TaxAccounting

The Effect of IFRS

Implementation on Tax
By: John R. McGowan, Ph.D., CPA
Matt Wertheimer, M. Acc.

U ntil recently, the movement toward adoption of international financial reporting standards (IFRS) as a sin-
gle 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 sig-
naled that she would slow down the IFRS road map proposed by the SEC last November. “I 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.
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 prin-
ciples (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 State-
ments (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

  1 Lamoreaux, “SEC Nominee Pledges to Revital-

ize Enforcement, Has Concerns About IFRS,”
JournalofAccountancy.com (January 16, 2009),
www.journalofaccountancy.com/Web/SEC
NomineeCommentsatCongressionalHearing.htm.

8 4 2 the tax adviser december 2009 © 2009 AICPA

preferable to IFRS. This convergence pro-
cess has been going on for years.
Income tax is an area in which the
IASB and FASB have worked for conver-
gence. The IASB’s income tax project was
originally a joint project with FASB, un-
dertaken 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 conver-
gence. International Accounting Standard
(IAS) No. 12, Income Taxes, is based on
the temporary difference approach devel-
oped 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 “sus-
pended 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 expo-
sure draft. It would then decide whether
to undertake a project that would elimi-
nate 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 adop-
tion) 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 stan-
dards. In addition, accounting systems
may need to be changed. The second sec-
tion focuses on the exposure draft to re-
place IAS 12 and reviews how this state-
ment 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.
  2 Note that FASB has codified its accounting stan-
dards; FAS 109 is now mostly codified in Account-
ing Standards Codification Subtopic 740-10.
  3 IASB, Exposure Draft ED/2009/2, Income Tax
(March 2009).
Working with the Client
Tax practitioners need to actively work
to anticipate the specific changes that will
EXECUTIVE
affect individual clients and should be in- SUMMARY
volved with clients as much as possible as
they begin making changes to conform to
• Although the pace of the
IFRS.4 The first step is to find out if the
client’s company has assembled a team transition from GAAP to IFRS
to deal with the transition to IFRS. If it has slowed recently, conver-
has, it is important that someone with a gence of the standards for
tax viewpoint be part of this team. Tax U.S. companies, including
directors should seek out these groups
the standards for accounting
and join as soon as possible. IFRS af-
for income taxes, will even-
fords companies a significant amount of
flexibility and options on how to account tually happen through the
for certain transactions. A company complete adoption of IFRS
should make the decisions on the elec- standards or the issuance
tions and treatment options under IFRS of a series of standards that
only after considering the potential tax
effectively conform GAAP
implications.5
to IFRS.
Next, a practitioner should assess the
client’s employees’ skill sets. Identify those
• The transition to IFRS will
who have experience and knowledge of
the subject. Employees should be pre- have an enormous impact on
pared to deal with the new issues and situ- the calculation and report-
ations that will arise with IFRS. It is just ing of income taxes for U.S.
as important to educate the client’s staff companies that are currently
as it is to educate the practitioner’s own reporting under GAAP. Both
tax staff. This will aid in the delivery of
CPAs with clients who will
data and information when it comes time
to prepare the tax return. Once the basic be subject to the new IFRS
accounting policies and procedures are standards and the tax depart-
understood, practitioners and directors ments of these clients should
should start raising a number of impor- be planning now for the
tant tax questions, such as: transition.
• Is the new financial reporting standard
a permissible tax accounting method? • The IASB has issued an expo-
• Is the new book method preferable for sure draft of a new standard
tax reporting purposes?
on income tax to replace
• Is it necessary to file changes in meth-
ods of accounting? IAS 12, the IFRS equivalent
• Will there be modifications in the com- of FAS 109, that reduces the
putation of permanent and temporary differences between IFRS
differences? and GAAP in accounting for
• How will reporting in accordance income taxes. The draft in-
with IFRS affect the computation of
cludes changes to the defini-
taxable earnings and profits, foreign
source income, and investments in tion of tax basis, the definition
subsidiaries? and treatment of temporary
differences, the treatment of
  4 See Whitehouse, “How the Tax Executives Should
uncertain positions, and the
Approach IFRS,” Compliance Week (July 22, recognition and calculation of
2008), www.complianceweek.com/article/4309. deferred tax amounts.
  5 See id.
t h e ta x a d v i s e r d e c e m b e r  2 0 0 9 8 4 3
TaxAccounting
In addition, practitioners and direc-
