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IAS 12 – Measurement of income tax on uncertain tax positions

Date recorded:

The project manager introduced Agenda Paper 4: Measurement of current income tax on uncertain tax position (link to the IASB's website) which provided background information on uncertainties and proposed two alternatives for the measurement of uncertain tax positions:

  • Alternative 1: When uncertainty was high, uncertain tax positions should be measured at expected value, otherwise other estimates could be applied; or
  • Alternative 2: Uncertain tax positions should be measured at either expected value, most likely estimate or more-likely-than-not estimate.

Regards detection risk, there were two views in the agenda paper:

  • View 1: An entity should assume that the tax authorities would examine the amounts reported to them and had full knowledge of all relevant information (assumed 100 per cent detection risk); or
  • View 2: Inclusion of an assessment of the detection risk in the measurement of tax assets and liabilities.

The staff asked the Committee whether they wanted to develop guidance on uncertain tax positions. If yes, the staff recommended Alternative 1 regards the measurement with View 1 regards the detection risk.

One Committee remember agreed to View 1 regards the detection risk but disagreed with Alternative 1 and would rather see Alternative 2 as entities could decide with regard to the specifics of the uncertain tax position. This would also bring convergence with US GAAP. A fellow Committee member asked whether the measurement applied to all of the tax position or only to the uncertain part. The project manager confirmed that it only applied to the uncertain part of tax positions. The Committee member replied that in that case the term ‘uncertain tax position’ would have to be defined in order to apply a different measurement to it. Another Committee member added that ‘uncertainty’ itself would have to be defined first and asked whether it was meant in a statistical sense (i.e. deviation from a mean).

Another Committee member said that he supported the recommended measurement alternative but not the staff view on detection risk where he preferred View 2. A fellow Committee member said that the Board should be asked whether they wish to issue guidance on uncertain tax positions and expressed concerns about the expected value method. The Chairman asked whether he would feel more comfortable with the ‘more-likely-than-not estimate’. The Committee member confirmed that but said that in his view this did not fit into IFRS from a conceptual point of view.

Another Committee member said that he would prefer Alternative 2 but he also thought that a more fundamental approach might be required than the alternatives offered in the agenda paper. The Chairman reminded the Committee member that this meant a more fundamental approach to measurement of current liabilities. The Committee member confirmed this. Another Committee member also preferred Alternative 2 and said that the IAS 12 measurement (i.e. ‘amount expected to be paid’) could be interpreted by the Committee. One Committee member disagreed with that and suggested that the Committee should focus more narrowly on the guidance in the Standard. IAS 12 stated that current tax liabilities should be measured at the amount expected to be paid to the taxation authorities. He acknowledged that there was diversity in practice and suggested interpreting the guidance to eliminate diversity. He agreed that there should be a definition of ‘uncertain tax positions’ and a clarification what the unit of account was. A Committee member replied that this was too broad to be interpreted by the Committee and therefore this issue should be referred to the IASB.

Another Committee member expressed concerns about entities being able to elect the most appropriate measurement under Alternative 2. He would rather clarify which measurement alternative was more appropriate in which circumstances. An observing IASB member agreed and said that if staff expected all three options under Alternative 2 to deliver the same amount then it should decide for one option. His preference would then be the “more-likely-than-not” estimate as this was already widely distributed through FIN 48 and therefore well understood.

Two observing IASB members said that IFRS 15 (being the most recent IFRS Standard) provided guidance on how to reach the best estimate. They thought this would be a good starting point for the IAS 12 issue.

The Chairman asked the Interpretations Committee if any of its members would support to stop performing work on that issue. 3 of the 13 Committee members present supported that.  Regards detection risk, the Chairman asked which Committee members supported View 1. 11 Committee members supported that. The Chairman proposed bringing back a staff paper to the Committee with a more detailed view on measurement, focusing on the clarification of scope and the amount that the entity expected to pay. One observing IASB member said that it should also be clarified what the unit of account was in this issue. None of the Committee members objected.

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