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Strategic Business Reporting (International) · Income taxes

IFRIC 23 Uncertainty over Income Tax Treatments Explained

Updated 11 October 2026 · Fact-checked

IFRIC 23 applies IAS 12 when it is unclear whether a tax authority will accept a treatment. Assume the authority examines it with full knowledge. If acceptance is probable, use the filed amount. If not, measure the uncertainty using the most likely amount or the expected value, whichever predicts the outcome better.

Understand IFRIC 23 Uncertainty over Income Tax Treatments

Tax rules are often open to interpretation. A company may claim a deduction, and the tax authority may later disagree. IAS 12 tells you how to account for tax, but it does not say what to do when the tax treatment itself is uncertain. IFRIC 23 fills that gap.

IFRIC 23 applies to current tax and deferred tax: taxable profit or loss, tax bases, unused tax losses, unused tax credits and tax rates. It does not add new disclosure rules. It works alongside IAS 12 and IAS 1 judgement disclosures.

The key idea is that you assume the tax authority will examine the treatment and has full knowledge of all relevant information. So the chance of the treatment never being looked at (detection risk) is ignored. You then ask one question: is it probable that the authority will accept the treatment?

If yes, you recognise tax in line with the treatment used in the tax return. No extra liability is needed. If no, you reflect the uncertainty in your tax numbers. You choose the method that better predicts the resolution: the most likely amount (a single outcome, suited to binary results) or the expected value (a probability-weighted sum, suited to a range of outcomes).

Assumptions and judgements must be reassessed when facts change, for example after a tax audit, a court ruling or new guidance from the authority. The effect is a change in estimate under IAS 8, not an error, unless it arises from a prior-period error. Entities must also consider whether to treat uncertain tax together with others or on its own, choosing the approach that better predicts resolution.

Key rules to remember

Recognition threshold
Probable acceptance by the tax authority → use the tax return treatment
'Probable' means more likely than not. Assume the authority examines with full knowledge.
Most likely amount
Single most likely outcome of the uncertainty
Best when there are two possible outcomes or the outcomes cluster around one value.
Expected value
Σ (probability of each outcome × amount of that outcome)
Best when there is a range of possible outcomes with no single clear one.
Uncertain treatment not probable to be accepted
Measure taxable profit, tax bases, losses, credits and rates using the chosen method
Applies to both current tax and deferred tax. Uncertain amounts normally increase the tax liability or reduce the tax asset.
Reassessment
Update judgements when facts and circumstances change
Treat as a change in estimate under IAS 8, with the effect in profit or loss (or elsewhere where the original tax was recognised).

How to solve IFRIC 23 Uncertainty over Income Tax Treatments questions

Use this sequence for any IFRIC 23 question. It keeps your answer structured and earns both technical and scenario marks.

  1. 1Identify the uncertain tax treatment and which items it affects: taxable profit, tax base, losses, credits or rates.
  2. 2Decide whether to assess it on its own or together with other uncertain treatments. Pick the approach that better predicts resolution.
  3. 3Assume the authority will examine it with full knowledge. Ignore the chance it is never audited.
  4. 4Judge whether acceptance is probable (more likely than not). Use the facts in the scenario, such as legal advice, past audit outcomes or the authority's published stance.
  5. 5If acceptance is probable, account for tax as filed. State that no additional provision is needed, and consider disclosure of significant judgements.
  6. 6If acceptance is not probable, choose most likely amount or expected value. Justify the choice. Then calculate the tax effect.
  7. 7Post the entry: adjust current tax payable and/or deferred tax, with the charge in profit or loss unless the item was recognised in OCI or equity. Include interest and penalties under the relevant standard.
  8. 8Comment on reassessment and disclosure, and link to professional judgement or ethics if the scenario hints at aggressive tax planning.

Quickest way: Three-question check

When to use it: Use it when time is short, for example a 5 to 8 mark part of a larger question.

  1. Question 1: Is acceptance probable? If yes, tax as filed and stop.
  2. Question 2: If no, is the outcome yes or no, or a range? Yes or no means most likely amount. Range means expected value.
  3. Question 3: Calculate the extra tax, adjust current or deferred tax, and state the P&L effect and disclosure point in one sentence each.

Common mistakes in IFRIC 23 Uncertainty over Income Tax Treatments

  • Reducing the liability because the authority might not audit the position.

