NEWS AND ANALYSIS
By Thomas Jaworski —
[email protected] Opinions vary on how the ongoing convergence with international financial reporting standards will ultimately affect U.S. tax compliance and reporting, but practitioners should be prepared for the potential consequences resulting from such a significant change to financial accounting. The Financial Accounting Standards Board and its international counterpart, as part of continuing efforts to converge IFRS and U.S. generally accepted accounting principles, assigned priority to rulemaking projects on accounting for financial instruments, revenue recognition, and leasing. FASB and the International Accounting Standards Board stressed the need for finalizing those standards by the end of 2012, and the SEC continues to monitor the boards’ work as it considers whether and how IFRS should be incorporated into the U.S. reporting system. (For prior coverage, see Tax Notes, Dec. 12, 2011, p. 1338, Doc 2011-25394, or 2011 TNT 234-7.) In recent months, the boards, recognizing the significance of these topics, decided to reissue proposed guidance on revenue recognition and leasing to receive public input that will be vital in developing comprehensive rules that can be applied throughout the world. Congress has expressed interest in financial accounting, and the House Ways and Means Committee held a hearing February 8 to consider how accounting standards can affect how public companies respond to tax policy. (For related coverage, see p. 794.)
The new leasing or revenue recognition standards will lead to significant changes in the balance sheet, said Schumaker. Joan Schumaker, a partner with Ernst & Young LLP, said last November that while the projects currently on the boards’ convergence agenda would directly affect income tax accounting, some of the resulting standards, ‘‘if they change financial accounting, will have deferred tax implications.’’ Schumaker, who was speaking at a conference hosted by the American Institute of Certified Public Accountants, said the new leasing or revenue recognition standards will lead to significant changes in the balance sheet. According to Schumaker, the new leasing standard, once finalized, would require lessees to report 792
both the intangible right to use their property as an asset as well as the liability for future lease payments on the balance sheet. ‘‘That’s going to give rise to all new assets and liabilities on the balance sheet for lessees, and that’s going to drive deferred tax consequences associated with all those payments,’’ she added. In an interview with Tax Analysts, Keith Peterka, a shareholder with Mayer Hoffman McCann PC’s Professional Standards Group, said the proposed requirements in the joint exposure draft on leases could have a significant tax impact. Companies will be required to recognize both an asset and liability for operating leases on their balance sheet, said Peterka, adding that the guidance does not provide a grandfather clause for existing operating leases. Peterka, who serves on the IFRS Foundation’s Small- and Medium-Sized Entities Implementation Group, said the new standard on revenue recognition may significantly change some industries’ historical practices and will need to be closely examined from an income tax perspective. Financial personnel should also understand how the acceptance of IFRS could affect U.S. tax reporting for standards that are not part of the convergence agenda, such as the prohibition of the last-in, first-out method of inventory under IFRS, Peterka said. International rulemaking on intangible assets and property, plant, and equipment that use a different basis of measurement and impairment could result in significant tax differences for U.S. companies, Peterka said. Practitioners should be aware of differences that may still exist between standards that are thought to be converged, such as guidance on share-based payments or business combinations, he added. Schumaker discussed the significant differences between U.S. and international accounting in the area of share-based payments. Under IFRS, an entity would adjust its deferred tax asset for sharebased payments each reporting period, while there would be no adjustment under U.S. GAAP, she said. ‘‘I would expect that in the area of share-based payments, the U.S. GAAP standard would probably conform to IFRS and we would see the remeasurement of deferred tax assets,’’ Schumaker said.
Tax Planning According to Schumaker, the convergence with IFRS could affect the tax compliance and planning for U.S. companies because some U.S. tax return items may be directly affected by a change in book accounting. A change in an entity’s accounting recognition for revenue could result in a tax change to its revenue recognition depending on what the entity TAX NOTES, February 13, 2012
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The Deferred Tax Consequences Of IFRS Convergence
NEWS AND ANALYSIS
Future of Income Tax Rules Accounting for income taxes was not part of the convergence process undertaken by FASB and the IASB. However, a recent consultation process conducted by the IASB gathered public input on the need for a comprehensive project to address the complex and unclear nature of International Accounting Standard No. 12, ‘‘Income Taxes.’’ (For prior coverage, see Tax Notes, Jan. 30, 2012, p. 534.) Schumaker said in her remarks that IAS 12 and FASB Accounting Standards Codification (ASC) topic 740, ‘‘Income Taxes,’’ are actually more similar than different because both are liability methods of accounting that prohibit the recognition of taxes for goodwill that is not amortizable for tax purposes. Both standards treat goodwill as a permanent item and do not provide discounting for deferred taxes, she added. Schumaker said, however, that significant differences exist in the disclosure requirements related to income tax, adding that IFRS requires more disclosure in several areas than U.S. GAAP, with the exception of disclosures pertaining to uncertain tax positions. IAS 12 doesn’t address UTPs or require disclosures for UTPs, but IAS 37, ‘‘Provisions, Contingent TAX NOTES, February 13, 2012
Liabilities and Contingent Assets,’’ provides applicable disclosure requirements. Also, ASC 740 permits the use of a valuation allowance to reduce an entity’s deferred income tax assets to the amount that is more likely than not to be realized, while valuation allowances are not recorded under IAS 12. Despite those differences, Peterka said that FASB and the IASB shouldn’t need to convene a joint project on income tax accounting or devote much time to the disparity in requirements relating to UTPs. Rather, Peterka suggested that improvements to the conceptual framework and the development of a common measurement criterion would result in better consistency in the recording of contingencies.
Peterka said that FASB and the IASB shouldn’t need to convene a joint project on income tax accounting or devote much time to the disparity in requirements relating to UTPs. ‘‘It is important to remember that even though a standard may be converged, there may still be differences,’’ Peterka said. Blouin, however, said she sees a need for standard setters to address the disparity in the treatment of UTPs. ‘‘That is a major issue, [and] it needs to get elevated,’’ she said, adding that FASB Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes,’’ applies to all industries. According to Blouin, FASB may have to consider whether to eliminate FIN 48 from U.S. GAAP or establish a separate income tax accounting system that includes the FIN 48 requirements. ‘‘Taxes are a funny thing,’’ she said. ‘‘There’s often some reluctance to address these issues because of the complexity.’’
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(C) Tax Analysts 2012. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
was doing for tax purposes, said Schumaker, adding that the entity may be required to file a Form 3115, ‘‘Application for Change in Accounting Method,’’ to notify the IRS even if there is no ultimate tax consequence determined. Jennifer Blouin, an associate professor of accounting at the University of Pennsylvania’s Wharton School, said that while the changes resulting from the convergence projects will be significant for some businesses, taxable income won’t change significantly for many U.S. companies because of the new rulemaking. Blouin did say that a company will likely be tasked with alerting the IRS about any accounting method changes resulting from the convergence effort if that company wants to continue what it has been doing for tax purposes. ‘‘Mostly I see it as a nuisance,’’ she said. She added, however, that there is the potential for a revenue consequence in leasing because the IFRS model is moving toward substance over form. Under the proposed standard, companies could actually change which types of leases they enter into because they will no longer be subject to the bright-line tests existing under U.S. GAAP that define operating leases versus capital leases, said Blouin. As a result, companies could hold leases that are taxed differently because ‘‘they may well enter into leases that are contractually different,’’ she said.
