Income Tax Accounting

Income tax accounting:
U.S. GAAP comparison

to IFRS
Short-term convergence
Since 2002, the International Accounting Standards
Board (IASB) and the U.S. Financial Accounting
Standards Board (FASB) have been committed to
the convergence of IFRS and U.S. GAAP.
Preparers and others, including regulators, have
called for convergence to simplify financial
reporting and to reduce the burden of compliance
for listed companies, especially those with a stockmarket listing in more than one jurisdiction.
The SEC, in removing the U.S. GAAP
reconciliation requirement for foreign private
issuers using IFRS, has cited the continuing
convergence of IFRS and U.S. GAAP as a
fundamental building block.
As part of its strategy to better protect
European investors investing in non-European
companies, the European Commission has also
thrown its weight behind convergence.
In March 2009, the IASB issued an exposure
draft proposing changes to IAS 12 with the
objective of clarifying various aspects of the
standard and to reduce differences between
IFRS and U.S. GAAP. The comment period
ended on July 31, 2009.
As a result of the feedback received, the IASB
abandoned the 2009 exposure draft and instead
took on a limited scope project to amend IAS
12 to address certain specific practice issues.
The limited scope project resulted in the 2010
amendment to IAS 12 addressing the
accounting for deferred taxes associated with
investment properties measured at fair value in
accordance with IAS 40, Investment Property.
The IASB, however, has since suspended
consideration of the other specific practice
issues it intended to address as part of the
limited scope project, such as the accounting
for uncertain tax positions, until work is
completed on other higher priority projects.
While both boards have indicated that they
would consider undertaking a fundamental
review of accounting for income taxes at some
time in the future, the time table and path
forward is not clear.
Comparison between U.S. GAAP

and IFRS
Although both frameworks require a provision
for deferred taxes, they differ in some areas
with regard to methodology (as outlined in the
table below). In the area of income tax
accounting for business combinations, the U.S.
GAAP and IFRS models are essentially
converged following the issuance of the
revised business combination standards.
Comparison between U.S. GAAP and

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General considerations
General approach
Basis for deferred tax Temporary

assets
differences (i.e.,
and liabilities
the difference
between the carrying
amount and tax basis
of assets and
liabilities).
Similar to IFRS,
except the
carrying amount is
not
bifurcated and tax
basis is
determined based on
the
amount that is
deductible via
amortization or
depreciation, as well
as the amount that
would be deductible
upon sale

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
Tax basis is
determined based on
the expected manner
of recovery. Assets
and liabilities may
have a dual manner
of recovery (e.g.,
through use and
through sale). In that
case, the carrying
amount of the asset
or liability is
bifurcated, resulting
in more than a single
temporary difference
No similar rebuttable
presumption of
recovery
through sale exists
for
investment property.
General approach

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
A rebuttable
presumption
exists that
investment
property measured at
fair
value will be
recovered
through sale.
Initial recognition
exception
A temporary
difference may arise
on initial recognition
of an asset or
liability. A deferred
tax liability or asset
A temporary
difference may arise
on initial recognition
of an asset or
liability. In asset
purchases that are

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
an asset or liability is
in a transaction that
(1) is not a business
combination, and (2)
affects neither
accounting profit nor
taxable profit at the
time of the
transaction.
the offset generally

recorded against the
assigned value of the
asset. The amount of
the deferred tax
asset or liability is
determined by using
a simultaneous
equations "method.
General approach

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Measurement of deferred tax

Tax rate
Tax rates and tax

laws that
have been enacted
or
substantively
enacted may be
used.
Use of substantively
enacted rates is not
permitted. The
effect of changes in
tax rates and tax
laws are reflected
only on the
enactment date.

IFRS
Issue
IFRS
U.S. GAAP
Measurement of deferred tax

General approach
Full provision
Similar to IFRS
Recognition of
deferred tax assets
A deferred tax asset

is
recognized if it is
probable
that sufficient
taxable profit will be
available to utilize
against the
temporary difference.
A deferred tax asset

is
recognized in full, but
is then reduced by a
valuation allowance if
it is more-likelythannot that some or all
of the deferred tax
asset will not
be realized.
Discounting
Prohibited for
deferred taxes.
Discounting current
tax assets and
liabilities is allowed
Prohibited.

