Uncertain tax treatments: measure and reassess

Learning objectives

• Calculate the effect of an uncertainty using the most likely amount and using the expected value.L2, L3
• Assess which method better predicts the resolution of the uncertainty (binary or widely dispersed outcomes).L3
• Recognise the effect on current and deferred tax consistently.L3
• Analyse the effect of new information (tax examination, expiry of the right to examine) as a change in estimate, and as an event after the reporting period.L3, L4

Normative references

• IAS 12 §88The entity discloses, in accordance with IAS 37, any tax-related contingent liabilities and contingent assets (for example, unresolved disputes with the taxation authorities); this paragraph deals only with disclosure, recognition being governed by IAS 12. When changes in tax rates or tax laws are enacted or announced after the reporting period, the entity discloses any significant effect of those changes on its current and deferred tax assets and liabilities (see IAS 10).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

26 questions

• IFRIC 23 requires the effect of every tax uncertainty to be measured using the expected value.L2
• When the same uncertainty affects current tax and deferred tax, the entity may use one probability of acceptance for current tax and another for deferred tax.L3
• The entity reassesses a judgement or estimate about an uncertain tax treatment when the facts and circumstances on which it was based change, or as a result of new information that affects it.L3
• The effect of new information about an uncertain tax treatment is recognised retrospectively, restating the year in which the treatment was used.L3
• Whether compensation of 2,000,000 is deductible depends on a single legal question: it is either allowed in full or disallowed in full. Which method better predicts the resolution?L2
• After the reporting date but before authorisation for issue, Norvaline learns new information about an uncertain tax treatment. Which standard determines whether this is an adjusting event?L3
• Orsavel is in dispute with the taxation authority over a reassessment not yet decided. How do IAS 12 and IAS 37 interact for this dispute?L3
• In which of these situations is the expected value, prima facie, the method that better predicts the resolution (subject to the entity's judgement)?L3
• For the transfer pricing adjustment that it judges not probably accepted, Pelvanor estimates (case data): no additional tax ({prob_nil}%), {amount_b} ({prob_b}%), {amount_c} ({prob_c}%) or {amount_d} ({prob_d}%). Judging the range scattered, it uses the expected value. Compute the additional tax to recognise.L2
• The Quessaro group is negotiating with two authorities the allocation of its distribution profits. Its advisers expect additional tax of {amount_a} ({prob_a}%), {amount_b} ({prob_b}%), {amount_c} ({prob_c}%) or {amount_d} ({prob_d}%), with no dominant outcome. What amount is recognised if the entity concludes that the expected value better predicts the resolution?L3
• Rastelle deducted an expense of {deduction}. The outcome is binary: the deduction is either allowed in full or disallowed in full; the probability of disallowance is {rejection_probability}% (case data). Tax rate: {tax_rate}%. Rastelle concludes that the most likely amount better predicts the resolution. Compute the additional tax to recognise.L2
• For a disputed withholding, Silvadore expects (case data): no tax ({prob_nil}%), {amount_central} ({prob_central}%) or {amount_high} ({prob_high}%). The outcomes being concentrated on one value, it uses the most likely amount. What amount does it recognise?L3
• In 20X5, Trelmont deducted in full the cost of equipment of {asset_cost}; a fully informed authority would probably require tax depreciation over {tax_life} years (acceptance not probable, most likely amount used by judgement). Carrying amount of the equipment at the reporting date: {carrying_amount}; rate {tax_rate}%. Compute the resulting increase in current tax and decrease in the deferred tax liability.L3
• Uvrelac judges acceptance of an exemption applied in its 20X5 return not probable; the additional tax measured using the method that better predicts the resolution amounts to {uncertain_tax}. Only current tax is affected. Record the entry at the reporting date.L3
• Valquessa deducted in 20X5 accelerated tax depreciation of {deduction_claimed} on moulds; a fully informed authority would probably allow only {deduction_expected} (most likely amount used). The deferred tax liability had been computed on the tax base in the return. Rate {tax_rate}%. Record the year-end entry reflecting the uncertainty consistently.L3
• At the end of 20X5, Wenlandor had recognised a current tax liability of {liability_released} for a deduction whose acceptance was not probable. In September 20X6, after an audit, the authority notifies it in writing that it agrees with this deduction. Record the 20X6 entry.L4
• The Yspala group's intragroup royalties are under examination; according to its advisers, the outcome may take about ten values between 0 and 1,200,000, none with a probability above 20%. Which method applies, subject to documenting the judgement?L3
• Zarnovel's reporting date is 31 December 20X5; the financial statements are to be authorised on 15 March 20X6. On 20 February 20X6, a final decision in Zarnovel's own dispute, concerning its 20X4 return, confirms the authority's position. How should the effect of this information be analysed?L4
• Arquevin's current tax liability for an uncertain treatment includes 120,000 for 20X1 and 90,000 for 20X2. In 20X5, the authority's right to re-examine 20X1 expires without an audit. Which treatment applies?L4
• Since 20X3 the Belcastor group had measured a transfer pricing uncertainty using the expected value (scattered outcomes). In 20X5, the authority publishes guidance that leaves only two outcomes: full acceptance or full rejection, rejection being the more likely according to its advisers. Write a memo: should the estimate be reassessed, which method should now be used, how should the effect be recognised? Distinguish rule, data and judgement.L4
• Calvidra has two uncertainties: (1) a tax credit whose acceptance is judged probable; (2) a deducted provision whose acceptance is not probable, affecting both 20X5 current tax and the tax base of an asset. Write a memo stating the amounts to recognise and the disclosures to consider, distinguishing rule, data and judgement.L3
• Two years after filing its return, Dorvenne has received no reaction from the authority on an uncertain treatment; this silence alone is enough to justify reassessing its judgement.L3
• Which of these events are examples of changes in facts and circumstances or new information that may, depending on the circumstances, lead to reassessing a judgement about an uncertain tax treatment?L3
• The supreme court of country X rejects, for another company, the deductibility of royalties similar to those the Estriva group deducts in country X. Estriva also deducts royalties in country Y, governed by different tax law and not covered by the decision. Which reassessment applies?L4
• Falquenne concludes that it is probable that the authority will accept an uncertain tax treatment; no adjustment is therefore recognised. What must it still consider?L3
• Where there are uncertain tax treatments, which disclosures must the entity consider providing, under the general requirements and the reference to tax contingencies?L3