    Students think about real-life audit chances.

    Fix: State the rule: assume examination with full knowledge. Detection risk is ignored.

  • Treating IFRIC 23 as a provision under IAS 37.

    The word 'uncertainty' triggers provision thinking.

    Fix: Uncertain income tax is accounted for under IAS 12 as current or deferred tax, not IAS 37.

  • Using expected value for a simple yes or no outcome.

    Probability weighting feels more technical.

    Fix: Use most likely amount for binary outcomes. Use expected value only for a range of outcomes.

  • Applying a probability weighting when acceptance is probable.

    Students jump straight to measurement.

    Fix: Test the probable threshold first. If met, use the tax return amount.

  • Forgetting the effect on deferred tax.

    Students focus on the current tax payable only.

    Fix: Check whether the uncertainty changes a tax base or unused losses. If so, adjust deferred tax too.

  • Treating a change in assessment as a prior-period error.

    Students link new information to restating comparatives.

    Fix: New facts, such as an audit conclusion, are a change in estimate under IAS 8, applied prospectively.

Worked examples

Example 1

Alpha Co claimed a deduction of $2m for a cost in its tax return. The tax rate is 25%. Alpha has legal advice that the authority will probably reject the deduction in full. It is a yes or no matter. Calculate the effect on the tax liability and state the accounting treatment.

Show the solution
  1. Uncertain treatment: the $2m deduction. Assume the authority examines it with full knowledge.
  2. Acceptance is not probable, so tax cannot be based on the filed treatment.
  3. The outcome is binary (full acceptance or full rejection), so the most likely amount is used. The most likely outcome is full rejection.
  4. Extra tax = $2m × 25% = $0.5m.
  5. Record: Dr Tax expense (profit or loss) $0.5m, Cr Current tax liability $0.5m. Consider interest and penalties separately, and disclose the judgement.

Answer: Alpha recognises an additional current tax liability of $0.5m, with a matching charge in profit or loss.

Example 2

Beta Co has an uncertain tax deduction of $1m. The tax rate is 30%. Beta estimates the possible outcomes: full deduction allowed with probability 50%, $600,000 allowed with probability 30%, and nothing allowed with probability 20%. Beta judges acceptance of the full claim not probable. Calculate the additional tax using expected value.

Show the solution
  1. There is a range of outcomes, so expected value is a suitable method.
  2. Expected allowed deduction = (50% × $1,000,000) + (30% × $600,000) + (20% × $0) = $500,000 + $180,000 + $0 = $680,000.
  3. Deduction disallowed on average = $1,000,000 − $680,000 = $320,000.
  4. Additional tax = $320,000 × 30% = $96,000.
  5. Record: Dr Tax expense $96,000, Cr Current tax liability $96,000.

Answer: Beta recognises an additional tax liability of $96,000.

Exam tips

  • Always state the two starting assumptions: full examination and full knowledge. Examiners reward this.
  • Name your measurement method and give a reason linked to the scenario, such as 'binary outcome, so most likely amount'.
  • Do not confuse IFRIC 23 with IAS 37. Say clearly that it falls under IAS 12.
  • Add a professional skills point: comment on management bias and whether aggressive tax positions need scepticism or ethics comment.
  • Mention reassessment when the scenario gives a tax audit result or court decision after the year end, and consider IAS 10.

Practice questions from Income taxes

IFRIC 23 Uncertainty over Income Tax Treatments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IFRIC 23 Uncertainty over Income Tax Treatments: frequently asked questions

What is the difference between IFRIC 23 and IAS 12?

IAS 12 sets the rules for current and deferred tax. IFRIC 23 clarifies how to apply those rules when it is uncertain whether the authority will accept a tax treatment. It adds recognition and measurement guidance, not a new tax standard.

When do I use most likely amount and when expected value?

Use most likely amount when the outcome is binary or clusters around one value. Use expected value when there is a range of possible outcomes with different probabilities. Choose the method that better predicts how the uncertainty will be resolved.

Does IFRIC 23 apply to interest and penalties?

IFRIC 23 does not cover interest and penalties related to income taxes. Account for them under the applicable standard, such as IAS 37 or IAS 12, depending on their nature.

Is IFRIC 23 examinable in ACCA SBR?

Yes. It can appear as part of an income tax or reporting scenario question. Expect to explain the principle and calculate the effect, with some discussion of judgement.