Income taxes: IFRS® Accounting Standards versus US GAAP

From the IFRS Institute �� June 2, 2023

From the Inflation Reduction Act and CHIPS and Science Act of 2022 to the ongoing global tax reform, tax law is becoming more complex and accounting for income taxes continues to receive significant attention. Some differences between IFRS Accounting Standards and US GAAP in this area are long-standing; however, other nuances are emerging. This is a good time to (re)visit how IAS 12¹��compares to ASC 740².

In this article, we identify 10 key differences between IFRS Accounting Standards and US GAAP in accounting for income taxes.��Our selection focuses on the differences that we believe are generally most impactful to net income or the most complex to deal with.

1. Backwards-tracing

Income tax, both current and deferred, may relate to items recognized outside profit or loss—i.e. in other comprehensive income (OCI) or equity. For example, measurement gains and losses on employee benefit liabilities, cash flow hedge reserves and available-for-sale reserves (US GAAP only) are recorded in OCI.

IFRS Accounting Standards	US GAAP
Under IAS 12, income tax related to items recognized outside profit or loss is itself recognized outside profit or loss. This relates to both items recognized in the current period and subsequent changes in items recognized in previous periods. This is referred to as ‘backwards-tracing��.��	Like IAS 12, income tax related to items recognized outside profit or loss in the current period is�� itself recognized outside profit or loss. Unlike IAS 12, subsequent changes are generally recognized in profit or loss—i.e. backwards-�� tracing is not permitted.

IFRS Accounting Standards

US GAAP

Under IAS 12, income tax related to items recognized outside profit or loss is itself recognized outside profit or loss. This relates to both items recognized in the current period and subsequent changes in items recognized in previous periods. This is referred to as ‘backwards-tracing��.��

Like IAS 12, income tax related to items recognized outside profit or loss in the current period is�� itself recognized outside profit or loss.

Unlike IAS 12, subsequent changes are generally recognized in profit or loss—i.e. backwards-�� tracing is not permitted.

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Dual reporters need to implement a process to monitor subsequent changes of items initially recognized outside profit or loss to keep track of and record this difference.

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2. Deferred tax assets recognition, valuation allowance and effect of AMT

In 2023, the Inflation Reduction Act (IRA) introduced a new Alternative Minimum Tax (Corporate AMT) of 15%, levied on certain large corporations in the US. US companies continue to measure deferred taxes based on the regular statutory rate, and account for the incremental AMT tax as it is incurred.

However, a company’s Corporate AMT status in the future will affect the realization of its deferred tax. For example, a company that forecasts reducing its regular tax with an existing net operating loss carryforward in a year that it is subject to the Corporate AMT may not benefit at all from that deferred tax asset if it anticipates always being an AMT taxpayer.

IFRS Accounting Standards	US GAAP
Under IAS 12, a deferred tax asset is recognized only to the extent it is probable (i.e. more likely than not) that taxable profit will be available against which the deductible temporary differences or the unused tax losses and tax credits can be realized. It appears that a company should consider whether it will be subject to the Corporate AMT when assessing to what extent deductible temporary differences and unused tax losses under the regular tax will be realized in the future. Read more in ��㣨Leyu�� publication,��.	Unlike IAS 12, US GAAP requires recognition of all deferred tax assets with a corresponding valuation allowance to the extent it is ‘more likely than not³��that the deferred tax assets will not be realized. Unlike IAS 12, we believe a company may elect to either consider or disregard its Corporate AMT status when evaluating the need for a valuation allowance. Using the above example, if the company elects to consider its Corporate AMT status, it would recognize a valuation allowance on the deferred tax asset. If it disregards its Corporate AMT status, it would not recognize a valuation allowance if it is more likely than not that it will have sufficient taxable income under the regular tax system to realize the deferred tax asset.

IFRS Accounting Standards

US GAAP

Under IAS 12, a deferred tax asset is recognized only to the extent it is probable (i.e. more likely than not) that taxable profit will be available against which the deductible temporary differences or the unused tax losses and tax credits can be realized.

It appears that a company should consider whether it will be subject to the Corporate AMT when assessing to what extent deductible temporary differences and unused tax losses under the regular tax will be realized in the future.

Read more in ��㣨Leyu�� publication,��.

Unlike IAS 12, US GAAP requires recognition of all deferred tax assets with a corresponding valuation allowance to the extent it is ‘more likely than not³��that the deferred tax assets will not be realized.

Unlike IAS 12, we believe a company may elect to either consider or disregard its Corporate AMT status when evaluating the need for a valuation allowance.

