For those companies reporting under International Financial Reporting Standards (IFRS), IAS 12 [Income Taxes] covers accounting for a company's income taxes and the reporting of deferred taxes. For those companies reporting under United States generally accepted accounting principles (US GAAP), FASB ASC Topic 740 [Income Taxes] is the primary source for information on accounting for income taxes. Although IFRS and US GAAP follow similar conventions on many income tax issues, there are some key differences that will be discussed in the reading.
Differences between how and when transactions are recognized for financial reporting purposes relative to tax reporting can give rise to differences in tax expense and related tax assets and liabilities. To reconcile these differences, companies that report under either IFRS or US GAAP create a provision on the balance sheet called deferred tax assets or deferred tax liabilities, depending on the nature of the situation.
Deferred tax assets or liabilities usually arise when accounting standards and tax authorities recognize the timing of revenues and expenses at different times. Because timing differences such as these will eventually reverse over time, they are called “temporary differences.” Deferred tax assets represent taxes that have been recognized for tax reporting purposes (or often the carrying forward of losses from previous periods) but have not yet been recognized on the income statement prepared for financial reporting purposes. Deferred tax liabilities represent tax expense that has appeared on the income statement for financial reporting purposes, but has not yet become payable under tax regulations.
This reading provides a primer on the basics of income tax accounting and reporting. The reading is organized as follows. Section 2 describes the differences between taxable income and accounting profit. Section 3 explains the determination of tax base, which relates to the valuation of assets and liabilities for tax purposes. Section 4 discusses several types of timing differences between the recognition of taxable and accounting profit. Section 5 examines unused tax losses and tax credits. Section 6 describes the recognition and measurement of current and deferred tax. Section 7 discusses the disclosure and presentation of income tax information on companies' financial statements and illustrates its practical implications for financial analysis. Section 8 provides an overview of the similarities and differences for income-tax reporting between IFRS and US GAAP. A summary of the key points and practice problems in the CFA Institute multiple-choice format conclude the reading.