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IFRS and Your Tax Practice

Why tax CPAs need to start investing time in understanding how International Financial Reporting Standards (IFRS) will apply to their businesses and their clients.

May 2009
by William Stromsem/The Tax Adviser

International financial reporting standards (IFRS) are coming and tax advisers need to understand the implications for their clients. In May 2008, the AICPA Council approved IFRS for nonpublic companies. In November 2008, the Securities and Exchange Commission (SEC) released its proposed roadmap that would require registrants to use IFRS by 2014, with voluntary adoption available to certain companies as early as 2009. In February 2009, new SEC chair Mary Shapiro announced that she might slow the implementation of IFRS, in part because of the burden the change would place on the faltering economy. However, in a global economy, the question is more when IFRS will replace GAAP than if it will; the answer is that for planning and systems changes, it is coming quickly.

IFRS Overview

In general, IFRS places a greater emphasis on fair market value (FMV) than historical cost and this has important implications for tax practitioners. It results in new types of book income as certain assets are adjusted to fair value annually; cost basis becomes unimportant for reporting financial accounting gains and losses; and cost recovery for tax will be unrelated to book depreciation, possibly requiring separate accounting to be able to prepare tax returns. Unless the tax system is adjusted to accommodate IFRS, companies may have to prepare numerous Forms 3115, Application for Change in Accounting Method, to change tax accounting methods, or there will be a proliferation of Schedule M adjustments.

IFRS also relies more on professional judgment than on strict accounting rules, so accountants will have to take more responsibility for evaluating
tax-related issues in financial statements and in tax planning.

Review of Tax Accounting Policies

The practitioner and the client should review each accounting policy for tax purposes. One approach to this analysis might be a spreadsheet similar to Schedule M but with an extra column to reconcile IFRS book, GAAP book and taxable income. IFRS will become the new book method of accounting on Schedule M and any differences between the IFRS column and the GAAP column in the spreadsheet will identify new Schedule M items to get from book to taxable income in the year of change. In addition, depending on how the IRS deals with the change to IFRS, the differences may indicate changes in tax accounting methods that underlie the change in methods of book accounting for which requests for a change in accounting method must be filed.

Valuation Gains

Under IFRS, certain income-producing assets are valued annually and any increase or decrease is reflected in book income. Recognizing gains and losses before a sale or exchange will require separate records and calculation of sales-based profits to comply with the tax law. This will also be a Schedule M adjustment.

For plants, property and equipment, IFRS also allows an annual revaluation calculation, with any reflected gains or losses going directly to the balance sheet. Companies will have to prepare a separate calculation based on a sale or exchange for Sec. 1231 and capital gains and losses, along with Schedule M adjustments. Similarly, some intangibles may have to be revalued annually, along with amortization, requiring Schedule
M adjustments.

This article has been excerpted from The Tax Adviser.
View the full article here (PDF).