Using the above example, if the company elects to consider its Corporate AMT status, it would recognize a valuation allowance on the deferred tax asset. If it disregards its Corporate AMT status, it would not recognize a valuation allowance if it is more likely than not that it will have sufficient taxable income under the regular tax system to realize the deferred tax asset.

IAS 12 and US GAAP have long diverged on the approach to��deferred tax assets. However, traditionally the net amount has been similar (absent differences in tax basis). With AMT, amounts of differed tax assets may diverge for companies permanently subject to AMT.

3. Top-up tax under Pillar Two (global tax reform)

Under the ‘Global Anti-Base Erosion (GloBE) rules of Pillar Two, jurisdictions around the world are introducing changes to their tax laws to ensure that large multinational groups pay at least 15% tax in each jurisdiction where they operate (top-up tax).

IFRS Accounting Standards	US GAAP
The International Accounting Standards Board has recently amended IAS 12 to introduce a temporary mandatory exception from the accounting for deferred tax related to top-up tax. However, companies are required to provide new disclosures about their exposure to the top-up tax at a reporting date, particularly before the new tax rules come into effect. Read more in ��㣨Leyu�� Hot Topic,��.	Under US GAAP, the top-up tax is accounted for as an alternative minimum tax. This means that like IAS 12, deferred taxes are measured at the regular tax rate and the effect of the top-up tax is recognized when it arises. Unlike IAS 12, this accounting treatment is not temporary. In addition, unlike IAS 12 no specific disclosures are required.

IFRS Accounting Standards

US GAAP

The International Accounting Standards Board has recently amended IAS 12 to introduce a temporary mandatory exception from the accounting for deferred tax related to top-up tax. However, companies are required to provide new disclosures about their exposure to the top-up tax at a reporting date, particularly before the new tax rules come into effect.

Read more in ��㣨Leyu�� Hot Topic,��.

Under US GAAP, the top-up tax is accounted for as an alternative minimum tax. This means that like IAS 12, deferred taxes are measured at the regular tax rate and the effect of the top-up tax is recognized when it arises. Unlike IAS 12, this accounting treatment is not temporary. In addition, unlike IAS 12 no specific disclosures are required.

The IAS 12 exemption has no expiry date. The accounting under IFRS Accounting Standards and US GAAP should therefore stay converged in this area for the foreseeable future. However, complying with the IAS 12 disclosures requirements might be challenging. Companies should monitor closely local enactment of Pillar Two in the jurisdictions in which they operate and assess potential exposures.

4. Intra-group transfers of inventory

Intra-group sales and purchases of inventory are eliminated on consolidation. However, they may have tax effects for:

the seller—e.g. the seller pays income taxes on intra-group profits related to inventory that remain within the consolidated group; or
the buyer—e.g. the new tax basis of inventory in the buyer’s jurisdiction exceeds the carrying amount of inventory in the consolidated financial statements.

IFRS Accounting Standards	US GAAP
Under IAS 12, the current tax effects for the seller are recognized in the current tax provision. Any related deferred tax effects are measured based on the tax rate of the buyer.	Unlike IAS 12, the current tax effects for the seller are deferred until the inventory is sold outside the consolidated group. Unlike IAS 12, the buyer does not recognize a deferred tax asset for the step-up in tax basis.

IFRS Accounting Standards

US GAAP

Under IAS 12, the current tax effects for the seller are recognized in the current tax provision.

Any related deferred tax effects are measured based on the tax rate of the buyer.

Unlike IAS 12, the current tax effects for the seller are deferred until the inventory is sold outside the consolidated group.

Unlike IAS 12, the buyer does not recognize a deferred tax asset for the step-up in tax basis.

Intra-group transfers of inventory frequently occur within global companies. This difference may therefore have significant practical implications for dual reporters.

5. Share-based payments

In some jurisdictions, companies may receive a tax deduction on share-based payment arrangements that (in amount or timing) differs from the cumulative expense recognized in profit or loss. Generally, this will give rise to the recognition of a deferred tax on the temporary difference.

IFRS Accounting Standards	US GAAP
Under IAS 12, the��the estimated tax deduction reflects what the company would claim if the awards were tax-deductible in the current period, based on the information available at the reporting date (e.g. share price, exercise price). If the estimated tax deduction: is less than or equal to the related cumulative remuneration expense, the associated tax benefit is recognized in profit or loss. exceeds the amount of the related cumulative remuneration expense, the excess is recognized directly in equity.	Under US GAAP, the temporary difference is based on the amount of compensation cost recognized in profit or loss without any adjustment for the company's current share price. The temporary difference creates an excess tax benefit or tax deficiency when the tax deduction arises. Unlike IAS 12, all excess tax benefits (deficiencies) are recognized as an income tax benefit (expense) in profit or loss in the period in which the tax deduction arises.