IFRS
Issue
IFRS
U.S. GAAP
General approach
Full provision
Similar to IFRS
Unrealized intragroup
profits (e.g., on
inventory
or fixed assets)
Any associated
current and deferred
taxes are recognized
at the time of the
transaction.
Any income tax

effects to the seller,
including taxes paid
and tax effects of any
reversal of temporary
differences, that
occur as a result of
the
intercompany sale
are
deferred and
recognized upon sale
to a third party or as
the transferred
property is amortized
or depreciated.
Specific applications
A temporary
difference
usually arises on
consolidation as a
result of
retaining the pretransaction carrying
amount of the
transferred asset
while having its tax

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
In addition, the buyer

is
prohibited from
recognizing a
deferred tax asset for
any
excess of tax basis
over the carrying
amount of the
transferred assets in
the
consolidated financial
statements.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Revaluation of PP&E
and
intangible assets
Deferred tax asset or

liability is recognized
with offsetting entry
in equity.
Prohibited.
Intraperiod tax
allocation
(backwards
tracing)
Income tax expense

is
recognized in the
income
statement unless the
tax
arises from a
transaction or event
which is recognized
Similar to IFRS for

items
occurring during the
year.
However, subsequent
changes (e.g., tax
rate changes,
valuation allowance
changes, etc.)

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
(in the same or

different period)
outside of the income
statement (e.g., in
equity), or unless the
tax arises from a
business
combination.
are recognized in
continuing operations
except
in limited
circumstances (i.e.,
backwards tracing
is
generally prohibited).
Deferred tax is
recognized on the
difference between
the carrying amount,
which is determined
using the historical
rate of exchange,
No deferred tax is
recognized for
differences related to
assets and liabilities
that are
remeasured from
local
General approach
Foreign nonmonetary
assets/liabilities
when the
tax-reporting
currency is
not the functional
currency

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
and the tax basis,

which is
determined using the
exchange rate on the
balance sheet date.
currency using
historical
exchange rates if
those
differences result
from
changes in exchange
rates or indexing for
tax purposes.
Deferred tax
liabilities are
recognized on
investments in
foreign and domestic
subsidiaries unless
Deferred tax
liabilities are
required on
temporary
differences arising
after 1992 that relate
General approach
Investments in
subsidiaries

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
(2) it is probable2
that the
temporary
differences will not
reverse in the
foreseeable future.
Unless such amounts

can be recovered
tax-free and the
parent expects to use
that method.
Deferred tax assets

are
recognized on
investments in
subsidiaries only to
the extent that it is
probable2 that the
No deferred tax
liabilities are
recognized on
undistributed profits
(and other outside
basis
differences) of
foreign
subsidiaries that

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Deferred tax assets

are
recognized only if it
is
apparent that the
will reverse in the
foreseeable future.
Investments in
corporate
joint ventures
Deferred tax
liabilities are
recognized on
investments in
corporate joint
ventures
Deferred tax
liabilities are
required on
temporary
differences arising
after 1992 that relate
to investments in

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
(2) it is probable2
that the
will not reverse in the
foreseeable future.
No deferred taxes
are recognized on the
(and
other outside basis
differences) of
foreign
corporate joint
ventures (that are
permanent in
duration) that meet
the indefinite
reversal criterion.
General approach

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
Deferred tax assets

are
recognized on
investments in
corporate joint
ventures only to the
extent that it is
probable2 that the
will reverse in the
foreseeable future.
Deferred tax assets

are
recognized only when
it is
apparent that the
temporary
difference will
reverse in the
foreseeable future.
General approach

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Investments in
associates
(equity-method
investments)
Deferred tax
liabilities are
recognized unless (1)
the
investor can control
the
sharing of profits and
(2) it is probable2
that the temporary
difference will not
reverse in the
foreseeable future.
Deferred tax
liabilities and
assets are generally
recognized on
temporary
differences relating
to equity-method
investments.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Deferred tax assets

are
recognized only to
the extent that it is
probable2 that the
will reverse in the
foreseeable future.
Change from
investee
status to subsidiary
status
No specific rules
apply.
General guidance
regarding deferred
taxes on
(and other outside
A deferred tax
liability related to
of the prior foreign
investee that would
not otherwise be
required after the

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
The deferred tax

liability continues to
be
recognized to the
extent that dividends
from the subsidiary
do not exceed the
parent companys
share of the
subsidiarys earnings
subsequent to the
date it became a
subsidiary, until the
disposition of the
subsidiary.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
For awards that

ordinarily
result in a tax
deduction (e.g.,
nonqualified stock
options in the federal
U.S. jurisdiction),
deferred taxes are
recorded as
the compensation is
earned.
For awards that

ordinarily
result in a tax
deduction (e.g.,
nonqualified stock
options in the federal
U.S. jurisdiction),
deferred taxes are
recorded as
the compensation is
earned.
General approach
Share-based
compensation
(equity-classified
awards)

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
The deductible
temporary
difference is based
on the
expected future tax
deduction
corresponding to the
percentage earned to
date (e.g., intrinsic
value of the award at
the reporting date
times the percentage
vested).
The deductible
temporary
difference is based
on the
compensation cost
recognized for
financial reporting
purposes, and is not
adjusted for changes
in stock price.
Changes in the stock
price do not affect
the deferred tax
asset or result in any
adjustments prior to
General approach

