Chapter 19:
Income Tax Accounting: U.S. GAAP Comparison to IFRS
Chapter Summary
The current income tax accounting frameworks under U.S. GAAP and IFRS are both balance sheet liability models and share many fundamental principles. For example, International Accounting Standard No. 12, Income Taxes (IAS 12) and ASC 740 require an entity to recognize the current and deferred tax consequences of transactions. However, there are significant differences in the details. This chapter provides a summary of the primary conceptual differences between accounting for income tax under U.S. GAAP and IFRS.
A comprehensive discussion of the accounting for income taxes under IAS 12 can be found in PwC’s Manual of Accounting—IFRS.
19.1 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 stock-market 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.
The table below compares U.S. GAAP and IFRS accounting for income tax. While the table compares many aspects of accounting for income tax, the table may not address all of the differences that should be considered to interpret and apply in practice the individual accounting standards. For example, there is income tax related guidance in U.S. GAAP literature that does not exist in IFRS, such as the guidance related to leveraged leases. All such instances may not be captured in the table.
19.2 Comparison between U.S. GAAP and IFRS
19.2.1 Comparison between the U.S. GAAP and IFRS Income Tax Accounting Models
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.
Note: The following table should neither be used as a substitute for reading the entire standard(s) nor be viewed as a complete list of the principle differences and similarities between income tax accounting under U.S. GAAP and IFRS.
1 The exception to the measurement principle for investment properties measured at fair value was issued in an amendment to IAS 12 in December 2010. The amendment is effective for annual periods beginning on or after January 1, 2012, with early adoption permitted.
2 The term “probable” is generally interpreted to mean more-likely-than-not when applying IFRS.
19.2.2 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. 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.
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. 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. 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.
Another difference in application stems from the assessment of deferred tax assets when losses have occurred in recent years. ASC 740-10-30-21 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.” 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:
. . . the 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.
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.” 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.