By Anne Rosivach
The sense of urgency once felt in U.S. tax departments to prepare for the potential implications of International Financial Reporting Standards (IFRS) might have been replaced in recent months by uncertainty, as regulatory bodies issued statements seeming to indicate at least a slowing in the pace of movement toward adoption of IFRS.
A statement earlier this year by the U.S. Securities and Exchange Commission (SEC) seemed to raise questions about its commitment to the existing roadmap, and the Financial Accounting Standards Board’s (FASB) decision not to jointly issue an exposure draft on accounting for income tax with the International Accounting Standards Board (IASB) could cause companies to turn their attention elsewhere.
The IASB and FASB worked for convergence in income tax for years, but the FASB board minutes for their October 2009 meeting, released last June, seem to indicate that the project has been put off for the foreseeable future:
“The boards [FASB and IASB] indicated that they would consider undertaking a fundamental review of accounting for income taxes at some time in the future. In the meantime, the IASB staff plans to present options on how the IASB should proceed with the proposals in the Exposure Draft at the November IASB meeting.”
The IASB also has revised its objectives for the income tax project, according to its Web site. “The project originally started as a convergence project with US GAAP. However, in the light of responses to an exposure draft published in 2009, the board has narrowed the scope of the project. “The board may consider a fundamental review of the accounting for income taxes after 2011.”
Despite the apparent slowing of the convergence process and questions about the SEC’s intentions, G20 leaders continued to call for standards convergence at their recent meeting, and both boards have aggressive agendas leading to July 2011, the original start date on the SEC roadmap for adoption of IFRS by U.S. companies. The G20 is a group of 20 finance ministers and central bank governors. The organization was established in 1999 with the goal of bringing together systemically important industrialized and developing economies to discuss key issues regarding the global economy.
Several scenarios are possible according to a Deloitte study, International Financial Reporting Standards for U.S. Companies: Tax Implications of an Accelerating Global Trend. In a note added to the study after FASB’s decision last year to not issue an exposure draft, the editor listed some of the possible scenarios:
“The FASB recently discussed the overall direction of the project and discussed a number of options, including whether to issue a revised version of FAS 109, a revised version of IAS 12, or do nothing. It appears that the project will be put on hold for the foreseeable future until the FASB gets a better understanding of any future SEC rulemaking on IFRS and decide how that rulemaking should affect standard-setting going forward. . . . The content contained herein has not been updated to reflect the FASB’s announcement.”
New IAS 12 reduces differences with U.S. GAAP
The exposure draft of IAS 12 eliminates a great many of the differences that exist between IFRS and GAAP in accounting for income taxes, according to an analysis by John R. McGowan and Matt Wertheimer, published in the AICPA’s Tax Adviser.
“It seems that taxpaying entities would not experience the same degree of upheaval if FASB were to adopt the new IFRS standard for income tax as a replacement for FAS 109,” McGowan and Wertheimer wrote. “However, entities should still assess the effect of these amendments across the entire spectrum of their tax function. These changes would still affect tax planning, tax provisions, tax compliance, and tax controversy.”
Along with the Deloitte editor, the AICPA authors identify requirements for uncertain tax positions as an area of continuing divergence.
The technical summary of the IAS 12 exposure draft, Income Taxes, addresses deferred tax issues as follows:
"If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an entity to recognize a deferred tax liability (deferred tax asset), with certain limited exceptions.
A deferred tax asset shall be recognized for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized.
Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. . . .
Deferred tax assets and liabilities shall not be discounted.
The carrying amount of a deferred tax asset shall be reviewed at each balance sheet date. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.”
Analysis of financial accounting methods
If the conversion to IFRS at some point is inevitable, it will require changes to several financial accounting methods, and companies will need to reevaluate their existing tax accounting methods, the Deloitte study states.
Changes in the accounting methods used for financial reporting purposes, according to the study, could raise the following tax accounting issues:
- Is the new financial reporting standard a permissible tax accounting method?
- Is the new book method preferable for tax reporting purposes?
- Is it necessary to file changes in methods of accounting?
- Will there be modifications in the computation of permanent and temporary differences?
- How will reporting in accordance with IFRS impact the computation of taxable earnings and profits, foreign source income, and investments in subsidiaries?
Financial reporting in the following areas should be analyzed for tax considerations:
- Revenue recognition principles
- Revaluation of property, plant, and equipment
- Component depreciation
- Inventory valuation
- Sale and leaseback transactions
- Pension liabilities and assets
- Business combinations
- Share-based payments
Slowing the pace of IFRS adoption in the U.S. has received strong support in recent weeks. Responding to the FASB and the IASB’s ambitious agendas to complete approximately a dozen new accounting standards – about half of which are major projects – by the end of 2011, Big Four accounting firm PricewaterhouseCoopers said the current timeline is not sufficient to produce standards that meet the boards' high thresholds for quality.
In its Point of View publication, the firm expressed “significant concern that the current pace of standard setting does not provide enough time for companies to fully analyze the proposals and respond comprehensively." The firm's leadership called upon standard setters to "reevaluate the current timeline and set more reasonable expectations."