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
If the actual or
estimated tax
deduction exceeds
the
cumulative sharebased
compensation
expense, the tax
effect of the excess is
recorded directly in
equity.
If the actual tax

benefit
exceeds the deferred
tax asset, the excess
benefit, which is
known as a windfall
tax benefit, is
credited directly to
shareholders equity.
General approach
If the actual or
If the tax benefit is
estimated tax
less than the
deduction is less than deferred tax asset,
or equal to
the shortfall is

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
The unit of
accounting is an
individual award (i.e.,
no windfall pool).
Available windfall
pool , and as a charge
to income tax
expense thereafter.
The unit of account is

not
specified. An entity
may
consider uncertain
tax
positions at the level
of the
individual uncertainty
or
group of related
The unit of account is

an
individual tax
position,
determined based on
the
manner in which the
entity
prepares and
supports its
income tax return and
General approach
Uncertain tax
positions
unit of account

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Alternatively, it may
choose to consider
tax uncertainties at
the level of its total
tax
liability to each
taxing
authority. The
approach taken for
determining the unit
of account is a policy
election.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Uncertain tax
positions
measurement
When it is probable2
that an entity has
incurred a liability
(without considering
detection risk), the
liability is measured
using either a
weighted average
probability
approach or at the
single best estimate
of the most likely
outcome.
For uncertain tax

positions
whose technical
merits meet the
more-likely-than-not
recognition threshold,
the benefit is
measured at the
largest amount of tax
benefit that is greater
than 50 percent likely
of being realized.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
Relevant developments to
uncertain tax positions
occurring after the balance
sheet date but before
issuance of the financial
statements (which would
include discovery of
information that was not
available as of the balance
sheet date) should be
considered either an
adjusting or non adjusting
event depending on
whether the new
information provides
evidence of conditions that
existed at the end of the
reporting period.
Relevant developments to
occurring after the balance
sheet date but before the
issuance of the financial
statements (which would
include the discovery of
information that was not
available as of the balance
sheet date) should be
considered a non
recognized
subsequent event for
which no
effect would be recorded
in the
current period financial
statements.
General approach
Uncertain tax positions
subsequent events

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
Uncertain tax positions
balance sheet
classification
A liability for uncertain

tax
positions is generally
classified as a current
liability
because entities
typically do
not have the
unconditional
right to defer
settlement of
for at
least 12 months after
the
reporting period.
A liability for
unrecognized tax
benefits is classified as
a
current liability only to
the
extent that cash
payments are
anticipated within 12
months of the reporting
date.
Otherwise, such
amounts are
reflected as noncurrent
liabilities.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
As such, an entity can

elect an accounting
policy to recognize
and measure interest
and penalties in
accordance with (a)
IAS 12, or (b) IAS 37,
Provisions,
Contingent Liabilities
and Contingent
Assets.
While not specifically

addressed in ASC
740, we believe
interest income
should be accounted
for in the same
manner as interest
expense.
General approach

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS
General approach
The accounting policy

applies to amounts
payable and amounts
recoverable. IAS 37
prohibits recognition
of a contingent asset
until it is virtually
certain, whereas IAS
12 requires uncertain
tax
assets to be recorded
on the basis of the
amount expected to
be recovered.
An expense for the

amount of the
statutory penalty is
recognized in the
period in
which the entity
claims or
expects to claim the
position in the tax
return.

IFRS
Issue
IFRS
U.S. GAAP
Full provision
Similar to IFRS

selected is applied to
classification (i.e.,
income taxvs. finance
or another
expense).
An accounting policy
is
selected and applied
consistently to the
classification of
interest and penalties
(i.e., income tax vs.
interest or another
expense).
General approach

should be applied
consistently.

IFRS
Issue
IFRS
U.S. GAAP
Presentation of deferred taxes

General approach
Full provision
Similar to IFRS
Offset of deferred tax

assets and liabilities
This is permitted only Similar to IFRS

when the entity has a
legally enforceable
right to offset and the
balance relates to the
tax levied by the
same authority.
Current/noncurrent
Deferred tax assets

and
liabilities are
classified net as
noncurrent on the
balance sheet, with a
supplemental note
disclosure for (1) the
Deferred tax assets

and
liabilities are either
classified as current
or noncurrent based
on the classification
of the related non-tax
asset or liability for

IFRS
Issue
IFRS
U.S. GAAP

General approach
Reconciliation of
actual and expected
tax expense
Full provision
Similar to IFRS
(2) The amounts

expected to be
recovered or settled
within 12 months of
the balance sheet
date and after 12
months from
the balance sheet
date.
Tax assets that are

not associated with
an underlying asset
or liability
(e.g., net operating
loss
carryforwards) are
classified in
accordance with the
expected reversal
period.
An explanation
between tax expense
and accounting profit
in either or both of
Reconciliation is
required for public
companies of the
reported amount of

