2
International Financial Reporting Standards (IFRS)
The International Financial Reporting Standards (IFRS) are high-quality accounting
standards set by the International Accounting Standards Board (IASB) and used around the
world. (Gill & Sawyers, 2020) . The IASB use a principle-based approach that leaves more room
to allow for different ways to interpret the accounting standards. On the other hand, Generally
Accepted Accounting Principles (GAAP) is a more rules-based approach in the US. GAAP
follows a top-bottom approach and uses a taxonomy to define the reporting framework. One of
the stated rationales for the transition is that adopting IFRS will allow the US to become
financially aligned with the rest of the world. GAAP is predominantly used around the world,
especially in Europe and Asia. Alignment will make it easier and faster to merge financial
information across countries. There are three tax-related strategies the US adopting IFRS will
impact, tax avoidance, inventory valuation, and tax compliance.
Tax Avoidance and IFRS Adoption
Tax avoidance is one area that could be significantly affected by adopting IFRS. Research
suggests that IFRS adoption may lead to increased accruals, which is linked to higher levels of
tax avoidance (Braga, 2017). Companies may not fully realize these impacts until they transition
from GAAP to IFRS. Unlike GAAP’s detailed rules, IFRS’s broader principles give companies
more leeway in their financial reporting. This flexibility can lead to discrepancies in taxable
income. For example, the divergence between tax and accounting rules allows managers to
engage in complex tax avoidance strategies without heavily impacting their financial statements
(Chen, Gavious, & Smith, 2017). By exploiting differences between GAAP and IFRS,
organizations might find ways to reduce their taxable income.
3
Inventory Valuation Differences
Another area of divergence is inventory valuation. In this regard, under GAAP,
companies are allowed to value inventory via first-in, first-out (FIFO); last-in, first-out (LIFO);
weighted average or, when assets and liabilities are identifiable, specific identification (Tribuzi,
2018). However, IFRS allows only the FIFO and weighted average method. This is because the
IFRS allows companies to value their inventory at inflated or more recent cost to reduce its
taxable income. The FIFO method tends to have relatively more current values and would be
more in line with current economic conditions when used to value inventory. When used to value
inventory, LIFO (which is not allowed under IFRS) better matches the cost of goods sold with
current prices and gives a different economic perspective to the income statement (Popatia,
2017).
Significance of Inventory and the Transition Between IFRS and GAAP
In many industries, inventory plays a crucial role, making its accounting and valuation a
significant concern. The differences between IFRS and US GAAP in how inventory costs are
measured and recorded can pose challenges for companies transitioning between these standards
or aligning acquired businesses with their group’s inventory policies (Bogle, 2022). Switching
inventory costing methods often necessitates changes in systems and processes. The choice of
inventory valuation method, such as LIFO under GAAP or FIFO under IFRS, directly affects a
company's gross income. When companies use different methods for GAAP and IFRS, they must
reconcile these differences and justify their chosen approach.
Challenges with Dual Compliance and Tax Implications
4
One major obstacle to adopting IFRS in the U.S. is the requirement for American
companies to maintain records compliant with both GAAP and IFRS. This dual compliance
impacts tax reporting. As noted by Braga (2017), companies that adopt IFRS for financial
statement preparation still need to use local GAAP for tax calculations. Publicly traded
companies in the U.S. must use GAAP for their financial statements to comply with SEC
regulations. The goal of IFRS adoption is to enable comparability in financial reports of
international companies. Currently, U.S. multinational companies must produce GAAP, IFRS,
and reconciliation statements, arguing that it is unfair for them to provide multiple reports
compared to the single IFRS document required by other multinational firms.
Impact of IFRS on Tax Strategies and Compliance
While IFRS was not initially expected to affect tax planning directly, its adoption has
influenced various tax strategies, including tax avoidance, inventory valuation, and compliance
(Braga, 2017). Short-term, IFRS adoption increases the workload for U.S. companies, requiring
additional documentation and reconciliation to meet compliance standards. Long-term, it affects
tax strategies and inventory valuation practices. As companies transition from GAAP to IFRS,
they might need to overhaul their inventory valuation methods, impacting their tax planning and
potentially reducing their ability to avoid taxes.
5
References
Bogle, K. (2022). Inventory Accounting: IFRS vs U.S GAAP. KPMG Advisory Articles doi:
https://advisory.kpmg.us/articles/2021/inventory-accounting.html
Braga, R. N. (2017). Effects of IFRS adoption on tax avoidance. Revista Contabilidade & Finanças, 28(75),
407-424. doi:http://dx.doi.org.ezproxy.liberty.edu/10.1590/1808- 057x201704680
Chen, E., Gavious, I., & Smith, T. (2017). The roles of book tax conformity and tax enforcement in‐
regulating tax reporting behaviour following international financial reporting standards adoption.
Accounting & Finance, 57(3), 681-699. doi:10.1111/acfi.12172
Gill, S., & Sawyers, R. B. (2020). Federal Tax Research (12th ed.). Mason, Ohio: Cengage.
Popatia, K. (2017). IFRS & GAAP: Reconciling differences between accounting systems and assessing the
proposed changes to the IFRS constitution. Northwestern Journal of International Law & Business, 38(1),
137-159.
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), 817-839.
doi:10.2979/indjglolegstu.25.2.0817
Powered by TCPDF (www.tcpdf.org)