IFRS Accounting Standards

US GAAP

Under IAS 12, the��the estimated tax deduction reflects what the company would claim if the awards were tax-deductible in the current period, based on the information available at the reporting date (e.g. share price, exercise price).

If the estimated tax deduction:

is less than or equal to the related cumulative remuneration expense, the associated tax benefit is recognized in profit or loss.
exceeds the amount of the related cumulative remuneration expense, the excess is recognized directly in equity.

Under US GAAP, the temporary difference is based on the amount of compensation cost recognized in profit or loss without any adjustment for the company's current share price.

The temporary difference creates an excess tax benefit or tax deficiency when the tax deduction arises. Unlike IAS 12, all excess tax benefits (deficiencies) are recognized as an income tax benefit (expense) in profit or loss in the period in which the tax deduction arises.

This difference requires dual reporters to establish a process to determine the difference for each (interim) reporting period that would include consideration of share price, exercise price and timing (period) of recognition of income tax.

6. Investments in subsidiaries, branches, joint arrangements and associates

The difference between the tax base of a parent or investor’s investment in a subsidiary, branch, joint arrangement or associate and the carrying amount of the related net assets in the consolidated financial statements is a temporary difference��commonly referred to as an ‘outside basis difference��.

IFRS Accounting Standards	US GAAP
Under IAS 12, tax effects on taxable outside basis differences are not recognized if: the investor is able to control the timing of the reversal of the temporary difference; and it is probable (i.e. more likely than not) that the temporary difference will not reverse in the foreseeable future. While ‘foreseeable future�� is not defined in IAS 12, in our view it is necessary to consider in detail a period of 12 months from the reporting date, and also take into account any transactions that are planned for a reasonable period after that date.	Tax effects on taxable outside basis differences in respect of certain foreign subsidiaries and corporate joint��ventures are not recognized if (‘indefinite reversal criteria��): the investor is able to control the timing of the reversal of the temporary difference, like IAS 12; and undistributed earnings will be reinvested indefinitely or can be distributed on a tax-free basis, unlike IAS 12. Other exceptions apply to domestic subsidiaries.

IFRS Accounting Standards

US GAAP

Under IAS 12, tax effects on taxable outside basis differences are not recognized if:

the investor is able to control the timing of the reversal of the temporary difference; and
it is probable (i.e. more likely than not) that the temporary difference will not reverse in the foreseeable future. While ‘foreseeable future�� is not defined in IAS 12, in our view it is necessary to consider in detail a period of 12 months from the reporting date, and also take into account any transactions that are planned for a reasonable period after that date.

Tax effects on taxable outside basis differences in respect of certain foreign subsidiaries and corporate joint��ventures are not recognized if (‘indefinite reversal criteria��):

the investor is able to control the timing of the reversal of the temporary difference, like IAS 12; and
undistributed earnings will be reinvested indefinitely or can be distributed on a tax-free basis, unlike IAS 12.

Other exceptions apply to domestic subsidiaries.

Dual reporters need to perform separate analyses under IFRS Accounting Standards and US GAAP.

For US GAAP, the analysis requires sufficient documentation to substantiate that the ‘indefinite reversal criteria�� are met. This requires a robust process involving people not only from within, but also outside the tax department.

7. Deferred tax: initial recognition exemption

IFRS Accounting Standards	US GAAP
Under IAS 12, deferred tax is not recognized for certain temporary differences that arise on the initial recognition of assets and liabilities. The exemption applies to: a deferred tax liability (but not a deferred tax asset) that arises from the initial recognition of goodwill; and a deferred tax asset or liability that arises from the initial recognition of an asset or liability in a transaction that is not a business combination, that at the time of the transaction affects neither accounting profit nor taxable profit and does not give rise to equal taxable and deductible temporary differences.	Like IFRS Accounting Standards, a deferred tax liability (but not a deferred tax asset) that arises on the initial recognition of goodwill is exempt from recognition. Unlike IAS 12, there is no exemption under US GAAP from recognizing a deferred tax asset or liability for the initial recognition of an asset or liability in a transaction that is not a business combination.

IFRS Accounting Standards

US GAAP

Under IAS 12, deferred tax is not recognized for certain temporary differences that arise on the initial recognition of assets and liabilities. The exemption applies to:

a deferred tax liability (but not a deferred tax asset) that arises from the initial recognition of goodwill; and
a deferred tax asset or liability that arises from the initial recognition of an asset or liability in a transaction that is not a business combination, that at the time of the transaction affects neither accounting profit nor taxable profit and does not give rise to equal taxable and deductible temporary differences.