tors 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 denomi-
nator of this equation, which in turn
could have either a positive or negative
Certain tax planning structures such as
transfer pricing agreements and cost
allocations across jurisdictions will be
affected by the transition to IFRS.
influence on the effective tax rate. This
change in effective tax rate could have
a trickle-down effect when it comes to
the finance department as it evaluates
the after-tax benefit of potential new
projects.6
Accounting Systems
To reflect the changes brought about by
IFRS, companies could modify their ac-
counting and reporting systems. Of im-
mediate concern is the ability to capture
parallel information on a U.S. GAAP and
IFRS basis, especially for the year(s) im-
mediately prior to adoption. Advance
preparation and an adequate amount of
lead time are paramount for this tran-
sition. Because reporting systems gen-
erate the tax data that preparers use
to generate tax returns, much is riding
on the completeness and sophistication
of these systems.
Before diving into the reconstruction
process, companies should take a step
back and remember that this is the per-
fect opportunity to address and rethink
how they calculate and report data. They
should first perform an overall assessment
of the system and then use this transition
as a chance to correct inefficiencies.7
Another area of opportunity that the
change permits is an increase in auto-
  6 See Ernst & Young, “IFRS: 10 Reasons Why Tax Must Be Involved” (2009),
http://tinyurl.com/ifrs10reasons.
  7 See Deloitte, “International Financial Reporting Standards for U.S. Compa-
nies” (2007), http://tinyurl.com/deloitteIFRS.
8 4 4 the tax adviser december 2009
mated processes. Clients should be talk-
ing with data suppliers about their tax
requirements to produce the data they
provide in a more automated fashion. Not
only will this increase efficiency, it will
also greatly reduce human calculation and
reporting errors.8
Input from the tax department is nec-
essary in the renovation of accounting sys-
tems. What transactions have a tax effect
with IFRS now? How will the preparer
of the information be able to determine
taxable versus nontaxable events with the
new system? These issues must not be left
to chance. Tax practitioners need to be
directly involved with programmers and
developers as they modify accounting sys-
tems to reflect IFRS.
Finally, the system needs several test
runs. Clients should prepare financials
with the new system, and practitioners
must take the time to help clients become
familiar with the changes. Clients’ tax re-
turn preparation should be done with a
trial run using the new system. By mak-
ing these test runs during the slow season,
tax preparers can work out a significant
number of problems before it is time to
prepare the actual returns.
Accounting for Income  Taxes:
Exposure Draft to Replace IAS 12
According to the IASB, the exposure
draft’s objective is to clarify and improve
IAS 12 and to reduce the differences be-
tween IAS 12 and the U.S. standard, FAS
109, and related U.S. GAAP. The expo-
sure draft for IAS 12 represents a large
step forward in convergence with FAS
109 and U.S. GAAP.
  8 See Ernst & Young, “IFRS: 10 Reasons Why Tax Must Be Involved.”
  9 IASB, Exposure Draft, Appendix A, p. 34.
10 IASB, Exposure Draft, ¶18, p. 21, and Appendix A, p. 35.
11 IASB, Exposure Draft, ¶¶B1–B9, pp. 36–37.
Definition of  Tax Basis and
Temporary Difference
IAS 12 currently requires the tax base
of an asset or liability to reflect the manner
in which the entity expects to recover the
asset (or settle the liability). This effectively
makes deferred tax a function of manage-
ment intent, which the IASB has tried to
avoid in other areas of financial
reporting. The exposure draft
proposes replacing the term
“tax base” with “tax basis,”
defined as “the measurement,
under applicable substantively
enacted tax law, of an asset, li-
ability or other item.”9 The tax
basis of both an asset and a li-
ability is determined by the tax
consequences of selling it for its carrying
amount at the reporting date.
At present, a temporary difference is
simply the difference between the carrying
amount of an item and its tax base. The ex-
posure draft redefines a temporary differ-
ence as the difference between the carrying
amount of an item and its tax basis that
the entity expects will affect taxable profit
when the carrying amount of the related
asset or liability is recovered or settled (or,
in the case of items other than assets or
liabilities, will affect taxable profit in the
future).10 The other type of temporary dif-
ference is differences between the carrying
amount of investments in a subsidiary or
joint venture and the tax basis of those in-
vestments in the tax jurisdiction of the par-
ent or investor.11 In effect, this means that
the IASB still relies on management intent
insofar as the measurement of deferred tax
depends on the entity’s expectations.
Exceptions to the Temporary
Difference Approach
Currently IAS 12 denies the recogni-
tion of deferred tax on most temporary
differences that arise from the initial
recognition of assets and liabilities. The
IASB adopted this approach as a practi-
cal solution to what it concluded were
