IFRIC 23
Published
Uncertainty over Income Tax Treatments
Addresses how to account for uncertainty over income tax treatments under IAS 12, requiring entities to reflect the effect of uncertainty using either the most likely amount method or the expected value method.
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Conceptual Framework Linkage
Why uncertain tax treatments needed specific guidance
IAS 12 requires entities to recognise CURRENT TAX and DEFERRED TAX based on the tax treatment expected to be applied in the relevant jurisdiction. But when there is UNCERTAINTY over whether a particular tax treatment will be accepted by the tax authority, entities faced a dilemma: apply the treatment and risk reversal, or apply a more conservative treatment and overstate tax expense. IFRIC 23 resolves this by requiring entities to REFLECT THE UNCERTAINTY using either the most-likely-amount method or the expected-value method – a measurement approach rather than a policy choice.
IFRIC 23 deliberately does NOT apply IAS 37's provisions framework to uncertain tax treatments. Instead, it creates a MEASUREMENT approach within IAS 12's existing current/deferred tax framework – a critically important distinction that affects how changes in estimates are treated.
The Conceptual Framework at work
IFRIC 23 applies the Conceptual Framework's faithful representation principle to a measurement problem. The entity must recognise the UNCERTAIN TAX POSITION using the method that best ESTIMATES the amount that will be accepted by the tax authority. This is not a "provision for uncertain taxes" – it is a MEASUREMENT ADJUSTMENT to the current or deferred tax asset/liability itself, ensuring that the tax balance sheet reflects the best estimate of the tax authority's likely position.
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Scope & Definitions
What IFRIC 23 covers
IFRIC 23 applies to INCOME TAX TREATMENTS that are UNCERTAIN – specifically, where there is uncertainty over whether the relevant tax authority will accept a particular tax treatment under the applicable tax law. The interpretation applies to both CURRENT TAX (affecting taxable profit) and DEFERRED TAX (affecting temporary differences). IFRIC 23 does NOT apply to: (a) taxes other than income tax (e.g. VAT, sales tax, property tax), (b) tax treatments that are certain, or (c) tax treatments where the uncertainty is about the TIMING of recognition, not the AMOUNT.
TYPICAL FACT PATTERNS
Transfer pricing arrangements where the tax authority may challenge the arm's-length nature of intercompany pricing Research and development tax credits where eligibility criteria are subject to interpretation Tax loss carryforwards where the authority may challenge the entity's ability to utilise them Permanent vs temporary difference classification where the tax treatment of a transaction is disputed
Key definitions
Uncertain tax treatment
A tax treatment (under applicable tax law) for which there is uncertainty over whether the relevant tax authority will accept it – the subject matter of IFRIC 23.
Most likely amount
The amount that is most likely to be accepted by the tax authority – the IFRIC 23 measurement method used when there is a single most likely outcome.
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The Core Assumption – Full Examination
The starting point for all uncertain tax analysis
IFRIC 23 requires the entity to ASSUME that THE TAX AUTHORITY WILL EXAMINE the tax treatment and has access to ALL RELEVANT INFORMATION. This means the entity cannot assume that the authority will NOT challenge the treatment, or that it will accept the treatment without examination. The entity must measure the uncertain tax position on the basis that the authority WILL review it and WILL have all relevant information available.
THE FULL EXAMINATION ASSUMPTION
The tax authority will examine the tax treatment The tax authority has access to all relevant information The measurement is based on the LIKELIHOOD of acceptance, not the DESIRABILITY of acceptance
⚠️ The full examination assumption means that entities cannot simply apply a tax treatment and hope the authority does not notice. IFRIC 23 forces entities to MEASURE the uncertainty as if it WILL be examined – a more conservative but more faithful approach.
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Considering Treatments Separately or Together
The separate vs combined analysis
IFRIC 23 requires the entity to consider EACH UNCERTAIN TAX TREATMENT SEPARATELY – unless the tax law requires them to be considered TOGETHER (e.g. where treatments are interdependent). Where treatments can be considered separately, each treatment is measured independently. Where they must be considered together, the combined effect is measured as a single uncertain tax position.
