopted, if material, under IAS 8.5

Income tax-related interest and penalties

Current IFRS is unclear about the accounting for interest and penalties related to income tax. Companies apply either IAS 12 or IAS 376, leading to differences in measurement and presentation.

In September 2017, the IFRS IC clarified that there is no such accounting choice going forward. A company first considers whether the particular amount payable or receivable for interest or penalties meets the definition of an income tax. This determines whether IAS 12 applies. Any scoped-out amount is dealt with under IAS 37.

Companies that have material amounts of interest or penalties related to income taxes need to reexamine their current accounting treatment to determine whether a change is required. This clarification, issued through an agenda decision, is effective immediately.

Differences could remain with US GAAP, which has guidance on accounting for and disclosing interest and penalties on unrecognized tax benefits. For example, companies can elect to classify interest and penalties as either income taxes or another expense classification.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.
1. IFRIC 23, Uncertainty over Income Tax Treatments
2. ASC 740, Income Taxes
3. IAS 1, Presentation of Financial Statements
4. IAS 12, Income Taxes
5. IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors
6. IAS 37, Provisions, Contingent Liabilities and Contingent Assets


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

Related content

Subscribe to our IFRS Perspectives Newsletter

Meet the IFRS team

KPMG Executive Education

CPE seminars and customized training

CPE seminars and customized training