IFRS AND TAX PLANNING 1
International Financial Reporting and Tax Planning Strategy
School of Business, Liberty University
IFRS AND TAX PLANNING 2
International Financial Reporting and Tax Planning Strategy
There are multiple accounting standards that exist around the globe. One of these
standards is called the International Financial Reporting Standards. The International Financial
Reporting Standards (IFRS) “is a single set of high-quality, understandable standards for the
general purpose of financial reporting which are principles-based that gives flexibility and
encourages professional judgement in contrast to the rules-based approach (US GAAP), that is,
follows specific accounting rules” (Dagnew, 2021, p. 259). These standards determine how
financial information should be organized and reported. The adoption of this standard has had a
major impact on taxes. This paper will focus on three specific areas that have been affected
which include inventory valuation, the treatment of certain assets, and revenue recognition.
Inventory Valuation
The first area of tax planning that has been affected is inventory valuation. “IFRS
currently does not allow LIFO inventory valuation. IFRS only allows FIFO and weighted
average cost” (Tribuzi, 2018). The IFRS completely prohibits the use of the LIFO method for
inventory valuation. This is different from the U.S. GAAP who does allow for this method. There
is a very important reason for this. Sedki et al. (2018) explained how there are major tax
concerns with the LIFO since it provides an unfair tax advantage by reducing the tax amount
during inflationary periods, and it has the potential for companies to misrepresent their financial
statements thought inaccurate profitability and inventory since they have more control in the
LIFO method (p. 26). The LIFO method can be considered to offer a company a tax loophole.
This is due to the fact that the LIFO method shows the largest cost of goods sold compared to the
other valuation methods that exist. As a result of this, there is a smaller net income and therefore
a smaller tax burden. It saves a company from what they consider unnecessary tax expenses.
IFRS AND TAX PLANNING 3
Asset Treatment
The second area of tax planning that has been affected is how assets are treated. There are
two main types of assets that are affected. The first type of asset that has been affected is
deferred tax assets and deferred tax liabilities. GAAP will recognize these assets and liabilities in
full if it is more likely than not that this tax position will be upheld while for the IFRS “a
probability weighted expected value is typically taken” (Cipriano et al., 2022, p. 100).
Depending on the probability amount will determine whether the full deferred tax asset or none
of the deferred tax asset will be recorded. This will affect whether or not a company will be able
to receive a tax benefit under the U.S. GAAP standard. Another difference between these
standards is the fact that IFRS treats all deferred tax assets and liabilities as non-current. On the
other hand, GAAP will recognize these assets and liabilities as either current or non-current
based on certain classifications.
The second asset type that has been affected by IFRS adoption is investment property.
Once again, U.S. GAAP measures and records this asset differently than IFRS. The U.S. GAAP
reports investment property on the balance sheet as historical cost minus depreciation while the
IFRS reports investment property at either the “fair value option”, which means that this asset is
listed directly on the balance sheet at fair value, or the “cost option”, which means that the asset
is disclosed in the footnotes of the financial statements at fair value (Conaway et al., 2021, p. 2).
The use of the IFRS method compared to the U.S. GAAP method for dealing with investment
property will have a major impact of financial statements. The use of fair value rather than using
depreciated historical cost will affect the amount of taxes that the company will have to pay since
investment property is recorded at a higher amount under IFRS than it would be under U.S.
GAAP.
IFRS AND TAX PLANNING 4
Revenue Recognition
The final area of tax planning that has been affected by the adoption of IFRS is revenue
recognition. Erguden (2020) explained how revenue is recognized by the IFRS when the
performance obligation is satisfied, and that the performance obligation is satisfied once the
goods and services have been transferred to the customer (p. 50). The U.S. GAAP standard
requires that the revenue be realized before it can be recorded. Also, the revenue is recorded in
the period in which it was realized and earned, not when the payment was received. Revenue is
also handled differently in each standard. “IFRS 15 develops a five-step model applicable to
revenue earned from a contract with customer. In main cases, it does not consider the industry or
the nature of transaction generating the revenue” (Trabelsi, 2018, p. 3). Conversely, GAAP has
industry specific guidelines on how revenue should be recognized. This will cause a significant
change in tax reporting along with affecting tax planning, accounting methods, and values.
Conclusion
In conclusion, the adoption of IFRS has had a major impact of the tax industry,
specifically with tax planning strategies and tax standards. The IFRS, or the International
Financial Reporting Standards, is a principles-based accounting standards while the GAAP,
Generally Accepted Accounting Principles, are rules based. IFRS had affected multiple areas of
the tax industry, but three major areas affected include inventory valuation, asset treatment, and
revenue recognition. The IFRS does not allow for the LIFO method which reduces the amount of
taxes paid. Deferred tax assets and liabilities are valued differently under each method. However,
there is a risk of not tax benefit under U.S. GAAP. Investment property is also valued differently
under each standard which changes the amount of taxes that a company pays. Revenue is
recognized differently which affects the way various aspects of tax are handled and reported.
IFRS AND TAX PLANNING 5
References
Cipriano, M., Cole, E. T. & Briggs, J. (2022). Value relevance and market valuation of assets
Measured using IFRS and US GAAP in the US equity market. International Journal of
Accounting & Information Management, 30(1), 95-144.
https://doi-org.ezproxy.liberty.edu/10.1108/IJAIM-06-2021-0126
Conaway, J. K., Liang, L. & Riedl, E. J. (2021). Market Perceptions of Fair Value Reporting for
Tangible Assets. Journal of Accounting, Auditing & Finance, p. 1-26.
https://ezproxy.liberty.edu/login?url=https://search.ebscohost.com/login.aspx?
direct=true&db=bth&AN=150906192&site=ehost-live&scope=site
Dagnew, D. K. (2021). Implementation of International Financial Reporting Standards: Its
Practices, Challenges and Prospects: The Case of Commercial Banks in Ethiopia.
Asia-Pacific Journal of Management Research and Innovation, 16(4), 259-271.
https://doi-org.ezproxy.liberty.edu/10.1177%2F2319510X211013597
Erguden, A. E. (2020). Analysis of Tourism Companies Listed in Istanbul Stock Exchange
According to IFRS-15 Standard. International Journal of Finance & Banking Studies,
9(1), 47-57. http://dx.doi.org.ezproxy.liberty.edu/10.20525/ijfbs.v9i1.650
Sedki, S. S., Posada, G. A. & Pruske, K. A. (2018). Differences Between U.S. GAAP and IFRS
In Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the Internal
Revenue Code. Journal of Accounting and Finance, 18(4), 23-29. https://www-proquest-
com.ezproxy.liberty.edu/docview/2118314851/fulltextPDF/DB7FAD326DDE48CAPQ/1
?accountid=12085
Trabelsi, N. S. (2018). IFRS 15 EARLY ADOPTION AND ACCOUNTING INFORMATION:
IFRS AND TAX PLANNING 6
CASE OF REAL ESTATE COMPANIES IN DUBAI. Academy of Accounting and
Financial Studies Journal, 22(1), 1-12. https://www-proquest-
com.ezproxy.liberty.edu/docview/2025304916/fulltextPDF/DEBF005972784C54PQ/1?
accountid=12085
Tribuzi, E. M. (2018). The Inevitable United States Adoption of IFRS: How and Why the United
States Should Be Prepared. Indiana Journal of Global Legal Studies, 25(2), 817+.
https://bi-gale-com.ezproxy.liberty.edu/global/article/GALE%7CA619742946?
u=vic_liberty&sid=summon
Powered by TCPDF (www.tcpdf.org)
