FAS 109 Accounting for Income Taxes
and IAS 12 Income Taxes
provide the guidance for income tax accounting under U.S. GAAP and IFRS, respectively. Both pronouncements require entities to account for both current tax effects and expected future tax consequences of events that have been recognized (that is, deferred taxes) using an asset and liability approach
. Further, deferred taxes for temporary differences arising from non-deductible goodwill are not recorded under either approach and the tax effects of items directly accounted for as equity during the current year are also allocated directly to equity. Finally, neither principle permits the discounting of deferred taxes.
Significant Differences and Convergence
Below we discuss the significant differences in the current literature.
- U.S. GAAP: Tax basis is a question of fact under the tax law. For most assets and liabilities there is no dispute on this amount; however, when uncertainty exists, it is determined in accordance with FIN 48 Accounting for Uncertainty in Income Taxes.
- IFRS: Tax basis is generally the amount deductible or taxable for tax purposes. The manner in which management intends to settle or recover a carrying amount affects the determination of tax basis.
Uncertain tax positions:
- U.S. GAAP: FIN 48 requires a two-step process, separating recognition from measurement. A benefit is recognized when it is "more likely than not" to be sustained based on the technical merits of the position. The amount of benefit to be recognized is based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. Detection risk is precluded from being considered in the analysis.
- IFRS: There is no specific guidance; IAS 12 indicates tax assets/liabilities should be measured at the amount expected to be paid. In practice, the recognition principles on provisions and contingencies in IAS 37 are frequently applied. Practice varies regarding consideration of detection risk in the analysis.
Initial recognition exemption:
- U.S. GAAP: No similar exemption for non-recognition of deferred tax effects for certain assets or liabilities.
- IFRS: Deferred tax effects arising from the initial recognition of an asset or liability are not recognized when the amounts did not arise from a business combination and, upon occurrence, the transaction affects neither accounting nor taxable profit (for example, acquisition of nondeductible assets).
Recognition of deferred tax assets:
- U.S. GAAP: Recognized in full (except for certain outside basis differences), but valuation allowance reduces assets to the amount that is more likely than not to be realized.
- IFRS: Amounts are recognized only to the extent it is probable (similar to "more likely than not" under U.S. GAAP) that they will be realized.
Calculation of deferred asset or liability:
- U.S. GAAP: Enacted tax rates must be used.
- IFRS: Enacted or "substantively enacted" tax rates (as of the balance sheet date) must be used.
Classification of deferred tax assets and liabilities in balance sheet:
- U.S. GAAP: Current or non-current classification, based on the nature of the related asset or liability, is required.
- IFRS: All amounts are classified as non-current in the balance sheet.
Recognition of deferred tax liabilities from investments in subsidiaries or joint ventures (JVs) (often referred to as outside basis differences):
- U.S. GAAP: Recognition is not required for investment in foreign subsidiary or corporate JVs that are essentially permanent in duration, unless it becomes apparent that the difference will reverse in the foreseeable future.
- IFRS: Recognition is required unless the reporting entity has control over the timing of the reversal of the temporary difference and it is probable ("more likely than not") that the difference will not reverse in the foreseeable future.