The International Accounting Standards Board is expected to issue proposals
later this year introducing significant changes to the current standard on
accounting for tax, IAS12, including some proposals on accounting for current
Faced with a current standard that has little guidance on the measurement of
the current tax figure, the IASB has considered the US approach, set out in
FIN48, to measure uncertain tax positions.
This requires an assessment of the probability of each possible outcome and
recognition of the highest amount which has over 50% cumulative probability of
Such a methodology not only assumes a level of accuracy in determining the
probability of outcomes, but is hard to align with any current measurement
The IASB has indicated, quite rightly, that it will not adopt such an
approach. But the likely alternative is that the uncertain tax positions be
recognised on an expected outcome measure.
This sounds promising, until you discover that an expected outcome measure is
defined as the ‘probability weighted average’ of the possible outcomes, not the
best estimate of what an entity expects to eventually pay. The IASB has put
forward an idea that the information presented should help users assess the
amounts, timing and uncertainty of future cash flows.
It is hard to understand how a measurement methodology that reflects a figure
that will never be the actual tax cash flow meets that objective. Additionally,
to move from the present principle that the current tax liability reflects the
best estimate of the amount that will be paid to a specific one that requires
a precise calculation to be applied to uncertain estimates of probability, seems
at odds with the IASB’s aim to adopt more principles-based standards.
Undoubtedly a single figure included in the financial statements cannot
portray the whole picture. IAS12 currently has requirements for disclosure of
tax-related contingent liabilities. But it lacks disclosure requirements in
respect of the uncertainties of timing and amount that surround figures in the
It’s the overall basic principle that’s missing a requirement to highlight
circumstances that will affect current and future tax liabilities or credits.
So yes, portray the right picture by requiring proper disclosure on the
uncertainties attached to tax provisions, just as for other provisions.
But, in proposals that might be heading even more into what some see as the
make-believe world of deferred tax, can we at least present a current tax
liability that may turn out to be reality?
Ken Wild is an audit partner and Elizabeth
Chrispin is audit director at Deloitte
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