IFRS
Issue
IFRS
U.S. GAAP

General approach
Full provision
(1) a reconciliation
computed first
by applying the
applicable tax rate(s)
to accounting profit
and then by
disclosing the basis
on which the
applicable
tax rate(s) are
calculated,
(2) a reconciliation
between the average
effective tax rate and
the applicable tax
Similar to IFRS
that would result
from applying the
domestic,
federal statutory tax
rates to
pretax income from
continuing
operations.
Differences in
interpretation
Although the income tax accounting guidance
under U.S. GAAP and IFRS share many
fundamental principles, in some places, the
standards use different terms to describe the
same or similar concepts and, as a result, can
be interpreted and applied in a number of
different ways.
Differences in
interpretation
In other places, one standard provides
additional interpretive guidance (such as
accounting for uncertain tax positions under
ASC 740) that does not exist under the other
framework. In still other places, the standards
provide different exceptions or carve-outs to
the basic principle.

and IFRS
One of the more apparent differences between
the standards involves the language used to
define the threshold for recognition of a deferred
tax asset. IAS 12 requires the recognition of a
deferred tax asset if future realization of a tax
benefit is probable. ASC 740-10-30-5 requires
a valuation allowance to be applied to a deferred
tax asset if realization of the underlying future
tax benefits is not more-likely-than-not.

and IFRS
Although the two frameworks use different
terminology, we understand that the two
Boards intended for the meaning of those
terms to be consistent under both IFRS and
U.S. GAAP.

and IFRS
In its 2009 exposure draft on accounting for income
taxes, the IASB considered what the term
probable should mean in the context of the
recognition of a deferred tax asset and proposed
clarifying that the recognition threshold be
consistent with the meaning of the term probable
as defined in IAS 37, Provisions, Contingent
Liabilities and Contingent Assets, IFRS 3, Business
Combinations (revised 2008), and with the
recognition threshold in ASC 740.

and IFRS
Another difference in application stems from
the assessment of deferred tax assets when
losses have occurred in recent years. ASC 74010-30-21 states, Forming a conclusion that a
valuation allowance is not needed is difficult
when there is negative evidence such as
cumulative losses in recent years.

and IFRS
Further, ASC 740-10-30-23, provides that the
weight given to the potential effect of negative
and positive evidence should be commensurate
with the extent to which it can be objectively
verified. A history of losses in recent years can
be objectively verified and thus can be
particularly difficult to overcome. IAS 12, par.
35, states:

and IFRS
Existence of unused tax losses is strong evidence
that future taxable profit may not be available.
Therefore, when an entity has a history of recent
losses, the entity recognizes a deferred tax asset
arising from unused tax losses or tax credits only
to the extent that the entity has sufficient taxable
temporary differences or there is convincing
other evidence that sufficient taxable profit will
be available against which the unused tax losses
or unused tax credits can be utilized by the entity.

and IFRS
IAS 12 does not prescribe a method for
weighting the available evidence. As a result,
there could be differences in the way that
evidence is weighted under U.S. GAAP, which
uses the term objectively verifiable, and IAS
12, which uses the term convincing.

and IFRS
It is important to note, however, that in most
cases we would expect that convincing
evidence would be objectively verifiable.
Still, in any area of accounting where
judgment is required, differences can
potentially arise.

Income Tax Accounting

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Income Tax Accounting

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Income tax accounting:

U.S. GAAP comparison

Comparison between U.S. GAAP

Comparison between U.S. GAAP and

Basis for deferred tax Temporary

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

the offset generally

Comparison between U.S. GAAP and

Measurement of deferred tax

Tax rates and tax

Comparison between U.S. GAAP and

Measurement of deferred tax

A deferred tax asset

A deferred tax asset

Comparison between U.S. GAAP and

Any income tax

Comparison between U.S. GAAP and

In addition, the buyer

Comparison between U.S. GAAP and

Deferred tax asset or

Income tax expense

Similar to IFRS for

Comparison between U.S. GAAP and

(in the same or

Comparison between U.S. GAAP and

and the tax basis,

Comparison between U.S. GAAP and

Unless such amounts

Deferred tax assets

Comparison between U.S. GAAP and

Deferred tax assets

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

Deferred tax assets

Deferred tax assets

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

Deferred tax assets

Comparison between U.S. GAAP and

The deferred tax

Comparison between U.S. GAAP and

For awards that

For awards that

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

If the actual tax

Comparison between U.S. GAAP and

The unit of account is

The unit of account is

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

For uncertain tax

Comparison between U.S. GAAP and

Comparison between U.S. GAAP and

A liability for uncertain

Comparison between U.S. GAAP and

As such, an entity can

While not specifically

Comparison between U.S. GAAP and

The accounting policy

An expense for the

Comparison between U.S. GAAP and