IFRS and Income Taxes

International Financial Reporting Standards (IFRS) is the accounting standard used in over 100 countries, although not the United States. As the global economy expands, the U.S. is considering a convergence with IFRS to achieve a uniform international accounting standard. The shift to a single standard is likely for publicly-held companies in the near future. Although the goal of convergence is to achieve uniform financial reporting standards worldwide, the transition to IFRS will not be without conflicts. One major difference between IFRS and generally accepted accounting principles (GAAP) in the U.S. is how details are treated.

When it comes to details, the entire guidance for IFRS fits into a single book roughly two inches thick. The GAAP rules fill three volumes totaling over eight inches. GAAP provides much more in the way of rules, restrictions, interpretations and exceptions than IFRS, which is principles-based.

Of interest to many prospective users of IFRS is the tax impact of this international change. The concepts that need to be addressed initially include tax accounting methods, FASB Interpretation No. (FIN) 48 and IAS 12. Many more topics will eventually require consideration, but information is gradually unfolding during this investigative process involved with convergence.

Once book accounting methods are changed, the impact on tax accounting methods requires consideration. For example, in cases in which book and tax methods are currently the same, if IFRS changes the book treatment, what happens to the existing tax method? How do you continue to use historical tax methods? Should tax conform to book methods? Will a request for a change in accounting method be necessary, requiring filing Form 3115? Will information be available to compute book/tax differences? Which method is acceptable for tax purposes? The answers to these questions will have a major impact on the preparation of tax returns.

Once these questions are answered on a federal level, all states imposing a corporate level tax may have their own interpretation of acceptable reporting methods. Multistate corporations may be faced with many adjustments to be made on a state and local level that could exceed the complication at the federal level.

To date, some of the differences in accounting methods noted include the disallowance of the last-in-first-out (LIFO) inventory method, valuations of property, plant and equipment for depreciation purposes, purchase price accounting and capitalization methods. As many differences also impact revenue recognition, FASB is attempting to consolidate the current 25 different industry-specific rules into one general standard, in anticipation of the convergence to IFRS.

FIN 48 and IFRS

FIN 48 attempts to provide guidance on accounting for uncertainty in tax positions. Publicly-held companies have followed this interpretation since last year, whereas full implementation of this standard has been delayed. The FASB interpretation requires corporations to assess the likelihood of uncertain tax positions being sustainable upon audit, assuming an examination is imminent. Potential tax liabilities must be accrued and disclosed if the position is “more likely than not” to be disallowed. Under IFRS reporting, all potential liabilities must be recognized, with no recognition threshold. The measurement of that tax liability is likely to differ from GAAP requirements, as their general approach to liabilities is a probability weighted method. A convergence of these standards might require the U.S. accepting an “expected value” approach to assessing tax liabilities.

International Accounting Standards (IAS) 12, Income Taxes

This IFRS standard mandates the allocation of taxes between periods as determined by the recognition of transactions in periods governed by the application of IFRS. The differences in recognition for financial statements and for tax purposes are reconciled through deferred taxes. IAS 12 describes recognition and measurement of deferred taxes using a temporary difference approach, similar to the method of FAS 109, Accounting for Income Taxes. Although there are significant differences in the treatment of tax basis, uncertain tax positions and recognition of deferred tax assets and liabilities, a joint exposure draft is expected from FASB and IASB sometime this year to effectively eliminate these differences. The resulting convergence is expected to have a major impact of the implementation of FIN 48 by establishing a measurement of tax liability based on probability-weighted average of the possible outcomes, including consideration of detection.


As most taxing jurisdictions around the world are not currently planning to adopt IFRS, companies in transition to the proposed worldwide standards will generally be impacted by the measurement and recognition of deferred taxes. Due to the significant tax consequences involved, any planned business combinations or major initiatives or products should be thoroughly reviewed in light of the anticipated changes presented by a convergence with IFRS standards. All tax planning strategies should be evaluated for consistency with the new rules before implementation.

As the Securities and Exchange Commission (SEC) continues to advance on its “Roadmap” to convergence, expect more guidance to be available as the convergence process continues.

About the Author

By Mary F. Bernard, CPA/MST is a Tax Principal and Director of State and Local Tax Services at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.

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