WHEN TO CONSIDER TREATMENTS TOGETHER
When the tax law treats the items as a single unit (e.g. a single transaction with multiple tax effects) When the treatments are INTERDEPENDENT – the acceptance of one depends on the acceptance of another When it is PRAGMATIC to consider them together because they are evaluated as a package by the tax authority
The practical impact of separate consideration
When treatments are considered separately, some treatments may be measured at 100% acceptance (no uncertainty), while others are measured using the most-likely or expected-value method. This granular approach means that only the genuinely uncertain positions carry the measurement burden – not the entire tax position.
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Is It Probable the Treatment Will Be Accepted?
The probability threshold for recognition
IFRIC 23 requires the entity to assess whether it is PROBABLE that the tax treatment will be ACCEPTED by the tax authority. If it IS probable, the full amount of the tax asset/liability is recognised at the full tax treatment amount. If it is NOT probable, the entity must reduce the recognised amount using the most-likely or expected-value method – but the tax asset or liability is STILL recognised; it is not derecognised or deferred.
THREE RECOGNITION SCENARIOS
Treatment almost certain (e.g. 95%+ probability of acceptance): recognise the full amount Treatment uncertain but probable (e.g. 50-95% probability): recognise the full amount, but measure using most-likely/expected-value method Treatment unlikely to be accepted (e.g. <50% probability): measure using most-likely/expected-value method; the asset/liability may be significantly reduced
Unlike IAS 37, which derecognises a provision when an outflow becomes remote, IFRIC 23 does NOT derecognise the tax asset or liability when acceptance is unlikely. The tax balance is ALWAYS recognised – only the MEASUREMENT changes based on the probability of acceptance.
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Measurement – Most Likely Amount vs Expected Value
The most-likely-amount method
When there is a SINGLE OUTCOME that is MORE LIKELY than any other outcome – for example, the tax authority will accept 70% of a deduction but reject 30% – the entity uses the MOST-LIKELY AMOUNT method. This method selects the single most probable outcome as the measurement basis, without considering the full range of possible outcomes.
MOST-LIKELY AMOUNT
Tax asset/liability = The single outcome most likely to be accepted by the tax authority
The expected-value method
When there are MULTIPLE POSSIBLE OUTCOMES with different probabilities – for example, the tax authority might accept 60%, 80%, or 100% of a deduction, each with a different probability – the entity uses the EXPECTED-VALUE method. This method calculates the WEIGHTED AVERAGE of all possible outcomes, weighted by their respective probabilities.
EXPECTED VALUE
Tax asset/liability = SUM of (Outcome amount × Probability of that outcome) for all possible outcomes
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Worked Example – Most Likely Amount Method
Example: R&D tax credit uncertainty
A technology company claims £2m of R&D tax credits. Based on similar cases, the company assesses: 70% chance the authority accepts £1.5m, 20% chance it accepts £1.0m, and 10% chance it accepts £0.
Step 1 – Identify uncertain treatment: £2m R&D tax credit claim
Step 2 – Apply most-likely-amount method:
Most likely outcome = £1.5m (70% probability – the single most likely outcome)
Step 3 – Recognise the tax asset:
Tax credit receivable = £1.5m
Step 4 – Expected value (for comparison):
Expected value = (£1.5m × 70%) + (£1.0m × 20%) + (£0 × 10%) = £1.25m
Step 5 – Method selection:
Since £1.5m is the SINGLE most likely outcome (70% > any other probability), the most-likely-amount method is appropriate – recognising £1.5m rather than the expected value of £1.25m.
Balance sheet impact:
Tax credit receivable: £1.5m
Deferred tax asset (if timing difference): adjusted accordingly
Step 2 – Apply most-likely-amount method:
Most likely outcome = £1.5m (70% probability – the single most likely outcome)
Step 3 – Recognise the tax asset:
Tax credit receivable = £1.5m
Step 4 – Expected value (for comparison):
Expected value = (£1.5m × 70%) + (£1.0m × 20%) + (£0 × 10%) = £1.25m
Step 5 – Method selection:
Since £1.5m is the SINGLE most likely outcome (70% > any other probability), the most-likely-amount method is appropriate – recognising £1.5m rather than the expected value of £1.25m.
Balance sheet impact:
Tax credit receivable: £1.5m
Deferred tax asset (if timing difference): adjusted accordingly
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Reassessment of Judgments and Estimates
When the measurement must be updated
IFRIC 23 requires that the entity REEVALUATES its uncertain tax position at EACH REPORTING DATE, taking into account: (a) new information about the tax authority's likely position, (b) changes in tax law or enforcement practice, (c) the outcome of any ongoing examination or audit, and (d) changes in the entity's own facts and circumstances. Changes in the measurement of the uncertain tax position are treated as CHANGES IN ACCOUNTING ESTIMATES under IAS 8 – recognised prospectively in profit or loss.
