Question

Accounting for Taxes

1. Using at least three properly cited references, describe the current convergence efforts of the FASB and IASB in the area of accounting for taxes.
2. Briefly describe some of the similarities and differences between GAAP and IFRS with respect to income tax accounting.

Answer 1

A) Efforts of the FASB and IASB accounting for taxes=

The scope of the overall IASB-FASB convergence project has evolved over time. The tables below reflect the current situation with the various projects. Some of the projects listed are joint IASB-FASB projects that are not officially part of the Memorandum of Understanding (MoU) between the two boards, but where the boards had nonetheless agreed to work jointly on the project.

Full details of progress on each project can be found on the individual project page for that topic. In a number of cases, the projects have been discontinued as joint projects and the IASB is continuing the projects in its own right, or the topic will be considered for a longer-term IASB research project.

For nearly 40 years, the International Accounting Standards Board (IASB) and its predecessor, the International Accounting Standards Committee (IASC), have been working to develop a set of high-quality, understandable, and enforceable International Financial Reporting Standards (IFRS) to serve equity investors, lenders, creditors, and others in globalized capital markets. When the IASB took over from the IASC in 2001, few countries had adopted International Accounting Standards (as IFRS were then called) even for cross-border public sales of securities, let alone for domestic public companies.

That all changed—and quite dramatically—with two events. First, in 2000, the International Organization of Securities Commissions (IOSCO) endorsed IFRS for cross-border securities offerings in the world’s capital markets. Then, in 2002, the European Union made the bold decision to require IFRS for all companies listed on a regulated European stock exchange starting in 2005. Those events started a snowball rolling, to the point where today roughly 100 countries require IFRS or a national word-for-word equivalent for all or most listed companies.

Almost from the outset, a key goal of the IASB and the IFRS Foundation, under which the IASB operates, has been to bring the United States on board. In a plenary address at the World Congress of Accountants in 2002, Paul Volcker, the first chairman of the Foundation’s trustees, said: “I do not think it reasonable today, if it ever was, to take the position that U.S. GAAP should, de facto, be the standards for the entire world. Rather, the International Accounting Standards Board, whose oversight trustees I chair, is now working closely with national standard setters throughout the world to develop common solutions to the accounting challenges of the day. The aim is to find a consensus on clearly defined principles, and I am delighted that the American authorities appear sympathetic to that objective.”

In October 2002, the IASB and FASB signed a memorandum of understanding that has come to be known as the “Norwalk Agreement.” The two boards pledged to use their best efforts to (a) make their existing financial reporting standards “fully compatible as soon as is practicable” and (b) “to coordinate their future work programs to ensure that once achieved, compatibility is maintained.” “Fully compatible” was generally understood to mean that compliance with U.S. GAAP would also result in compliance with IFRS. That is, the standards would be aligned though not identical.

With the Norwalk Agreement, the boards launched a series of both short-term and longer-term convergence projects aimed at eliminating differences in the two sets of standards. The two boards agreed that where either IFRS or U.S. GAAP had the clearly preferable standard, the other board would adopt that standard. And where both boards’ standards needed improvement, the boards would work jointly on an improved standard.

The Norwalk Agreement has been updated several times since 2002, but always with the objective of two sets of standards that were converged in principle if not in words. The IFRS-U.S. GAAP convergence approach has been repeatedly endorsed by global financial leaders such as the G-20 as an important step on the path toward a single set of global accounting standards.

B) Difference between GAPP and IFRS income tax accounting -

GAPP =

1)Classification is split between current and noncurrent components on the basis of either (1) the underlying asset or liability or (2) the expected reversal of items not related to an asset or liability.

2) Deferred tax assets are recognized in full and then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be recognized.

3) Enacted tax rates are used.

4) ASC 740 prescribes a two-step recognition and measurement approach to determining the amount of tax benefit to recognize in the financial statements.

5) Tax expense from intercompany sales is deferred until the related asset is sold or disposed of, and no deferred taxes are recognized for the purchaser's change in tax basis.

6) No deferred tax is recognized on the remeasurement from local currency to functional currency.

7) (1) Leveraged lease exemption — no deferred tax is recognized under ASC 740. See ASC 840-30 for information about the tax consequences of leveraged leases.

(2) No similar exception under U.S. GAAP.

8) Special-deduction tax benefits should not be anticipated by offsetting a deferred tax liability. Instead, such tax benefits should be recognized for financial reporting purposes no earlier than the year in which they are available to reduce taxable income on the entity's tax returns. In addition, the future tax effects of special deductions may nevertheless affect (1) the average graduated tax rate to be used in measuring deferred tax assets and liabilities when graduated tax rates are a significant factor and (2) the need for a valuation allowance for deferred tax assets.

9) Deferred tax is computed on the basis of share-based compensation expense recognized.

10) Backward tracing is generally prohibited. Subsequent changes to deferred taxes originally charged or credited to equity are generally allocated to continuing operations, not to equity.

11) Required for public companies only; expected tax expense is computed by applying the domestic federal statutory rates to pretax income from continuing operations.

Nonpublic companies must disclose the reconciling nature of the reconciling items but not the amounts.

12) Deferred tax is recognized on all undistributed earnings, arising after 1992, of domestic subsidiaries and joint ventures. No deferred tax is recognized on undistributed earnings of foreign subsidiaries and corporate joint ventures if the duration of such earnings is considered permanent.

IFRS =

1)There is no split between current and noncurrent. All deferred tax assets and liabilities are classified as noncurrent.

2) No valuation allowance concerning deferred tax assets. Deferred tax assets are only recognized if it is probable (more likely than not) that they will be used.

3)Enacted or "substantively" enacted tax rates are used.

4) IAS 12 does not specifically address the accounting for tax uncertainties. The recognition and measurement provisions of IAS 37 are relevant because an uncertain tax position may give rise to a liability of uncertain timing and amount. Recognition is based on whether it is probable that an outflow of economic resources will occur. Probable is defined as more likely than not. Measurement is based on the entity's best estimate of the amount of the tax benefit.

5) Tax expense from intercompany sales is recognized, and the buyer's tax rate is used to recognize deferred taxes for the change in tax basis.

6) Deferred tax is recognized on the remeasurement from local currency to functional currency.

7) (1) No similar exception under IFRSs.

(2) "Initial recognition" exemption — deferred tax is not recognized for taxable or deductible temporary differences that arise from the initial recognition of an asset or liability in a transaction that (a) is not a business combination and (b) at the time of the transaction does not affect accounting profit or taxable profit. Changes in this unrecognized deferred tax asset or liability are not subsequently recognized.

8) No similar guidance in IAS 12.

9) Deferred tax is computed on the basis of the hypothetical tax deduction for the share-based payment in every period under the applicable tax law (i.e., intrinsic value).

10) As with the initial treatment, IAS 12 requires that the resulting change in deferred taxes also be charged or credited back directly to equity.

11) Required for all entities applying IFRSs; expected tax expense is computed by applying the applicable tax rate(s) to accounting profit, disclosing also the basis on which any applicable tax rate is computed.

12) Deferred tax is recognized on the undistributed earnings of any form of investee unless (1) the parent is able to control the timing of the reversal of the temporary difference and (2) it is probable that the temporary difference will not reverse in the foreseeable future.