inappropriate accounting consequences
of temporary differences. The exposure
draft proposes eliminating that excep-
tion. Therefore, deferred tax would be
recognized on all temporary differences
whenever they arise. The only exception
is with the initial recognition of goodwill,
where the deferred tax liability would not
be recognized.12
The exposure draft also requires that
any temporary difference arising on the
initial recognition of an asset or liability
be split into:
• The asset or liability, without any en-
tity-specific tax effects; and
• The entity-specific tax effects generally:
The extent to which the tax treatment
of an item in the hands of the entity
places the entity in a better or worse
position than the taxpayer as a whole.
The first amount becomes the carrying
amount of the asset or liability. The entity
recognizes deferred tax as a temporary
difference from this carrying amount.
Interestingly, the practical impact of
this approach maintains the former ini-
tial recognition exception. Specifically,
where an asset or liability is recognized
other than in a business combination or
in a transaction that affects comprehen-
sive income, equity, or taxable profit,
the entity also recognizes a premium or
allowance (the difference between the
amount paid for an asset, or received for
a liability, and its carrying amount, to-
gether with any associated deferred tax
asset or liability). As a result, the entity
offsets the premium or allowance against
the deferred tax balance.
Allocation of T
  ax to Components
of Comprehensive Income or
Equity
The exposure draft requires an entity
to recognize any change to a tax asset or
liability relating to an item accounted
for in an earlier period in profit or loss,
without any backward tracing. IFRS
currently states that current and de-
ferred tax should be charged or credited
in other comprehensive income (OCI)
or directly in equity if the tax relates to
items that were credited or charged,
whether in the current or previous pe-
riod, in OCI, or directly in equity. Back-
ward tracing refers to the current treat-
ment under IAS 12 where subsequent
changes to those amounts are also al-
located to OCI or equity as applicable.
For example, an available-for-sale secu-
rity had $100 of unrealized appreciation
and was reported in other comprehensive
income (a separate component of share-
holders’ equity) net of tax (assuming a
40% rate) as a $60 increase in year 1. As-
suming no changes in market value of the
security and a tax rate change to 45%,
backward tracing would result in the $5
incremental tax effect being allocated to
comprehensive income in year 2. The ex-
posure draft maintains the exception for
backward tracing for share-based pay-
ment transactions. For example, any tax
deduction received in excess of the cumu-
lative expense for an award is accounted
for in equity.13
Uncertain T
  ax Positions
The exposure draft indicates that en-
tities measure uncertain tax positions on
an expected outcome basis (e.g., as the
probability-weighted average of expected
outcomes).14 Uncertain tax positions arise
when there is an uncertainty as to the
meaning of the law, the application of the
law to a particular transaction, or both.
Practice in this area has lacked uniformity
because IAS 12 does not explicitly address
the recognition and measurement of un-
certain tax positions.
The exposure draft also requires that
entities disclose information about the
major sources of uncertainties estimation
Exhibit 1: Distribution of potential outcomes
Amount of tax position
management believes will Percentage likelihood tax
be sustained position will be sustained
$100
   80
   60
   40
   20
relating to tax effects to help users assess
the possible financial effects of the use of
estimates for both uncertainty and tim-
ing.15 An example of uncertainty is the
effect of an unresolved dispute with tax
authorities. The exposure draft specifi-
cally requires:
• A description of the uncertainty; and
• An indication of its possible finan-
cial effects on amounts recognized for
taxes and the timing of those effects.
The increased disclosure requirements
may be a source of significant controversy
due to the sensitive nature of these items.
FASB guidance for uncertain tax po-
sitions uses a two-step process. The first
step is determining whether the recogni-
tion of an uncertain tax position is ap-
propriate. If so, the second step is accu-
rately measuring that position. The tax
benefit of an uncertain tax position can
be recognized only if it is more likely
than not that the tax position is sustain-
able based on its technical merits. The
tax position is then measured by using a
cumulative probability model: the larg-
est amount of tax benefit that is more
than 50% likely to be realized on ulti-
mate settlement.
Example: Enterprise E takes a tax de-
duction that results in a tax benefit of
$100. The position is just barely more
likely than not. In other words, it is
only 50.1% likely based on the techni-
cal merits that E will prevail in litiga-
tion with the taxing authority. After E
determines that the position has met
the recognition threshold, it estimates
the distribution of potential outcomes
Cumulative probability tax
position will be sustained
15%   15%
20   35
20   55
30   85
15 100

