IFRS for SMEs:
A less taxing standard?
On July 9, 2009, the IASB published the
International Financial Reporting Standard
for Small and Medium-sized Entities
(“IFRS for SMEs” or “the standard”),
a self-contained standard of about
230 pages designed to ease the burden
of IFRS reporting for entities that do not
have public accountability.
Globally, more jurisdictions may be
encouraged to replace existing local
GAAP with IFRS for SMEs. As a result,
it holds important implications for US
companies with multinational subsidiaries.
The United Kingdom Accounting Standards
Board (UK ASB), for example, has already
issued a Consultation Paper asking for
comments on its proposal to replace existing
UK GAAP with IFRS by 2012.
Overview of Income Tax Accounting Treatment
The Income Tax section of IFRS for SMEs contains several key provisions from the IASB’s Exposure Draft to amend IAS 12 Income Taxes (the “Exposure Draft”). For example, IFRS for SMEs includes the guidance in the Exposure Draft for tax basis, uncertain tax positions and the use of a valuation allowance. IFRS for SMEs also includes several provisions from the existing standard, such as intraperiod allocation, tax rates to apply to distributions and balance sheet classification. A closer look at the provisions in the standard provides insight into the potential for increased complexity and diversity in some areas.
Under IFRS for SMEs, the tax basis of an asset is
determined based on the tax consequences associated with
selling the asset for its carrying amount. This definition is consistent with the Exposure Draft. However, it differs from existing IFRS and US GAAP. Under existing IFRS, tax basis
is based on the expected manner of recovery, which may be
through use, sale or a combination thereof. Under US GAAP,
tax basis is based on the amount that will be deductible for tax purposes through use or upon sale.
The definition used in the standard will likely cause the
recognition and measurement of deferred taxes to differ
from existing IFRS and US GAAP. The requirement to
determine tax basis by reference to sale of the asset will
result in instances where tax basis does not reflect the
underlying economics and expected tax consequences
associated with the asset. This definition received
significant negative feedback from respondents to
the Exposure Draft.
Uncertain tax positions
All tax positions are measured using the probability-weighted average amount of all possible outcomes, assuming the tax
authorities will review the amounts reported and have full
knowledge of all relevant information. This requirement is
consistent with the proposal in the Exposure Draft, which
differs from both existing IFRS and US GAAP.
This is an area where the guidance in IFRS for SMEs may
increase cost and complexity. Because the standard does
not apply a threshold to the recognition of an uncertain tax position, it may be costly and time-consuming for entities
to assess every tax position taken in every period in order
to identify all possible outcomes. This is another area of
the Exposure Draft that received significant negative
feedback from respondents.
Initial Recognition Exception
IFRS contains an exception to recording deferred taxes in
transactions that are not business combinations and do
not impact income or equity. IFRS for SMEs is similar to
the Exposure Draft and US GAAP in that it does not include
such an exception. However, the standard differs from the
Exposure Draft and US GAAP in that it does not provide
guidance on how to recognize and measure the related
IFRS for SMEs
Without specific guidance, it is likely diversity in practice will develop. One model that may emerge is a US GAAPbased model, which requires that deferred taxes are recognized using a...