Globally On 7 June 2017, the International Accounting Standards Board (IASB or the Board) issued IFRIC Interpretation 23 — Uncertainty over Income Tax Treatments (the Interpretation). The Interpretation clarifies application of recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. In line with the global changes India has also made the changes in the Indian Accounting Standard (Ind AS) 12 “ Income taxes” through notification dated 30th March, 2019.
Need for change
It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future. Consequently, a dispute or examination of a particular tax treatment by the taxation authority may affect an entity’s accounting for a current or deferred tax asset or liability.
The Interpretation (IFRIC 23) specifically addresses the following:
► Whether an entity considers uncertain tax treatments separately
► The assumptions an entity makes about the examination of tax treatments by taxation authorities
► How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates
► How an entity considers changes in facts and circumstances
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The Interpretation does not apply to taxes or levies outside the scope of IAS 12/ Ind AS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments
IFRIC 23 apply globally from 1st January 2019, and permit the early adoption also, however applicability of appendix C of Ind AS 12 is applicable for annual reporting periods beginning on or after April 1, 2019. Earlier application is permitted. If an entity applies this Appendix for an earlier period, it shall disclose that fact
Does an entity consider uncertain tax treatments separately?
An entity shall determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments based on which approach better predicts the resolution of the uncertainty.
In determining the approach that better predicts the resolution of the uncertainty, an entity might consider, for example, (a) how it prepares its income tax filings and supports tax treatments; or (b) how the entity expects the taxation authority to make its examination and resolve issues that might arise from that examination.
Examination by taxation authorities
In assessing whether and how an uncertain tax treatment affects the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, an entity shall assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.
Determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates
An entity shall consider whether it is probable that a taxation authority will accept an uncertain tax treatment. If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, the entity shall 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 it is not probable that the taxation authority will accept an uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates.
An entity shall reflect the effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which method the entity expects to better predict the resolution of the uncertainty:
(a) The most likely amount—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.
(b) The expected value—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.
Changes in facts and circumstances
An entity should reassess any judgements and estimates made if the facts and circumstances change or new information becomes available. The effect of a change in facts and circumstances, or the emergence of new information, should be reflected as a change in accounting estimates as per IAS 8 Accounting Policies, Changes in Accounting Estimates and An entity should apply IAS 10 Events after the Reporting Period to determine whether a change that occurs after a reporting period is an adjusting or non-adjusting event.
What has changed??
Now the company has to assign the probability of each uncertain tax treatment and conclude on the appropriateness of the tax payable and provision of contingency.
For example: If the company is an industry where the advertisement expense has been disallowed by the taxation authority, but the company has not disallowed the same in there computation of the income, the company has to disclose the fact in their financial along with the corresponding amount. also the company has to change its contingency provision in accordance with the probability assignment.