12 IASB, Exposure Draft, ¶21, p. 22. 14 IASB, Exposure Draft, ¶26, p. 23.
13 IASB, Exposure Draft, ¶B43, p. 49. 15 IASB, Exposure Draft, ¶49, p. 32.

t h e ta x a d v i s e r d e c e m b e r  2 0 0 9 8 4 5
TaxAccounting
as shown in Exhibit 1 on p. 845 (after
considering, for example, prior history
and the enterprise’s and the taxing au-
thority’s settlement postures).16
Thus, in this example, FASB stipulates
that $60 (with a cumulative probabil-
ity of 55%) is the largest amount that is
more than 50% likely of being ultimately
realized.17 The measurement of the tax li-
ability under IFRS is likely to differ from
GAAP requirements because IFRS’s gen-
eral approach to liabilities is a probabil-
ity-weighted method. Using the data from
Exhibit 1, an expected value or probabil-
ity-weighted method would indicate that
a tax benefit of $85 could be recognized,
as in Exhibit 2.
Presentation
The exposure draft requires entities to
offset the current amount of deferred tax
assets against the current amount of de-
ferred tax liabilities and the noncurrent
amount of deferred tax assets against the
noncurrent amount of deferred tax li-
abilities.18 This offset should occur when
an entity has a legally enforceable right
to set off current tax assets against cur-
rent tax liabilities, and the deferred tax
assets and deferred tax liabilities relate
to taxes levied by the same tax author-
ity. As such, it now follows U.S. GAAP,
where an entity recognizes the amount
in full but then reduces it by the valua-
tion allowance to the amount that the
entity expects to recover. U.S. GAAP
also stipulates that the classification of
deferred tax assets and deferred tax li-
abilities must follow the classification
of the related nontax asset or liability
for financial reporting (as either current
or noncurrent). If a deferred tax asset is
not associated with an underlying asset
or liability, it is classified based on the
anticipated reversal periods. The entity
must allocate any valuation allowances
between current and noncurrent deferred
tax assets for a tax jurisdiction on a pro-
rata basis under U.S. GAAP.
Exhibit 2: Distribution of probability-weighted potential outcomes
Amount of
tax position Percentage
management likelihood tax
believes will be position will be
sustained sustained
$100 15%
   80 20
   60 20
   40 30
   20 15
Transitional and First-Time
Adoption Provisions
According to the exposure draft, an
entity must apply the new requirements
for the allocation of tax to components
of profit or loss, OCI, or equity prospec-
tively from the date of the first open-
ing statement of financial position.19 In
places where deferred tax has not been
recognized on items due to the initial rec-
ognition exception, the new requirements
are applied as if the items concerned had
been acquired for their carrying amounts
outside a business combination at the
date of the first opening statement of
financial position. Finally, entities tran-
sitioning to IFRS are also generally re-
quired to apply the proposed new stan-
dard retrospectively. However, the entity
must apply the new requirements for the
allocation of tax to components of profit
or loss, OCI, or equity prospectively from
the date of transition to IFRS.
Recognition of Deferred   Tax
Assets
Under U.S. GAAP, deferred taxes are
recognized in full but are then reduced by
a valuation allowance if it is considered
more likely than not that some portion
of the deferred taxes will not be realized.
The exposure draft includes a proposal
to recognize deferred tax assets in full,
less (if applicable) a valuation allow-
ance to reduce the net carrying amount
to the highest amount that is more likely
Distribution Cumulative
of probability- probability-
weighted potential weighted amount
outcomes of tax benefit
$15 $15
  16   31
  12   43
  12   55
  30   85
than not to be realizable against taxable
profit. This approach replaces the exist-
ing single-step recognition of the portion
of a deferred tax asset for which realiza-
tion is probable.20
Calculation of Deferred Asset or
Liability
Deferred tax assets are future taxes
that an entity would receive because of
deductible temporary differences and
the tax effect of recognizing unused tax
loss carryforwards and unused tax cred-
its. Deferred tax liabilities are those taxes
that are going to be payable in the future
as a result of taxable temporary differ-
ences.21 These amounts will vary depend-
ing on which tax rate is used. The expo-
sure draft clarifies that “substantively
enacted” means that future events re-
quired by the enactment process histori-
cally have not affected the outcome and
are unlikely to do so.22
Use of Different T
  ax Rates on
Distributed or Undistributed
Earnings
Certain jurisdictions tax an entity’s
taxable income at different rates, de-
pending on whether the entity distributes
the income to owners or retains it. Other
jurisdictions give the entity a deduction
from taxable income for dividends paid
to owners. In these situations, the IASB
decided to require the entity to use the
distributed rate to measure tax assets or

