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US GAAP versus IFRS - Income taxes - EY - United States


Income taxes

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ASC 740, Income Taxes, and IAS 12, Income Taxes, require entities to account for both current tax effects and expected future tax consequences of events that have been recognized (i.e., deferred taxes) using an asset and liability approach. Deferred taxes for temporary differences arising from non-deductible goodwill are not recorded under both US GAAP and IFRS, and tax effects of items accounted for directly in equity during the current year are allocated directly to equity.

Neither US GAAP nor IFRS permits the discounting of deferred taxes.

Significant differences

Tax basisTax basis is a question of fact under the tax law. For most assets and liabilities, there is no dispute on this amount; however, when uncertainty exists, it is determined in accordance with ASC 740-10-25.Tax basis is generally the amount deductible or taxable for tax purposes. The manner in which management intends to settle or recover the carrying amount affects the determination of tax basis.
Taxes on intercompany transfers of assets that remain within a consolidated groupRequires taxes paid on intercompany profits to be deferred and prohibits the recognition of deferred taxes on differences between the tax bases of assets transferred between entities/tax jurisdictions that remain within the consolidated group.Requires taxes paid on intercompany profits to be recognized as incurred and requires the recognition of deferred taxes on differences between the tax bases of assets transferred between entities/tax jurisdictions that remain within the consolidated group.
Uncertain tax positionsASC 740-10-25 requires a two-step process, separating recognition from measurement. A benefit is recognized when it is "more likely than not" to be sustained based on the technical merits of the position. Detection risk is precluded from being considered in the analysis. The amount of benefit to be recognized is based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement.IFRS does not include specific guidance. IAS 12 indicates that tax assets and liabilities should be measured at the amount expected to be paid. Some adopt a "one-step" approach that recognizes all uncertain tax positions at an expected value. Others adopt a "two-step" approach that recognizes only those uncertain tax positions that are considered more likely than not to result in a cash outflow. Practice varies regarding the consideration of detection risk in the analysis.
Initial recognition exemptionDoes not include an exemption like that under IFRS for non-recognition of deferred tax effects for certain assets or liabilities. Deferred tax effects arising from the initial recognition of an asset or liability are not recognized when (1) the amounts did not arise from a business combination and (2) upon occurrence, the transaction affects neither accounting nor taxable profit (e.g., acquisition of non-deductible assets).
Recognition of deferred tax assetsRecognized in full (except for certain outside basis differences), but valuation allowance reduces asset to the amount that is more likely than not to be realized.Amounts are recognized only to the extent it is probable (similar to "more likely than not" under US GAAP) that they will be realized.
Calculation of deferred tax asset or liabilityEnacted tax rates must be used.Enacted or "substantively enacted" tax rates as of the balance sheet date must be used.
Classification of deferred tax assets and liabilities in balance sheetCurrent or non-current classification, based on the nature of the related asset or liability, is required.All amounts classified as non-current in the balance sheet.
Recognition of deferred tax liabilities from investments in subsidiaries or joint ventures (JVs) (often referred to as outside basis differences)Recognition not required for investment in a foreign subsidiary or corporate JV that is essentially permanent in duration, unless it becomes apparent that the difference will reverse in the foreseeable future.Recognition required unless the reporting entity has control over the timing of the reversal of the temporary difference and it is probable ("more likely than not") that the difference will not reverse in the foreseeable future.

Other differences include: (i) the allocation of subsequent changes to deferred taxes to components of income or equity, (ii) the calculation of deferred taxes on foreign nonmonetary assets and liabilities when the local currency of an entity is different than its functional currency, (iii) the measurement of deferred taxes when different tax rates apply to distributed or undistributed profits and (iv) the recognition of deferred tax assets on basis differences in domestic subsidiaries and domestic joint ventures that are permanent in duration.


While the Boards have abandoned plans for a joint convergence project, the IASB may consider a fundamental review of the accounting for income taxes as part of its agenda consultation process during 2012.

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