Increased recognition of tax liabilities on balance sheet - IASB Guidance

Australian companies might find themselves needing to recognise tax liabilities in their financial statements earlier according to a new interpretation being issued by a global accounting rule making authority.

The release of this guidance, which is being issued by the London-based interpretations committee that operates under the auspices of the International Accounting Standards Board, could result in more tax liabilities being recognised.

It is also significant that the guidance is being released at a time when debate about the disclosure of tax liabilities is still high on the political agenda in Australia and an area of continued intense focus of parliamentary committees wanting to explore how the government can alter the tax rules to close of any opportunities for revenue leakage.

Why would companies need to include more tax liabilities in their accounts? The interpretation requires companies to consider whether the Australian Taxation Office would not accept the company's tax treatment. It comes down to the assessment probability of the Tax Office no accepting the company’s preferred tax position.

In other words a company would need to recognise a tax liability on its balance sheet even though it is yet to resolve a tussle with the Tax Office over whether its application of the law is correct.

There is also the possibility that even where it is probable that a company’s tax position will accepted by the Tax Office that the board of directors of the entity should consider disclosing the fact that a contingent liability exists.

The importance of this is that users of financial statements that might have an interest in the company will be able to better understand the potential for greater tax liability. Without going into too much detail on other accounting developments this is consistent with the thinking that exists in relation to the recognition of credit losses in the banking sector, for example, because banks are being required to bring forward credit losses at time when it is more likely that portfolios of loans will default.

This interpretation of the tax accounting requirements in the rulebook for putting together company financial statements was deemed so significant that a multi-agency media release was issued.

Kelly O'Dwyer, the Minister for Revenue and Financial Services, said that tax was a key focus for the government and that "it is good to see an increased emphasis on encouraging clearer disclosures by corporates of areas of tax uncertainty in their financial statements".

The Australian Accounting Standards Board, the Tax Office and the Australian Securities and Investments Commission all get a word in on this significant change in playing field for tax disclosure.

Jeremy Hirschorn, the ATO deputy commissioner, said that companies should have regard to the Tax Office’s public guidance on what is likely to lead to a scrap with the ATO over a tax position.

"Thanks to our improved management of disputes, the ATO has a success rate in matters that ultimately go to litigation of more than 75%, and a recent track record in settled matters of recovering about 75% of the disputed tax on average," the deputy commissioner said. "When companies are in doubt as to their tax positions, we strongly encourage them to engage with us to obtain certainty rather than be exposed to significant uncertain positions, which rarely improve with time."

This is not just about engaging with the Tax Office for companies and the ASIC has made it clear in the same media release that reporting on tax will be a part of its surveillance program that looks at company financial statements.

"Tax is a focus area for ASIC’s review of financial reports as at 30 June 2017. Directors should consider the appropriate treatment of uncertain and disputed tax positions in financial reports, including whether there is a need to recognise a liability or disclose a contingent liability," said John Price, a commissioner at the ASIC.

The AASB is the standard setter responsible for accounting guidance and its chairman, Kris Peach, reminds companies in the release that it is probability of what might get paid in taxes that matters in the context of the guidance being flagged as important by the three regulators.

"The probability threshold is now being applied at an earlier point and could result in more tax liabilities being recognised. Previously, a tax liability was only recognised if the directors assessed it was probable that the entity would be required to pay additional tax," Kris Peach noted.