Income-tax Accounting: Same Difference?

The International Accounting Standards Board takes a stab at simplifying how companies account for deferred taxes.

Sarah Johnson
- CFO.com | US

March 31, 2009

The International Accounting Standards Board has proposed changes to
simplify its income-tax accounting guidelines. The feedback the
standard-setter gets could influence the final changes that are made to
the equivalent rule in U.S. generally accepted accounting principles—or
even result in the replacement of the U.S. rule.

After several years of deliberations with the Financial Accounting
Standards Board and with constituents confused about how to follow IAS
12, its income-tax rule, the IASB released a 56-page exposure draft
today and is collecting public comment through the end of July. The
intent of the changes is to more closely align the U.S. and
international standards and simplify how companies account for deferred
taxes, explains IASB board member Warren McGregor.

In its proposal, the IASB has maintained the gist of IAS 12 and its
U.S. equivalent, FAS 109, by expecting companies to still take a
"temporary difference approach" to account for the difference between
the book basis and tax basis of assets and liabilities expected to
reverse over time. In other words, users will be still be directed — as
they are in GAAP —  to account for expected tax effects of events and
transactions now, rather than wait until those taxes are paid or tax
refunds are collected.

What has changed: IASB has eliminated most of its exceptions for
when companies have to acknowledge temporary differences. For example,
if approved, IAS 12 would become more like FAS 109 in how companies
treat tax assets and liabilities for investments in subsidiaries, joint
ventures, associates, and branches.

Simplifying the rules, however, doesn't mean that companies that
follow the IASB's international financial reporting standards will
suddenly view their accounting work for resolving the differences
between financial reporting rules and tax rules as easy. "Accounting
for deferred taxes, by its nature, is a complex issue," McGregor says.
"There are a number of issues that arise in relation to just how will
you account for the tax effect of an ongoing transaction. So even
simplifying the standard, making it more principles-based, won't remove
the fact that it's still not an easy standard to apply."

Nevertheless, the IASB is promoting its latest proposal as a simpler
version that's the result of a joint effort between its board and FASB.
For its part, however, FASB isn't proposing any changes to its
income-tax rule, FAS

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