TRIGGERS FOR REASSESSMENT
New tax authority guidance or rulings that affect the probability of acceptance Progress in an ongoing tax audit or examination Changes in tax legislation or case law New information about the entity's own facts (e.g. successful appeal in a similar case)
Because changes are treated as changes in accounting estimates (not changes in accounting policies), there is no restatement of prior periods – the adjustment is recognised prospectively in the period of change.
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Disclosure
What IFRIC 23 requires
Description of the uncertain tax treatments and the nature of the uncertainty The amount of the current and deferred tax assets and liabilities affected by the uncertainty The measurement method used (most-likely amount or expected value) and the reasons for selecting it The assumptions and estimates underlying the measurement Changes in the measurement during the period and the reasons for those changes
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Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether a tax treatment is uncertain and therefore within IFRIC 23's scope Whether uncertain treatments should be considered separately or together Whether the most-likely-amount or expected-value method is more appropriate Whether it is probable the treatment will be accepted by the tax authority
SIGNIFICANT ESTIMATES
The probability distribution of possible outcomes for each uncertain tax treatment The most likely outcome amount when using the most-likely-amount method The expected value of outcomes when using the expected-value method
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IFRIC 23 vs US GAAP
Comparison – IFRIC 23 vs ASC 740
FeatureIFRIC 23 (IFRS)US GAAP (ASC 740)
FrameworkMeasurement adjustment within IAS 12 – NOT a provision under IAS 37Morelihood standard – recognition threshold is "more likely than not" (>50%)
Recognition thresholdNo derecognition – tax asset/liability always recognised; measurement adjustedDerecognition when the tax position is NOT more likely than not to be sustained
Measurement methodMost-likely amount or expected valueCumulative probability method – the largest benefit with >50% probability of recognition
Interest and penaltiesNot addressed by IFRIC 23 – may be accounted for as tax expense or finance costAccrued as part of income tax expense under ASC 740
Changes in estimatesProspective recognition under IAS 8 (change in estimate)Recognised in the period the determination is made
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Statement Mapping
Where every IFRIC 23 event lands
EventStatement(s) affectedNotes
Current tax asset/liability recognised with uncertaintySOFP SOPLMeasured at most-likely or expected-value amount; difference vs tax return amount in profit or loss
Deferred tax asset with uncertaintySOFP SOPLMeasured at most-likely or expected-value; reversal of deferred tax in profit or loss
Reassessment of uncertain tax positionSOPL SOFPChange in estimate under IAS 8 – prospective recognition
Interest and penalties on underpaid taxSOPL SOFPTypically recognised as tax expense or finance cost, not part of the IFRIC 23 measurement
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Related Standards
Cross-reference map
StandardConnection
IAS 12The parent standard IFRIC 23 interprets, supplying the overall current and deferred tax accounting framework
IAS 37Deliberately not applied to uncertain tax treatments – IAS 12's own measurement framework governs this area
IAS 8Governs whether a change in an uncertain tax position estimate is treated as a change in accounting estimate
Quick-reference glossary
Uncertain tax treatment
A tax treatment for which there is uncertainty over whether the relevant tax authority will accept it – the subject matter of IFRIC 23.
Most-likely amount
The IFRIC 23 measurement method selecting the single most probable outcome when there is one outcome more likely than any other.
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Glossary
Uncertain tax treatment
A tax treatment (under applicable tax law) for which there is uncertainty over whether the relevant tax authority will accept it – the subject matter of IFRIC 23.
Most-likely amount
The IFRIC 23 measurement method that selects the single most probable outcome when there is one outcome more likely than any other.
Expected value
The IFRIC 23 measurement method that calculates the weighted average of all possible outcomes, weighted by their respective probabilities.
Full examination assumption
The IFRIC 23 assumption that the tax authority will examine the tax treatment and has access to all relevant information – the starting point for measuring uncertain tax positions.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
May-2017
In May 2017, the International Accounting Standards Board (Board) issued IFRIC 23 Uncertainty over Income Tax Treatments. It was developed by the IFRS Interpretations Committee.
Apr-2024
IFRS 18 Presentation and Disclosure in Financial Statements
Minor consequential amendment to IFRIC 23