|How Will IFRS Affect Accounting for Income Taxes?
The first wave is coming.
July 30, 2009
Previously published in the AICPA Tax Insider.
Bowing to pressure to standardize financial reporting around the globe, the U.S. is considering switching form U.S. Generally Accepted Accounting Principles (GAAP) to International Financial Accounting Standards (IFRS) starting in 2012. In November 2008, the SEC created a roadmap that outlined a plan that would require large companies to adopt beginning 2014. In addition, it appears the SEC will begin allowing about 100 companies to adopt IFRS voluntarily earlier, beginning in 2010. According to the SEC, it will decide a final timeline in 2011, so the required transition will be unknown until 2011. In addition, the new SEC chairman recently supported the transition, but hinted that the timeline may change.
Can we expect dramatic effects on reported earnings in the future? One significant change would be the accounting for income taxes. Because such changes could affect (the variability of) reported earnings, it is worth looking forward to the potential impact of this new standard.
Accounting for Income Taxes: Differences Between GAAP and IFRS
Major differences are cash taxes, LIFO (a historical method of recording the value of inventory, a firm records the last units purchased as the first units sold)-FIFO (is a common method for recording the value of inventory, in which the next item to be shipped is the oldest of that type in the warehouse), fair value measurement and uncertain tax positions.
Other differences between GAAP and IFRS accounting for taxes are shown in the table below.
The changes in accounting for income taxes resulting from IFRS will be significant. While a timetable for mandated IFRS is not clear, tax practitioners should nonetheless become familiar with the new rules, especially if clients inquire as to its potential impact. It is also important to know that the IFRS rules will only govern income taxes.
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Charles Swenson, CPA, PhD is professor of Accounting at the University of Southern California and co-Founder of the national Tax Credit Group. Namryoung Lee is visiting scholar, both at the Marshal School of Business at the University of Southern California.