Key Differences Between US GAAP and IFRS

There are many similarities with respect to income tax accounting under IFRS and US GAAP. There are, however, also many notable differences. For example, although both IFRS and US GAAP require a provision for deferred taxes, there are differences in the methodologies they employ.

Key Provisions and Differences in Deferred Tax Methodologies Under IFRS and US GAAP

The following table highlights the key similarities and differences in the methodologies for deferred income tax under IFRS and US GAAP (Sources: IFRS: IAS 1, IAS 12, and IFRS 3; US GAAP: FAS 109 and FIN 48 – “Similarities and Differences – A Comparison of IFRS and US GAAP, “PriceWaterhouseCoopers, October 2006).

$$ \textbf{General Considerations} \\ \begin{array}{|l|l|l|} \hline \textbf{Issue} & \textbf{IFRS} & \textbf{US GAAP} \\ \hline \begin{array}[t]{l} \text{Basis for deferred tax} \\ \text{assets and liabilities} \end{array} & \begin{array}[t]{l} \text{Temporary differences – like} \\ \text{the difference between the tax} \\ \text{base and the carrying amount} \\ \text{of assets and liabilities} \end{array} & \begin{array}[t]{l} \text{Similar to IFRS} \end{array} \\ \hline \begin{array}[t]{l} \text{Revaluation of plant, property,} \\ \text{equipment and intangible} \\ \text{assets} \end{array} & \begin{array}[t]{l} \text{A deferred tax recognized} \\ \text{in equity} \end{array} & \begin{array}[t]{l} \text{Not applicable because} \\ \text{revaluation is prohibited} \end{array} \\ \hline \begin{array}[t]{l} \text{Foreign non monetary} \\ \text{assets or liabilities when the} \\ \text{tax reporting currency is not} \\ \text{the functional currency} \end{array} & \begin{array}[t]{l} \text{The difference between the} \\ \text{carrying amount determined} \\ \text{using the historical rate of} \\ \text{exchange and the tax base} \\ \text{determined using the balance} \\ \text{sheet date exchange rate is} \\ \text{recognized as a deferred tax} \end{array} & \begin{array}[t]{l} \text{The standard does not} \\ \text{allow the recognition any} \\ \text{differed tax in this} \\ \text{scenario} \end{array} \\ \hline \begin{array}[t]{l} \text{Treatment of undistributed} \\ \text{profit:} \\ \text{Investment in subsidiaries} \\ \text{OR} \\ \text{Investment in joint} \\ \text{ventures} \end{array} & \begin{array}[t]{l} \text{A differed tax is recognized} \\ \text{unless the parent company} \\ \text{is able to control the} \\ \text{distribution of profit and} \\ \text{it is likely that the} \\ \text{temporary difference will} \\ \text{not reverse in the} \\ \text{foreseeable Future.} \end{array} & \begin{array}[t]{l} \text{A deferred tax is} \\ \text{required on temporary} \\ \text{difference that relate} \\ \text{to investment in} \\ \text{domestic subsidiaries,} \\ \text{except when the} \\ \text{amount can be} \\ \text{recovered free of} \\ \text{tax and the entity} \\ \text{expects to use} \\ \text{that method. No} \\ \text{deferred taxes are} \\ \text{recognized on} \\ \text{undistributed profits} \\ \text{of foreign subsidiaries} \\ \text{that meet the indefinite} \\ \text{reversal criterion} \end{array} \\ \hline \begin{array}[t]{l} \text{Uncertain tax positions} \end{array} & \begin{array}[t]{l} \text{The standard requires the} \\ \text{recognition of the} \\ \text{deferred taxes paid or} \\ \text{recoverable should the} \\ \text{entity’s expectations} \\ \text{become real.} \end{array} & \begin{array}[t]{l} \text{A tax benefit from} \\ \text{uncertain tax position} \\ \text{could be recognized} \\ \text{only if the} \\ \text{possibility of occurrence} \\ \text{of the underlying} \\ \text{event is more} \\ \text{than 50%.} \end{array} \\ \hline \end{array} $$

$$ \textbf{Measurement of Deferred Tax} \\ \begin{array}{|l|l|l|} \hline \textbf{Issue} & \textbf{IFRS} & \textbf{US GAAP} \\ \hline \begin{array}[t]{l} \text{Tax rates} \end{array} & \begin{array}[t]{l} \text{Tax rates and tax} \\ \text{laws that have} \\ \text{been enacted or} \\ \text{substantively enacted} \end{array} & \begin{array}[t]{l} \text{The use of substantively} \\ \text{enacted rates is not} \\ \text{permitted. Tax rate} \\ \text{and tax laws used} \\ \text{must have been} \\ \text{enacted.} \end{array} \\ \hline \begin{array}[t]{l} \text{Recognition of deferred tax} \\ \text{assets} \end{array} & \begin{array}[t]{l} \text{A deferred tax asset is} \\ \text{recognized if it is} \\ \text{probable} \\ \text{(more likely than not)} \\ \text{that sufficient taxable} \\ \text{profit will be} \\ \text{available against which the} \\ \text{temporary difference can} \\ \text{be utilized. A} \\ \text{deferred tax asset} \\ \text{could be recognized only} \\ \text{if the likelihood of} \\ \text{sufficient taxable profit} \\ \text{to be generated in} \\ \text{the future is 50% or more.} \end{array} & \begin{array}[t]{l} \text{A deferred tax asset is} \\ \text{fully recognized, but could} \\ \text{be decreased later with} \\ \text{a valuation allowance} \\ \text{if the likelihood of} \\ \text{recoverability changes.} \end{array} \\ \hline \end{array} $$