16 This example is taken from the FASB Project Updates, Uncertain Tax Posi-
tions, www.fasb.org/project/uncertain_tax_positions.shtml.
17 However, the statistical mode, or single best estimate, is $40, which would
have been recognized in the financial statements based on the board’s previ-
ous decision. See FASB Project Updates, Uncertain Tax Positions.
18 IASB, Exposure Draft, ¶¶ 36–37, p. 28.
19 IASB, Exposure Draft, ¶¶ 50–52, p. 33.
20 IASB, Exposure Draft, ¶23, p. 22.
21 IASB, Exposure Draft, Appendix A, p. 34.
22 IASB, Exposure Draft, ¶B26, p. 43.

8 4 6 the tax adviser december 2009

liabilities if the entity expects to distrib-
ute income to owners and has the ability
to do so. In all other cases, entities are
required to use the undistributed rate.
The exposure draft changes the require-
ments relating to the tax effects of dis-
tributions to shareholders. Under new
rules, the entity would measure current
and deferred tax assets and liabilities
using the rate expected to apply when it
realizes or settles the tax asset or liability,
including the effect of its expectations of
future distributions. This would replace
the requirement in IAS 12 to use the un-
distributed rate.23
IFRS Carries Global Tax
Implications the P&L statement to U.S. tax account-
Budgeting and Reporting
The shift to IFRS would affect the
full array of corporate processes. The
multinational giants that the SEC an-
On March 31, 2009, the IASB published
an exposure draft of an IFRS intended
to replace IAS 12.
nounced it would permit to start re-
porting using IFRS in two years’ time
would also face significant tax ramifi-
cations in each country in which they
do business. Accounting firms are ad-
vising tax departments to assess both
the benefits and the costs of the transi-
tion while managing the attendant risks
inherent in the differences between
IFRS and tax reporting rules. As more
countries implement IFRS, it is highly
probable that there will be an immedi-
ate impact on certain aspects of foreign
tax reporting. Moreover, there will be a
corresponding effect on the overall effec-
tive tax rate for those U.S. multination-
als that rely on reducing foreign taxes to
maintain their effective tax rate. Compa-
nies operating in countries requiring or
23 IASB, Exposure Draft, ¶25, p. 23.
24 See Lau and Soltis, “A Guide to Foreign Corporation E&P (Part I),” 35 The
Tax Adviser 290 (May 2004).
25 Sec. 1248.
26 Sec. 956.
moving toward the use of IFRS should
be aware of possible changes in a num-
ber of important areas.
Earnings and Profits
Earnings and profits (E&P) play a key
role in international taxation, including
the foreign tax credit (FTC). Regs. Sec.
1.964-1 specifies three steps to compute
a foreign corporation’s E&P. First, the
corporation should prepare a local cur-
rency earnings statement for the year.
Second, it should make necessary ac-
counting adjustments to conform the
foreign profit and loss (P&L) statement
to GAAP. Third, the corporation should
