Dealing with uncertain tax positions in your financial statements

Tax alert - November 2017

Iain Bradley and Belinda Spreeuwenberg

The External Reporting Board has issued a new interpretation NZ IFRIC 23 Uncertainty over Income Tax Treatments to clarify how to reflect uncertainties relating to income taxes in financial statements. This occurs when there is uncertainty over whether the relevant tax authority will accept a tax treatment under tax law.

NZ IFRIC 23 applies to for-profit entities that report under Tier 1 or Tier 2 and will take effect from annual reporting periods beginning on or after 1 January 2019, with early adoption permitted.

The interpretation is limited to income taxes and addresses how to recognise and measure current or deferred tax assets or liabilities in accordance with NZ IAS 12 Income Taxes where there is uncertainty over income tax treatments.
The interpretation provides that:

1. An entity is required to use judgement to determine whether it should consider each uncertain tax treatment independently or together.

2. An entity should assume that the tax authority will examine amounts it has a right to examine and will have full knowledge of all related information when considering uncertain tax treatments.

3. If the entity concludes that it is not probable that a tax authority will accept an uncertain tax treatment, an entity must reflect the effect of the uncertainty in their financial statements using the most likely amount or the expected value of the uncertain tax treatment when determining the taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates. Where the uncertain tax treatment affects both current tax and deferred tax, consistent judgement and estimates are necessary.

4. Where there is a change in facts and circumstances on which an earlier judgement or estimate of an uncertain tax treatment is based, the change should be reflected as a change in accounting estimate applying NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Examples include changes that can arise upon release of an Inland Revenue ruling or interpretation statement, judgement from a court, knowledge of a similar tax treatment used by the entity or another entity that the tax authority has agreed or disagreed with, and the expiry of a tax authority’s right to examine or re-examine a tax treatment.

Implications of uncertain tax treatments

Where an entity concludes it is probable that a tax authority will accept an uncertain tax treatment, the recognition and measurement of current tax and deferred tax assets or liabilities should be consistent with the tax treatment the entity has used or plans to use in tax return filings.

If an entity concludes it is not probable that the tax authority will accept an uncertain tax treatment, it should reflect the effect of uncertain tax treatments using either of the following methods:

a. The most likely amount. This is the single most likely amount in a range of possible outcomes and is a better predictor of the uncertainty where the outcome could be binary or concentrated on one outcome.

b. The expected value. This is the sum of the probability-weighted amounts in a range of possible outcomes.

To illustrate the expected value method of determining the taxable income, consider a New Zealand company (NZ Co) that has taken tax deductions relating to transfer pricing. The entity has concluded that it is not probable that Inland Revenue will accept the tax treatment and that the possible outcomes are:


Estimated Additional Taxable Income


Estimate of expected value

Outcome One




Outcome Two




Outcome Three






While outcome two is the most likely outcome, NZ Co determines that the uncertainty of the tax treatment is not concentrated on one outcome. NZ Co would therefore use the expected value of $65, and accordingly recognise and measure their current tax liability based on this value. The estimate would be updated in each subsequent period until the uncertainty is resolved.

If an entity applies NZ IAS 12 to account for interest and penalties on income tax, the interest and penalties will fall within the scope of the interpretation.

NZ IFRIC 23 does not introduce new disclosure requirements. Instead the interpretation highlights disclosures that should be considered under other existing accounting standards. For example, an entity considers whether it needs to disclose judgements made and information about the assumptions and estimates in accordance with NZ IAS 1 Presentation of Financial Statements.

Specific guidance has been included in the interpretation on the transition to applying the interpretation. As retrospective application of the new interpretation may be difficult without the use of hindsight, there are two transition approaches allowed. An entity can either re-state the comparatives if possible to do so without the use of hindsight, or adjust the cumulative effect of initially applying the interpretation in opening equity.

Entities may find that an ongoing obligation to consider court decisions, Inland Revenue positions, or other changes to facts and circumstances that may create uncertainty over tax treatment under tax law, for tax positions taken in prior years, is an onerous burden. While there is some time before NZ IFRIC 23 takes effect, it may be worthwhile to start recording material tax positions and monitoring any development that may create an uncertain tax treatment, so that entities are ready to comply with the interpretation from 1 January 2019.

Did you find this useful?