The effect of IFRS implementation on tax.

• Author: McGowan, John R.
• Position: International financial reporting standards

EXECUTIVE SUMMARY

* Although the pace of the transition from GAAP to IFRS has slowed recently, convergence of the standards for U.S. companies, including the standards for accounting for income taxes, will eventually happen through the complete adoption of IFRS standards or the issuance of a series of standards that effectively conform GAAP to IFRS.

* The transition to IFRS will have an enormous impact on the calculation and reporting of income taxes for U.S. companies that are currently reporting under GAAP. Both CPAs with clients who will be subject to the new IFRS standards and the tax departments of these clients should be planning now for the transition.

* The IASB has issued an exposure draft of a new standard on income tax to replace IAS 12, the IFRS equivalent of FAS 109, that reduces the differences between IFRS and GAAP in accounting for income taxes. The draft includes changes to the definition of tax basis, the definition and treatment of temporary differences, the treatment of uncertain positions, and the recognition and calculation of deferred tax amounts.

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Until recently, the movement toward adoption of international financial reporting standards (IFRS) as a single set of globally accepted accounting standards seemed to be moving at a relentless pace. However, in her confirmation hearings, newly appointed Securities and Exchange Commission chair Mary Schapiro signaled that she would slow down the IFRS road map proposed by the SEC last November. "1 will take a big deep breath and look at this entire area again carefully and will not necessarily feel bound by the existing road map that's out for comment," she said. (1) She cited such reasons as the ailing economy and costs of implementation for her concern about the rapid pace of U.S. IFRS adoption.

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Despite this development, a case can be made that complete adoption may not be necessary to bring about convergence of U.S. generally accepted accounting principles (GAAP) with IFRS. For example, the Financial Accounting Standards Board (FASB) has designed most of the standards it has issued in the past four years to bring U.S. GAAP standards and international GAAP standards (IFRS) closer together. A good example of this is Financial Accounting Statement (FAS) No. 141(R), Business Combinations (rev. 2007), and FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (2007), for minority interests. In these cases, FASB issued standards that were consistent with the international standards. The International Accounting Standards Board (IASB) is doing the same thing as FASB: It is issuing standards to bring it closer to a U.S. GAAP alternative over time where U.S. GAAP is deemed preferable to IFRS. This convergence process has been going on for years.

Income tax is an area in which the IASB and FASB have worked for convergence. The IASB's income tax project was originally a joint project with FASB, undertaken as part of the IASB's and FASB's short-term convergence project aimed at eliminating differences between U.S. GAAP and IFRS. Accounting for income taxes seemed an ideal topic for convergence. International Accounting Standard (IAS) No. 12, Income Taxes, is based on the temporary difference approach developed by FASB and used in FAS No. 109, Accounting for Income Taxes. (2) However, the project proceeded slowly, and FASB announced last year that it had "suspended indefinitely" its deliberations on the income tax project. On March 31, 2009, the IASB published an exposure draft of a new standard on income tax intended to replace IAS 12. (3) The IASB solicited comments on the exposure draft that should have been received by July 31, 2009. FASB indicated that it would seek input from U.S. constituents by issuing an invitation to comment on the IASB exposure draft. It would then decide whether to undertake a project that would eliminate differences in accounting for income taxes by adopting the proposed new standard.

The primary goal of this article is to explain how the implementation of IFRS (whether through convergence or adoption) would affect tax. The first section focuses on two key areas that companies should address to prepare for IFRS. First, resources will be needed to help clients get up to speed on the new accounting standards. In addition, accounting systems may need to be changed. The second section focuses on the exposure draft to replace IAS 12 and reviews how this statement is largely in line with FAS 109 and U.S. GAAP. The final section examines the effect of IFRS adoption on tax compliance for U.S. multinationals.

Working with the Client

Tax practitioners need to actively work to anticipate the specific changes that will affect individual clients and should be involved with clients as much as possible as they begin making changes to conform to IFRS. (4) The first step is to find out if the client's company has assembled a team to deal with the transition to IFRS. If it has, it is important that someone with a tax viewpoint be part of this team. Tax directors should seek out these groups and join as soon as possible. IFRS affords companies a significant amount of flexibility and options on how to account for certain transactions. A company should make the decisions on the elections and treatment options under IFRS only after considering the potential tax implications. (5)

Next, a practitioner should assess the client's employees' skill sets. Identify those who have experience and knowledge of the subject. Employees should be prepared to deal with the new issues and situations that will arise with IFRS. It is just as important to educate the client's staff as it is to educate the practitioner's own tax staff. This will aid in the delivery of data and information when it comes time to prepare the tax return. Once the basic accounting policies and procedures are understood, practitioners and directors should start raising a number of important tax questions, such as:

* Is the new financial reporting standard a permissible tax accounting method?

* Is the new book method preferable for tax reporting purposes?

* Is it necessary to file changes in methods of accounting?

* Will there be modifications in the computation of permanent and temporary differences?

* How will reporting in accordance with IFRS affect the computation of taxable earnings and profits, foreign source income, and investments in subsidiaries?

In addition, practitioners and directors should address the changes that IFRS will have on the company's effective tax rate. This is the ratio of income tax to pretax income. IFRS could potentially change the numerator and the denominator of this equation, which in turn could have either a positive or negative influence on the effective tax rate. This change in effective tax rate could have a trickle-down effect...