Like IFRS Accounting Standards, a deferred tax liability (but not a deferred tax asset) that arises on the initial recognition of goodwill is exempt from recognition.

Unlike IAS 12, there is no exemption under US GAAP from recognizing a deferred tax asset or liability for the initial recognition of an asset or liability in a transaction that is not a business combination.

The IAS 12 exemption applies, for example, if a company buys equipment whose cost will not be fully deductible for tax purposes. This difference requires dual reporters to establish a process to identify and quantify the difference for each reporting period.

However, the exemption does not apply to the accounting of deferred taxes that arise at inception of a lease or decommissioning provision (asset retirement obligation). For those, the deferred tax treatment should therefore align under both GAAPs.

8. Interest and penalties related to income taxes

IFRS Accounting Standards	US GAAP
IAS 12 does not explicitly address the accounting for interest and penalties. Therefore, the general requirements of IAS 12 apply. An accounting policy choice is not available. A company applies judgment to assess the characteristics of interest or a penalty to determine whether it meets the definition of an income tax. If interest and penalties are considered income tax, any associated uncertainties are accounted for under IAS 12. Otherwise, the provisions guidance in IAS 37⁴��applies.	US GAAP provides an accounting policy choice to classify interest and penalties as either income tax or as a component of pretax income (loss) (e.g. as interest expense). It also provides the following recognition guidance. Interest on an underpayment of income tax is recognized when interest would begin accruing under the provisions of the tax law. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the penalties are recognized in the period in which the company claims or expects to claim the position on the tax return.

IFRS Accounting Standards

US GAAP

IAS 12 does not explicitly address the accounting for interest and penalties. Therefore, the general requirements of IAS 12 apply.

An accounting policy choice is not available.
A company applies judgment to assess the characteristics of interest or a penalty to determine whether it meets the definition of an income tax.
If interest and penalties are considered income tax, any associated uncertainties are accounted for under IAS 12. Otherwise, the provisions guidance in IAS 37⁴��applies.

US GAAP provides an accounting policy choice to classify interest and penalties as either income tax or as a component of pretax income (loss) (e.g. as interest expense).

It also provides the following recognition guidance.

Interest on an underpayment of income tax is recognized when interest would begin accruing under the provisions of the tax law.
If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the penalties are recognized in the period in which the company claims or expects to claim the position on the tax return.

Differences in the accounting may exist in practice especially if an interest or penalty does not meet the requirement to be considered income tax under IFRS Accounting Standards.

9. Uncertain income tax treatments

The term ‘uncertain income tax treatments�� generally refers to income tax treatments used or planned to be used by a company that may be challenged by the tax authorities, and which may result in additional taxes, penalties or interest—i.e. tax exposures.�� Uncertain tax treatments may arise in relation to taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates.

IFRS Accounting Standards	US GAAP
Under IFRIC 23⁵, if there is uncertainty about an income tax treatment, a company considers whether it is probable (i.e. more likely than not) that the tax authority will accept the company’s tax treatment included or planned to be included in its income tax filing. If more likely than not,��the tax treatments used or planned to be used in the tax filings are retained for accounting purposes, with no adjustment. If unlikely, the company reflects the effect of uncertainty in determining the related tax treatments. Two methods are available to reflect the effect of uncertainty. For each uncertain tax treatment, the company uses the method that best predicts the resolution of the uncertainty: the most likely amount—i.e. the single most likely amount in a range of possible outcomes. This may best apply when the possible outcomes of the uncertainty are binary or are concentrated on one value. the expected value—i.e. the sum of the probability-weighted amounts in a range of possible outcomes. This may best apply when there is a range of possible outcomes that are neither binary nor concentrated on one value.	Under US GAAP, if there is uncertainty about an income tax treatment, then a company considers whether it is more likely than not, based on the technical merits of the position, that some level of the related tax benefit will be sustained on examination. If more likely than not, the company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized on settlement. If not more likely than not, the tax payable is established for the entire tax benefit. Unlike IFRIC 23, US GAAP does not allow the most likely amount or the expected value methods.

IFRS Accounting Standards

US GAAP

Under IFRIC 23⁵, if there is uncertainty about an income tax treatment, a company considers whether it is probable (i.e. more likely than not) that the tax authority will accept the company’s tax treatment included or planned to be included in its income tax filing.

