In the 21st century the adaptation of the International Financial Reporting Standards (IFRS), which is the critical financial reporting issue, is becoming a global movement. This is because of a rise in globalization as well as other related regulations that put pressure towards having a common international accounting framework. Presently, more than 100 organizations use IFRS as the basis of financial reporting especially businesses that want to expand globally. In America, the union of IFRS with the US Generally Accepted Accounting Principles (GAAP) has been continuing for several years. The convergence officially began in 2002, during the Norwalk Agreement involving the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (Durocher & Gendron, 2011). It is critical that auditors, management accountants, corporate executives, financial analysts and other individuals or businesses involved with financial reporting to understand the standards set forth under both GAAP and IFRS. This paper aims to compare the differences between IFRS and US GAAP concerning the income taxes.
An income tax is a governmental tax forced on financial earnings made by all entities within a country's authority. Per the law, individuals and businesses ought to file an income tax return annually to decide whether they owe any taxes or are qualified for a tax refund. The government makes use of income tax to finance its activities and serve its people. The regulation related to the income taxes in IFRS are put in the International Accounting Standard (IAS) 12; Income Taxes . While in GAAP the guideline linked to the cash flows statement in the US is integrated into Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, Income Taxes . US GAAP is thus set by FASB which is an organization of accounts, regulators, and financial analysts who pencil in accounting activities to curb current changes in the markets (IASPlus, 2018). In that whenever a new matter arises, the FASB analyzes the situation and come up with a projected accounting course of action and takes it for assessment and remark to several users of financial statements. This allows for the smooth presentation of earnings and disclosure.
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IFRS, on the other hand, was set up in 2001 and implemented by the European Union in 2005. This standard system was formulated as an encouragement for recently capitalist nations like China to come up with accounting that meets international standards (Schipper, 2005). The development of IFRS aims to ensure that most international businesses will comply with those rules so that they can enable financiers and investors globally comprehend the financial positions of the companies that they choose to do business with, invest in or even extend credit to. The idea behind IFRS is comparable to GAAP, and this brings about some similarities in regards to the income taxes. For instance, they both call for entities to account for mutually anticipated future tax penalty of events and present tax effects that have been acknowledged such as deferred taxes using a liability and asset method. In both IFRS and US GAAP, deferred taxes for provisional differences that arise from nondeductible goodwill are not documented. Additionally, tax effects of things accounted for unswerving equity in the present year are allotted directly to equity. Lastly, neither IFRS nor US GAAP allows the discounting of deferred taxes. In general, when it comes to the income tax accounting framework both IFRS and US GAAP have similar standards about the foundation of deferred tax liabilities and assets: the acknowledgment of short-term distinction among the carrying sum and tax base of liabilities and assets in the financial statements.
There are several disparities between IFRS and GAAP when it comes to company allocation of its income taxes amongst discontinued processes, continuing operations and other comprehensive income (OCI). IFRS uses "backward tracing" technique whereby an organization has to evaluate each entry that is booked in OCI or discontinued businesses and document the suitable tax outflow or profit for that item. While GAAP uses a more mechanical and in other instances intricate approach that more than often yields odd or illogical results. Another difference is noted in uncertain tax positions. In US GAAP, an individual or organization cannot be acquainted with a tax gain in its financial statements except if it shows that it is more probable than not that the advantage will be continued on an audit by the taxing authority entirely on the base of the professional persona of the related tax position. While in IFRS, there has not been a formal standard put in place of uncertain tax positions. This is because IAS 12 does not expressly deal with the recognition, accounting uncertainties and measurement criteria of IAS 37, Provisions, Contingent Liabilities, and Contingent Assets are significant since an uncertain tax position may bring about the liability of uncertain amount and timing.
In my opinion, IFRS appears to more reasonably present financial statement results as it relates to income taxes in comparison to GAAP. This for me is because of how they differ when it comes to their stand on uncertain tax positions. In GAAP, there is a need for a two-step measurement and recognition method used to determine the sum of tax benefits to distinguish in the financial statement. While in IFRS they understand that uncertain tax position may bring about the liability of uncertain amount and timing and hence recognition is usually based on if it is likely that depletion of economic wealth will take place.
References
Durocher, S., & Gendron, Y. (2011). IFRS: On the docility of sophisticated users in preserving the ideal of comparability. European Accounting Review , 20 (2), 233-262.
Schipper, K. (2005). The introduction of International Accounting Standards in Europe: Implications for international convergence. European Accounting Review , 14 (1), 101-126.
IAS Plus. (2018). Statement of cash flows: Key differences between U.S. GAAP and IFRSs. Retrieved from https://www.iasplus.com/en-us/standards/ifrs-usgaap/cashflows
