GAAP and IFRS

Income-tax Accounting: Same Difference?

The International Accounting Standards Board takes a stab at simplifying how companies account for deferred taxes.
Sarah JohnsonMarch 31, 2009

The International Accounting Standards Board has proposed changes to simplify its income-tax accounting guidelines. The feedback the standard-setter gets could influence the final changes that are made to the equivalent rule in U.S. generally accepted accounting principles—or even result in the replacement of the U.S. rule.

After several years of deliberations with the Financial Accounting Standards Board and with constituents confused about how to follow IAS 12, its income-tax rule, the IASB released a 56-page exposure draft today and is collecting public comment through the end of July. The intent of the changes is to more closely align the U.S. and international standards and simplify how companies account for deferred taxes, explains IASB board member Warren McGregor.

In its proposal, the IASB has maintained the gist of IAS 12 and its U.S. equivalent, FAS 109, by expecting companies to still take a “temporary difference approach” to account for the difference between the book basis and tax basis of assets and liabilities expected to reverse over time. In other words, users will be still be directed — as they are in GAAP —  to account for expected tax effects of events and transactions now, rather than wait until those taxes are paid or tax refunds are collected.

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What has changed: IASB has eliminated most of its exceptions for when companies have to acknowledge temporary differences. For example, if approved, IAS 12 would become more like FAS 109 in how companies treat tax assets and liabilities for investments in subsidiaries, joint ventures, associates, and branches.

Simplifying the rules, however, doesn’t mean that companies that follow the IASB’s international financial reporting standards will suddenly view their accounting work for resolving the differences between financial reporting rules and tax rules as easy. “Accounting for deferred taxes, by its nature, is a complex issue,” McGregor says. “There are a number of issues that arise in relation to just how will you account for the tax effect of an ongoing transaction. So even simplifying the standard, making it more principles-based, won’t remove the fact that it’s still not an easy standard to apply.”

Nevertheless, the IASB is promoting its latest proposal as a simpler version that’s the result of a joint effort between its board and FASB. For its part, however, FASB isn’t proposing any changes to its income-tax rule, FAS 109, Accounting for Income Taxes.

Rather, FASB has given the IASB the lead on this project, which has been underway for several years. The U.S. board stopped deliberating on changes to FAS 109 in 2007. For now, FASB plans to ask U.S. constituents to provide feedback on IASB’s exposure draft through a comment invitation to be issued in April.

Based on the comments, FASB will decide whether to adopt the redesigned rule. The boards have been working on converging their standards for most of this decade, hoping to have a melded set of rules by 2011. The IASB plans to have a final, modified version of IAS 12 ready by 2010.

Ironically, McGregor notes, the IASB — which was established in 2001 ­— based IAS 12 on FAS 109. And even if neither board makes any more changes than the ones outlined in the exposure draft, there will still be some differences, some of which could be resolved through tweaks to other rules while others that are specific to U.S. companies’ circumstances could stay the same.