This article is the fifteenth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to the accounting for income taxes. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
Under IFRS, the pronouncement that provides guidance for the accounting for income taxes is International Accounting Standard (IAS) 12, Income Taxes, which is accompanied by two interpretations: SIC-21 Income Taxes - Recovery of Revalued Non-Depreciable Assets, and SIC-25, Income Taxes - Changes in the Tax Status of an Entity or its Shareholders. Under U.S. GAAP, the primary standard dealing with the accounting for income taxes is FASB Statement No. 109, Accounting for Income Taxes, which is surrounded and interpreted by an abundance of U.S. GAAP literature. Both IAS 12 and Statement No. 109 are based on the balance sheet liability approach whereby an entity recognizes deferred tax assets and liabilities for temporary differences (differences between the carrying amount of an asset or liability on the balance sheet and its tax base) and for operating loss and tax credit carryforwards. However, numerous differences arise because both frameworks have various exceptions to the basic principle. Following are a few of the major differences currently existing between IAS12 and Statement No. 109:
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IFRS |
U.S. GAAP |
Tax rate used to calculate deferred taxes |
Deferred taxes are calculated using the “substantively enacted” tax rate as of the balance sheet date. |
Deferred taxes are calculated using the “enacted” tax rate as of the balance sheet date. |
Recognition of deferred tax assets |
A deferred tax asset is recognized to the extent that it is “probable” that it will be realized. |
All deferred tax assets are recognized and a valuation allowance is recognized to the extent that it is “more likely than not” that the deferred tax assets will not be realized. |
Classification of deferred tax assets and liabilities |
Deferred taxation is always classified as “non-current”. |
Deferred taxation follows the classification of the related non-tax asset or liability. |
Uncertain tax positions |
IAS 12 is silent on this matter. General criteria of IAS 12 and IAS 37, Provisions, Contingent Liabilities and Contingent Assets, are commonly applied. |
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, applies. |
Intercompany transfers of assets remaining within the group |
There are no exceptions allowed, and therefore deferred taxes are recorded using the buyer’s tax rate. |
Buyers cannot recognize deferred taxes. Income tax paid by the seller is deferred upon ultimate realization. |
Income taxes are frequently identified as a source of significant reconciling items for U.S. listed foreign registrants applying IFRS. On this basis, in 2002 the International Accounting Standards Board (IASB) added a convergence project to its agenda with the objective of reducing the differences between IAS 12 and Statement No. 109. The IASB is expected to soon release an exposure draft of revised IAS 12. The Financial Accounting Standards Board is waiting for the IASB to complete its project and will decide what to do once the revised IAS 12 is released. As a result of such convergence efforts, the differences illustrated above are expected to narrow in the future. However, based on the current status of IASB deliberations on the exposure draft, it is likely that IAS 12 and Statement No. 109 will not reach full convergence.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group.
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