Differences Between Gaap & Ifrs in Accounting for Income Taxes

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Income Tax Memorandum
Over the past few years, there has been a push to adopt a single international accounting standard in order to simplify commerce in the global economy we live in today. However, this is more easily said than done because of some very notable differences between U.S. GAAP and IFRS standards. One of the most significant differences between GAAP and IFRS arises when accounting for income taxes. The first issue that arises when accounting for income taxes is determining the tax basis of an asset or liability. Under IFRS standards, tax basis is based on the expected manner of recovery. These standards define the tax base of an asset as the amount that will be deductible for tax purposes against any taxable economic benefits that will be received in the future. Similarly, the tax base of a liability is defined as its carrying amount, less any amount that will be deductible for tax purposes in the future. Under U.S. GAAP standards, tax basis is a question of fact under the tax law, which means the tax basis of an asset or liability is the amount used for tax purposes. For example, in the case of an asset, tax basis includes the amounts that are deductible for deprecation, as well as any amounts that would be deductible upon sale or liquidation of the asset under tax law. Another key difference between IFRS and GAAP is how income tax expense (benefit) is allocated to financial statement components. IFRS allows for a full “backwards tracing” approach to be used. In this approach, income tax expense is recognized in the income statement regardless of the period in which the tax expense or benefit is recognized. Under GAAP standards, “backwards tracing” is prohibited, and income tax is allocated to the financial statement category where the pre-tax item was recorded. A further difference between IFRS and GAAP arises when dealing with Deferred Tax Assets (DTA’s) and Deferred Tax Liabilities (DTL’s). The first difference between the two...
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