Companies should measure uncertain tax liabilities by applying the accounting standards that govern provisions and income taxes, principally IAS 37 Provisions, Contingent Liabilities and Contingent Assets together with IFRIC 23 Uncertainty over Income Tax Treatments issued by the IFRS Interpretations Committee of the International Accounting Standards Board. The core measurement principle is to determine the best estimate of the outflow required to settle a present obligation at the reporting date, reflecting the substance of tax positions rather than the form. This affects both current tax liabilities and related deferred tax accounting under IAS 12 Income Taxes.
Assessing acceptability and measurement approach
An entity must first decide whether the tax authority will accept the tax treatment used in the return. Guidance from the IFRS Interpretations Committee of the International Accounting Standards Board instructs companies to assess whether acceptance is probable, commonly understood as more likely than not. If acceptance is probable, recognize the tax effect consistent with the tax return. If acceptance is not probable, measure the liability using the amount that best reflects the likely outcome: use the most likely amount when a single outcome is predominant, or the expected value (probability-weighted average) when a range of outcomes exists and better predicts the result. Practical guidance from major practitioners such as Deloitte and PwC reinforces these judgments and highlights the need for robust documentation and support from tax advisors.
Practical considerations, causes and consequences
Measurement requires judgment because causes of uncertainty include ambiguous legislation, differing interpretations across jurisdictions, and evolving transfer-pricing practices. Territorial and cultural factors matter: countries with opaque administrative practices or aggressive enforcement create greater measurement risk, while well-established rulings reduce it. Companies should also consider interest and penalties where applicable and apply discounting under IAS 37 when the time value of money is material.
Consequences of measurement choices can be significant: misestimation leads to adjustments to profit or loss, impacts on deferred tax assets and liabilities, volatility in reported earnings, and heightened scrutiny in tax audits. Accurate measurement supports stakeholder confidence; authoritative guidance from the IFRS Interpretations Committee of the International Accounting Standards Board and practical commentary from firms such as Deloitte and PwC provide usable frameworks, but entities must tailor judgments to local tax realities and document assumptions to withstand regulatory and auditor review. Robust governance, clear judgments, and timely disclosure are essential to manage the human, cultural and territorial complexities inherent in uncertain tax positions.