$$ \textbf{Business Combinations-acquisitions} \\ \begin{array}{|l|l|l|} \hline \textbf{Issue} & \textbf{IFRS} & \textbf{US GAAP} \\ \hline \begin{array}[t]{l} \text{Previously unrecognized} \\ \text{tax losses of the} \\ \text{acquirer} \end{array} & \begin{array}[t]{l} \text{If the recognition criteria} \\ \text{for the deferred tax} \\ \text{asset are met, a} \\ \text{deferred tax asset is} \\ \text{recognized. The offsetting} \\ \text{credit is recorded} \\ \text{as income.} \end{array} & \begin{array}[t]{l} \text{Similar to the IFRS,} \\ \text{except that the} \\ \text{offsetting credit is} \\ \text{recorded against goodwill} \end{array} \\ \hline \begin{array}[t]{l} \text{Tax losses of} \\ \text{the acquiree} \\ \text{(initial recognition)} \end{array} & \begin{array}[t]{l} \text{Similar requirements as} \\ \text{for the acquirer except} \\ \text{that the offsetting} \\ \text{credit is recorded} \\ \text{against goodwill.} \end{array} & \begin{array}[t]{l} \text{Similar to the IFRS.} \end{array} \\ \hline \end{array} $$

$$ \textbf{Presentation of Deferred Tax} \\ \begin{array}{|l|l|l|} \hline \textbf{Issue} & \textbf{IFRS} & \textbf{US GAAP} \\ \hline \begin{array}[t]{l} \text{Offset of deferred tax} \\ \text{assets and liabilities} \end{array} & \begin{array}[t]{l} \text{Permitted only when the} \\ \text{company has a legally} \\ \text{enforceable right to} \\ \text{offset and the balance} \\ \text{is related to taxes} \\ \text{imposed by the same} \\ \text{authority.} \end{array} & \begin{array}[t]{l} \text{Similar to the IFRS.} \end{array} \\ \hline \begin{array}[t]{l} \text{Current/noncurrent} \end{array} & \begin{array}[t]{l} \text{The net of deferred tax} \\ \text{assets and liabilities} \\ \text{is classified as} \\ \text{noncurrent on the} \\ \text{balance sheet} \end{array} & \begin{array}[t]{l} \text{Deferred tax assets and} \\ \text{liabilities are either} \\ \text{classified as current} \\ \text{or noncurrent, based on} \\ \text{the classification of the} \\ \text{related non tax asset} \\ \text{or liability for financial} \\ \text{reporting. Tax assets} \\ \text{or liabilities not associated} \\ \text{with an underlying} \\ \text{asset of liability are} \\ \text{classified based on the} \\ \text{expected reversal period} \\ \text{The standard has two} \\ \text{scenarios:} \\ \text{1.The deferred tax is related} \\ \text{to a specific asset/} \\ \text{liability:} \\ \text{The classification would depend} \\ \text{on the classification of} \\ \text{the underlying asset/} \\ \text{liability.} \\ \text{2.The deferred taxes are} \\ \text{unrelated to a specific} \\ \text{asset/liability:} \\ \text{The classification would} \\ \text{depend on the time} \\ \text{at which the} \\ \text{settlement is expected} \\ \text{to be made.} \end{array} \\ \hline \end{array} $$

Question 1

In relation to the recognition of deferred tax assets, which of the following statements is correct?

1. Under IFRS, a deferred tax asset is recognized in full, but is then reduced by a valuation allowance if it is more likely than not that some or all will not be realized.
2. Under US GAAP, a deferred tax asset is recognized in full, but is then reduced by a valuation allowance if it is more likely than not that some or all will not be realized.
3. Under US GAAP, a deferred tax asset is recognized if it is probable that sufficient taxable profit will be available against which the temporary difference can be utilized.

Solution

The correct answer is B.

Under US GAAP, a deferred tax asset is recognized in full, but is then reduced by a valuation allowance if it is more likely than not that some or all will not be realized. Choice B is inaccurate because it describes the recognition of a deferred tax asset under US GAAP and not IFRS. Choice C is incorrect because it describes the recognition of a deferred tax asset under IFRS and not under US GAAP.

Question 2

MMO reported a tax asset of one million dollars in its latest financial reports. The company’s management believes that the company would be able to reverse only $700,000 of the tax asset. Which of these choices best describes the situation if the company reports under IFRS versus what it may report under US GAAP?

1. Assets reported under IFRS and US GAAP would be equal.
2. The reported assets under IFRS would be more than the reported assets under US GAAP.
3. The reported assets under US GAAP would be more than the reported assets under IFRS.

Solution

The correct answer is C.

The only difference in treatment between US GAAP and IFRS for tax assets with susceptible recovery is that the former requires the creation of a valuation allowance, while the later deducts the susceptible amount directly. Although the tax loss net value would be equal under both reporting standards, the company would report a higher level of total assets under US GAAP.