ACCA Strategic Professional · Strategic Business Reporting (International) · Income taxes
Hotel Co's finance director proposes omitting a current tax provision for an aggressive transfer-pricing position that the tax authority is currently challenging, because disclosure might alarm lenders before a loan renewal. Management believes it is probable the authority will not accept the position. Which response best reflects IAS 12 (as clarified by IFRIC 23) and professional ethics?
Hotel should reflect the uncertainty in its current tax measurement, using the most likely amount or expected value, and disclose significant judgements. Since acceptance is not probable, leaving it out to help the loan renewal would be misleading and breach the ethical duties of integrity and objectivity.
- AOmit the provision since the dispute is unresolved and disclosure is optional
- BReflect the uncertainty in measuring current tax, using the most likely amount or expected value, and disclose significant judgementsCorrect
- CProvide only when cash is paid, as tax is accounted for on a cash basis
- DDisclose a contingent liability only and leave tax expense unchanged
Explanation
IFRIC 23 applies to uncertain tax treatments: if it is not probable that the authority will accept the treatment, the uncertainty is reflected using the most likely amount or expected value. Omitting it to protect a loan renewal breaches integrity and objectivity and misleads users. Tax is accrual-based, and the exposure belongs in tax expense and liability, not just a contingent note.
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