Income Tax Under Gaap and Ifer

Topics: Taxation, Balance sheet, Tax Pages: 5 (1510 words) Published: April 29, 2013
Accounting for Income Tax
Under IFRS, Income Tax is taxes based on taxable profits, and taxes that are payable by a subsidiary, associate or joint venture on distribution to investors.

U.S GAAP defines income tax as all domestic federal, state and local taxes based on income, including foreign income taxes from an entity's operations that are consolidated, combined or accounted for under the equity method, both foreign and domestic.

In IFRS, the guidance about accounting for income taxes is in International Accounting Standard (IAS) 12.
The guidance about accounting for income taxes in U.S GAAP is in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740.
Now, I will talk about some differences in specific parts about income tax between IFRS and GAAP.

First of all, it's the tax basis.
The tax basis of an asset or liability is one of the key elements in determining deferred tax assets (DTAs) and deferred tax liabilities (DTLs). A company determines DTAs and DTLs by comparing the book carrying amount an asset or liability to the tax basis of that asset or liability, and then applying the applicable tax rate to the resulting difference.

Under IAS 12, the tax basis of an asset is defined as the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. Moreover, it also defines the tax basis of a liability as its carrying amount, subtracting any amount that will be deductible for tax purposes relate to that liability in future periods. In the case of revenue that is received in advance, the tax basis of the resulting liability is its carrying amount, deducting any amount of the revenue that won't be taxable in the future periods.

Under ASC 740, the tax basis of an asset or liability is the amount used for tax purposes. For example, in the case of a depreciable asset, tax basis is not solely limited to the amounts that are deductible through depreciation but also includes any amounts under tax law that would be deductible upon sale or liquidation of the asset.

Then I will talk about Initial Recognition.
Temporary differences will appear when a company initially recognizes an asset or liability. Such differences often arise in a business combination when the assets and liabilities are recorded at their FVs but the tax bases don't change.

Under IAS 12, no deferred tax is recognized in a transaction that (1) is not a business combination and (2) affects neither accounting profit nor taxable profit at the time of the transaction. Thus the result of any differences between book and tax base is recognized as it is realized for tax purposes.

Under ASC740, a company gets the assigned value of an asset acquired outside a business combination and the related DTA or DTL by running simultaneous equations. Simultaneous equations:
FBB-[Tax Rate*(FBB-Tax Basis)] =CPP FBB=Final Book Basis
(Tax Basis-FBB)* Tax Rate=DTA/DTL CPP=Cash Purchase Price
Third, I will say something for intercompany transactions
Companies that are included in a set of consolidated financial statements often have transactions with other companies that are included in those consolidated financial statements. For example, a parent may transfer property to its subsidiary.

Under IAS 12, for intercompany transfers of assets, any associated current and deferred taxes are recognized at the time of the transaction.
Under ASC 740, a buyer is not allowed from recognizing DTAs involve an intercompany transfer of assets. Any income tax effects to the seller that result from an intercompany sale are recorded on the balance sheet as a deferred charge and recognized upon sale to a 3rd party or as the transferred property is amortized or depreciated.

Fourth, we come to uncertain tax positions.
Because income tax laws are complex and are...
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