If more likely than not,��the tax treatments used or planned to be used in the tax filings are retained for accounting purposes, with no adjustment.
If unlikely, the company reflects the effect of uncertainty in determining the related tax treatments.

Two methods are available to reflect the effect of uncertainty. For each uncertain tax treatment, the company uses the method that best predicts the resolution of the uncertainty:

the most likely amount—i.e. the single most likely amount in a range of possible outcomes. This may best apply when the possible outcomes of the uncertainty are binary or are concentrated on one value.
the expected value—i.e. the sum of the probability-weighted amounts in a range of possible outcomes. This may best apply when there is a range of possible outcomes that are neither binary nor concentrated on one value.

Under US GAAP, if there is uncertainty about an income tax treatment, then a company considers whether it is more likely than not, based on the technical merits of the position, that some level of the related tax benefit will be sustained on examination.

If more likely than not, the company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized on settlement.
If not more likely than not, the tax payable is established for the entire tax benefit.

Unlike IFRIC 23, US GAAP does not allow the most likely amount or the expected value methods.

While sources of uncertainty may vary by company, tax reform or changes in tax law often create new applications that may eventually result in income tax exposures. Dual reporters need to ensure that their documentation of tax uncertainties is fit for both IFRS Accounting Standards and US GAAP.

10. Interim financial reporting

Under both IFRS Accounting Standards and US GAAP, the income tax expense recognized in each interim period is based on the best estimate of the weighted-average annual rate expected for the full year applied to the pre-tax income of the interim period. However, differences may arise when accounting for a change in tax rates.

IFRS Accounting Standards	US GAAP
Under IAS 34⁶��if a change in tax rate is enacted (or substantively enacted) in an interim period, in our view a company may elect an accounting policy (to be consistently applied) to: recognize the effect of the change immediately in the interim period in which the change occurs; or spread the effect of a change in the tax rate over the remainder of the annual reporting period via an adjustment to the estimated annual effective income tax rate.	Unlike IFRS Accounting Standards, if a change in a tax rate is enacted in an interim period, the effect of the change is required to be recognized in income from continuing operations immediately in the interim period of enactment. The estimated annual effective tax rate would then be evaluated and adjusted for the change and any resultant change applied prospectively.

IFRS Accounting Standards

US GAAP

Under IAS 34⁶��if a change in tax rate is enacted (or substantively enacted) in an interim period, in our view a company may elect an accounting policy (to be consistently applied) to:

recognize the effect of the change immediately in the interim period in which the change occurs; or
spread the effect of a change in the tax rate over the remainder of the annual reporting period via an adjustment to the estimated annual effective income tax rate.

Unlike IFRS Accounting Standards, if a change in a tax rate is enacted in an interim period, the effect of the change is required to be recognized in income from continuing operations immediately in the interim period of enactment.

The estimated annual effective tax rate would then be evaluated and adjusted for the change and any resultant change applied prospectively.

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Because alternative approaches may be acceptable under IFRS Accounting Standards, dual reporters may align their accounting with US GAAP. That is unless a policy has been established in the past or has been set by the parent for group reporting.

Forthcoming developments

The FASB recently proposed changes to income tax disclosures under US GAAP that would address investor requests for more transparency about income taxes. The new disclosures would include jurisdictional information and greater disaggregation of information in the rate reconciliation and income taxes paid disclosure. Read more in ��㣨Leyu�� Defining Issues,��.

The IASB has no active standard-setting project to require similar income tax disclosures.

��㣨Leyu�� resources:

Handbook:��
Article:��
Hot Topic:��
Defining Issues:��

Footnotes

IAS 12, Income Taxes
ASC 740, Income Taxes
'More likely than not' means likelihood of realization is more than 50%.
IAS��37, Provisions, Contingent Liabilities and Contingent Assets
IFRIC 23, Uncertainty over Income Tax Treatments
IAS 34, Interim Financial Reporting

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Partner, Dept. of Professional Practice, and US-France Corridor Leader, ��㣨Leyu�� US

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Associate Director, Dept. of Professional Practice, ��㣨Leyu�� Global Delivery Center

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From the IFRS Institute �� June 2, 2023

1. Backwards-tracing

2. Deferred tax assets recognition, valuation allowance and effect of AMT

3. Top-up tax under Pillar Two (global tax reform)

4. Intra-group transfers of inventory

5. Share-based payments

6. Investments in subsidiaries, branches, joint arrangements and associates

7. Deferred tax: initial recognition exemption

8. Interest and penalties related to income taxes

9. Uncertain income tax treatments

10. Interim financial reporting

Forthcoming developments

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