Uncertain Tax Positions: Recognition, Measurement, and Disclosure Under GAAP and IFRS

Tax uncertainty is a reality for multinational corporations and complex enterprises.

Whether it stems from interpretative ambiguity, evolving laws, or aggressive tax strategies, companies often find themselves in positions where the outcome of a tax treatment is uncertain — potentially leading to future adjustments, liabilities, or disputes.

To ensure financial statements remain reliable and transparent, both U.S. GAAP and IFRS have established guidance on recognizing, measuring, and disclosing these uncertain tax positions (UTPs).

This article offers a detailed examination of how UTPs are accounted for under ASC 740 (U.S. GAAP) and IFRIC 23 (IFRS) — highlighting their similarities, key differences, and practical implications.

What Is an Uncertain Tax Position?

An uncertain tax position arises when it is unclear whether a tax treatment applied (or intended to be applied) in a tax return will be sustained upon examination by a tax authority.

This uncertainty could relate to:

• The existence of a tax liability or asset

• The amount of taxable income or deductible expenses

• The recognition of tax credits or exemptions

• The classification of transactions or jurisdictions

• The likelihood of penalties or interest being imposed

Such uncertainty requires judgment in financial reporting and may result in the recognition of a tax liability, a reduction in a tax benefit, or enhanced disclosures to users of financial statements.

Applicable Standards

Under U.S. GAAP: ASC 740-10 (formerly FIN 48)

ASC 740-10 provides a two-step framework for accounting for income tax uncertainty in the U.S.:

1. Recognition — Determine whether it is more likely than not that a tax position will be sustained based on its technical merits.

2. Measurement — Quantify the benefit as the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate resolution.

This model is rule-based and focuses on identifying and reserving for specific risk positions.

Under IFRS: IFRIC 23 — Uncertainty over Income Tax Treatments

IFRIC 23 clarifies how to apply the recognition and measurement principles of IAS 12 (Income Taxes) in the presence of uncertainty.

Its approach is principles-based, focusing on whether it is probable that the tax authority will accept a given treatment.

If uncertainty exists, the entity must:

• Evaluate the tax treatment assumed in the tax return

• Use either the most likely amount or expected value method to reflect the uncertain position

• Assume the tax authority has full knowledge and will examine the position

The goal is to reflect the expected outcome of the uncertainty in the financial statements.

Recognition: Will the Tax Position Be Sustained?

U.S. GAAP (ASC 740): More-Likely-Than-Not Test

An entity must first determine whether the tax position is more likely than not (greater than 50% chance) to be sustained on its technical merits, assuming full knowledge and examination by a taxing authority.

• If the threshold is not met, no tax benefit is recognized.

• The full amount is recorded as a liability or valuation allowance.

Recognition is not based on likelihood of audit, detection, or negotiation.

IFRS (IFRIC 23): Probability-Based Judgment

IFRIC 23 does not use a binary threshold like ASC 740.

Instead, entities must:

• Consider whether it is probable the tax authority will accept the position

• If yes, account for taxes consistently with the tax return

• If no, reflect the uncertainty using an estimation technique

The focus is on reporting the best estimate of the tax consequences based on available information.

Measurement of Uncertain Tax Benefits

U.S. GAAP: Largest Amount >50% Likely to Be Realized

Once a position passes the recognition test, the company measures the tax benefit as the largest amount of benefit that has a cumulative likelihood over 50% of being realized upon resolution.

This requires scenario analysis and probability-weighted judgment of possible outcomes.

IFRS: Most Likely Amount or Expected Value

Under IFRIC 23, entities choose between:

• The most likely amount: the single most probable outcome

• The expected value: a probability-weighted average of all possible outcomes

The method chosen must best reflect the expected resolution of the uncertainty.

Subsequent Measurement and Reassessment

Both U.S. GAAP and IFRS require ongoing evaluation of tax positions at each reporting date.

Entities must adjust their estimates if:

• New information becomes available

• Tax laws change

• Audits or negotiations lead to settlements

• Statutes of limitation expire

Derecognition is required when the recognition criteria are no longer met.

Presentation in Financial Statements

Balance Sheet

Uncertain tax positions are typically included in:

• Income taxes payable, if expected to be settled in cash soon

• Deferred tax liabilities or assets, if timing differences exist

• Other liabilities, depending on the nature and maturity

There is no separate line item for UTPs, but their aggregate impact must be included in appropriate accounts.

Income Statement

Changes in uncertain tax positions impact current or deferred income tax expense.

Associated interest and penalties are:

• Recognized in income tax expense (under most policies)

• Or disclosed separately if the company has an alternate policy

Disclosure Requirements

Both frameworks emphasize transparency in financial statements.

Under U.S. GAAP, entities must disclose:

• Total amount of unrecognized tax benefits

• The portion that would impact the effective tax rate if recognized

• Roll-forward of the beginning and ending balances

• Significant changes expected in the next 12 months

• Policy for interest and penalties

Under IFRS, disclosures include:

• Judgments made in applying the standard

• Assumptions and estimates used

• The nature and extent of uncertainties

• Potential impact on the future effective tax rate

While IFRS is generally less prescriptive, it still requires clear and comprehensive disclosure.

Tax Strategy and Financial Implications

Uncertain tax positions affect:

• Effective tax rate (ETR) and tax planning

• Deferred tax asset valuation and recognition

• Provisions for liabilities related to taxes

• Earnings volatility, particularly when reserves are released or increased

Companies must weigh the benefit of aggressive tax strategies against the potential cost of reversals, audit challenges, and public scrutiny.

Internal Controls and Documentation

To ensure compliance and audit readiness, companies should:

• Maintain well-documented tax positions, including legal and technical support

• Establish procedures for evaluating and updating UTPs regularly

• Collaborate across tax, legal, and accounting functions

• Monitor regulatory updates and court decisions affecting positions

Strong documentation is critical — both to defend positions in tax audits and to justify accounting treatment in financial reporting.

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Uncertain tax positions are a normal part of modern business operations — but they must be carefully evaluated, measured, and disclosed to ensure transparent financial reporting.

Under both ASC 740 and IFRIC 23, companies must:

• Recognize uncertain positions only when justified

• Measure the benefit using appropriate estimation techniques

• Monitor and adjust positions as new facts emerge

• Provide users with clear, high-quality disclosure.