INTERNATIONAL FINANCIAL REPORTING AND TAX PLANNING STRATEGY
International Financial Reporting and Tax Planning Strategy
Liberty University, ACCT 612
INTERNATIONAL REPORTING AND TAX PLANNING STRATEGY
International Financial Reporting and Tax Planning Strategy
The International Financial Reporting Standards, or IFRS, were created with the intention
to bring consistency to financial reporting in the business world at an international level. It has
been hoped that as countries begin to adopt these standards, it will provide greater transparency
among their key financial statements and increase stakeholder awareness on profitability,
regardless of the company or line of work. The adoption of IFRS has not yet taken place in the
United States, and international accounting literature provides evidence that there may be
implications on accounting quality using it as a global tax base (Herath & Melvin, 2017).
Currently however, as many as 120 countries have already adopted IFRS, making it the most
common global set of standards (Palmer, 2021).
Even though it is still not clear yet as to when the United States will accept these
international standard’s, tax planners and business professionals must be vigilant in considering
how and to what extent the adoption will have on current tax planning strategies, both in short
and long term. Key components to a business’s successes rely on tax planning procedures and
accounting methods to help management and key officers the tools they need to make positive
business decisions and provide honest financial health regarding their corporations. Areas like
revenue recognition and inventory valuation are several areas that financial professionals should
be considering as they prepare for the imminent adjustment. A recent study on tax avoidance in
areas where mandatory adoption of IFRS was occurring suggested that there is an increase in a
company’s involvement in tax avoidance after such adoption (Braga, 2017).
Revenue Recognition
Since IFRS’s creation and acknowledgement in the world, the boards of FASB and IASB
have slowly begun to converge US GAAP and IFRS. Recent updates in accounting standards like
INTERNATIONAL REPORTING AND TAX PLANNING STRATEGY
ASC 606, which helps clarify the principles of revenue recognition and revenue standards, are
some of the changes that have taken place in an attempt to create synergy and unify the two
reporting standards. (Ferkatch, 2019) Under GAAP ruling, there are complex and different
revenue recognition requirements for specific industries and transactions. Under IFRS, and now
through ASC 606, an entity recognizes revenue as an amount received for the transfer of goods
or services by applying a 5-step process. This guidance allows consistency regardless of industry
or geographical location (ASU 2014-09). IFRS standards also require enhanced disclosures
regarding service revenue and contracts. Since the new adoption of ASC 606 in the US, many
businesses are discovering how unprepared they are in making these changes and seeing an
increase in audit expenses as they struggle to distinguish revenue and face the new disclosure
reporting and in compliance. (Dohrer, Kushmerick, Lee-Andrews & Thorps, 2020). Though a
struggle to implement in the short run, long term corporations are looking at reporting methods
that will make tax planning easier as comparisons of financials at a global level will not be so
subjective to transaction type or industrially specific.
Inventory Valuation
When manufacturing companies are establishing their financial reporting an important
decision within that process is considering inventory valuation methods. Currently through
GAAP, there are three acceptable inventory valuation methods and those are FIFO, LIFO, and
the weighted-average method (Ross, 2021). LIFO is used primarily in the US for its income tax
rules (Gary, 2014) and is prohibited in IFRS due to potential distortions it may cause within a
manufacturer’s financial statements (Tun, 2021). Current tax benefits of using LIFO are the
ability to deduct the most current cost of purchased inventory against current sales. As product
costs rise due to inflation, so does the cost of goods sold which increases a business’s cost of
INTERNATIONAL REPORTING AND TAX PLANNING STRATEGY
goods sold deduction and in turn lowers its taxable income (Brandenburg, 2018). Many
businesses have used this method of tax planning and reliance for years and have been able to
avoid significant amounts of tax during higher inflation periods. If this method is eliminated
when adopting to IFRS, companies will need to report higher tax numbers (Jaegar, 2009) but
under current tax rules, if a company changes its inventory accounting method to another
acceptable method and the result is a higher inventory value, the difference in additional tax is
payable over a period of four years (Harris and Dilling, 2012).
Conclusion
It seems as though throughout the history of discussion in implementing International
Financial Reporting Standards, the United States and many other countries are in no hurry to
fully comply. Even with the surge in global expansion over the last 50 years and the need to
harmonize financial reporting, large economies have only excepted portions of the proposed
standards (Wingard, Bosman & Amisi, 2016). For those corporations that exist on global levels,
understanding IFRS and making the changes to begin “soft reporting” with those standards will
help them in their current tax planning procedures and prepare them for potential major tax
changes regarding revenue recognition and inventory valuation.
INTERNATIONAL REPORTING AND TAX PLANNING STRATEGY
References
Accrual Accounting Concept in IFRS and GAAP. Finance Train. (2013, January 23).
https://financetrain.com/accrual-accounting-concept-in-ifrs-and-gaap/.
Braga, R. N. (2017). Effects of IFRS adoption on tax avoidance. Revista Contabilidade & Finanças,
28(75), 407–424. https://doi.org/10.1590/1808-057x201704680
Dohrer, B. D., & Thorps , D. (2020, July 1). Challenges to consider in auditing revenue recognition.
Journal of Accountancy. https://www.journalofaccountancy.com/issues/2020/jul/auditing-revenue-
recognition-challenges-to-consider.html.
Gray, D., & Ehoff Jr., C. (2013). Lower Of Cost Or Market Inventory Valuation: IFRS Versus US GAAP.
Journal of Business & Economics Research (JBER), 12(1), 19.
https://doi.org/10.19030/jber.v12i1.8372
Herath, S. K., & Melvin , A. (2017). The Impact of IFRS Adoption on Corporate Income Taxation: A
review of literature . International Journal of Business Management and Commerce, 2(1), 1–9.
Jaeger, Jaclyn. “Gauging IFRS effect on tax planning, accounting.” Compliance Week Aug. 2009: 27+.
Business Insights: Global.
Palmer , B. (2021, March 31). International Financial Reporting Standards (IFRS). Investopedia.
https://www.investopedia.com/terms/i/ifrs.asp.
Ross, S. (2021, May 26). How Does Inventory Accounting Differ Between GAAP and IFRS? Investopedia.
https://www.investopedia.com/ask/answers/052015/how-does-inventory-accounting-differ-
between-gaap-and-ifrs.asp.
Tax Reform Series: Opportunity - LIFO Inventory Method. Sikich LLP. (2019, May 8).
https://www.sikich.com/insight/sikich-series-on-tax-reform-changes-not-included-in-tax-cuts-and-
jobs-act-offer-opportunity-lifo-inventory-method/.
Tun, Z. T. (2021, May 31). Why LIFO Is Banned Under IFRS. Investopedia.
https://www.investopedia.com/articles/investing/042115/why-last-first-out-banned-under-ifrs.asp.
Wingard, C., Bosman, J., & Amisi, B. (2016). The legitimacy of IFRS: An assessment of the influences
on the due process of standard-setting. Meditari Accountancy Research, 24(1), 134–156.
https://doi.org/10.1108/medar-02-2014-0032
Wolfson , D., & Hooven , D. (2020, March 11). Revenue Recognition: GAAP vs. IFRS: What this Means
for Your Company. Revenue Recognition | GAAP vs. IFRS | Pittsburgh Audit Services.
https://www.schneiderdowns.com/our-thoughts-on/revenue-recognition-gaap-vs-ifrs.
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