illustrate the effects of the events after the reporting period ias 10 3 described a 613315

Uncertain tax positions – unit of account

An entity has submitted a tax return indicating a current tax liability of £2.5 million. This £2.5 million includes the tax effect of a deduction disputed by the tax authority, the tax effect of which is £500,000. In other words, if the tax authority”s challenge is sustained the entity”s tax liability will in fact be £3 million. The entity has received advice that the tax authority is extremely unlikely (say 10%) to sustain its challenge.

The entity”s accounting policy for uncertain tax positions is that nothing is recognised for a position unless the position is considered more likely than not to occur. Where a position is considered more likely than not to occur, it is recognised and measured based on the probability of its occurrence.

If the entity regards the unit of account as the tax return as a whole, it is clearly more likely than not that the tax return will result in a payment of tax. Based on the advice the entity has received, there is a 90% probability that the liability will be £2.5 million and 10% probability that the liability will be £3 million. It would therefore record a current tax liability of 2.55 million (£2.5m × 0.9 + £3.0m × 0.1). This could equally have been calculated as £2.5m × 1 + £0.5m × 0.1 (i.e. the £2.5 million on the submitted return that is certain to be paid, with a 10% probability that an additional £500,000 will be paid).

If, however, the entity regards its unit of account as the disputed deduction, it would not recognise any liability for this at all, based on the advice received that the probability of the tax authority”s challenge being sustained is only 10%. It would therefore recognise a current tax liability of only £2.5 million (i.e. the undisputed amount of the tax return).