1-Hour Writer

This week’s discussion board asks us to compare and contrast accounting for income tax reporting standards between U.S. GAAP and IFRS.  The two approaches are similar in some ways, but different in others.  Even though both approaches rely on the same information, they can both give very different answers in terms of deferred taxes for income tax purposes.  This can result from the way different exemptions are used, how different deferred assets are recognized, and what information each approach uses in their calculations of the income tax (740.., 2014, 2).

            In terms of initial recognition exemption, and with IFRS “deferred tax effects arising from the initial recognition of an asset or liability are not recognized when the amount did not arise from a business combination and upon occurrence, the transaction affects neither accounting nor taxable profit”  (U.S…, 2011, 34).  An example of this would be when a company purchases an asset that it will not be able to deduct.  In comparison U.S. GAAP does not have any provisions that allow for a kind of exemption as IFRS does for the “non-recognition of deferred tax effects for certain assets.” (U.S…, 2011, 34).  Whether or not a business is able to recognize these types of deferred tax effects can impact the numbers that are given by both of these approaches thus causing them to differ greatly.

            A second difference is how each approach recognizes deferred tax assets.  U.S. GAAP recognizes the tax effects in full “but the valuation allowance reduces asset to the amount that is more likely than not to be realized” (U.S…, 2011, 34).  In contrast, IFRS only recognizes the amounts “to the extent it is probable that they will be realized” (U.S…, 2011, 34). 

            A third difference is on how the deferred tax asset or liability is calculated.  Under U.S. GAAP the “enacted tax rates must be used.”  (U.S…, 2011, 34).  In contrast, IFRS says that only “enacted or substantively enacted tax rates as of the balance sheet date must be used.” (U.S…, 2011, 34). 

            A fourth difference is how each approach classifies the deferred tax assets and liabilities in the balance sheet.  Under U.S. GAAP, “current or non-current classification, based on the nature of the related asset or liability is required.” (U.S…, 2011, 34).   In contrast IFRS, “all amounts are classified as non-current in the balance sheet.” (U.S…, 2011, 34). 

            Finally, a fifth difference is the recognition of deferred tax liabilities from investments in subsidiaries or joint ventures.  Under U.S. GAAP, “recognition is not required for investment in a foreign subsidiary or corporate joint venture that is essentially permanent in duration, unless it becomes apparent that the difference will reverse in the foreseeable future.” (U.S…, 2011, 34).    In contrast under IFRS, “recognition is required unless the reporting entity has control over the timing of the reversal of the temporary different and is probable that the difference will not reverse in the foreseeable future.”  (U.S…, 2011, 34).   

            So in conclusion, these are just a few of the ways that U.S. GAAP and IFRS differ in terms of income tax reporting as this basically relates to how they account for deferred tax assets and liabilities.  It can be a very confusing subject, and one that will take time for someone to completely figure out.  However, by looking at the differences above it is clear to see why the calculations presented by each approach can differ simply because each takes into account different information and uses the information in different ways. 

References

“740 income taxes”  (2014).  FASB.  Retrieved September 18, 2014 from