make necessary adjustments to conform
ing standards. If IFRS were implemented
in the United States, steps two and three
would be altered to reflect principles-
based financial statements rather than
GAAP. Therefore, the implementation of
IFRS could potentially have a significant
impact on the size of E&P from foreign
subsidiaries.
Given the important role E&P plays
in numerous international tax provisions,
IFRS implementation could affect several
areas.24 For example, a foreign corpora-
tion’s E&P is most frequently associated
with the foreign tax credit (Secs. 902 and
960) and subpart F income (Secs. 951(a)
(1)(A) and 952(c)). E&P also applies in
assessing the effects on gain from the sale
of a controlled foreign corporation’s:
• CFC stock; 25
• Investments in U.S. property as
dividends; 26
• I n b o u n d o r f o r e i g n - t o - f o r e i g n
reorganizations; 27
27 Sec. 367(b).
28 Sec. 864(e)(4).
29 Sec. 338.
30 See Deloitte, “Global Tax Implications of International Financial Reporting
Standards” (2008), www.iasplus.com/usa/0809globaltax.pdf.
t h e ta x a d v i s e r
• Interest and other expense allocations
among classes of income (e.g., foreign
versus U.S. source income); 28 and
• A deemed asset purchase election on a
qualified purchase of a foreign corpo-
ration’s stock.29
Equity
FASB proposed a narrow definition
of equity that would limit the ability to
classify certain financial instruments as
equity; the definition is still under dis-
cussion. For countries that use IFRS as
the basis for statutory reporting, changes
to the characterization of an instrument
from equity to debt may trigger inter-
est expense limitation rules. A change
in the definition of equity arising from
a change in accounting standards may
also unexpectedly eliminate the tax ben-
efits of hybrid instruments because the
income may be treated as interest rather
than a dividend. IFRS will also
cause certain legal instruments,
such as those that can be con-
verted from debt to equity, to be
bifurcated between their equity
and debt elements. Under GAAP,
however, such an instrument is
reported as a liability.30
Transfer Pricing
Wider adoption of IFRS could have
both positive and negative effects on
the development and implementation of
transfer pricing policies. In one respect,
implementing transfer pricing policies
may eventually become easier as com-
panies develop the documentation and
necessary expertise under IFRS. In the
beginning, however, certain tax plan-
ning structures such as transfer pricing
agreements and cost allocations across
jurisdictions will be affected. These cal-
culations are typically expressed as a per-
centage of financial accounting measures
such as profit, margin, etc., and IFRS will
affect those measures.
Balance sheet allocations required
under IFRS will also have transfer pricing
d e c e m b e r  2 0 0 9 8 4 7
TaxAccounting
implications. For example, under both
SFAS 141 and IFRS 3, all excess value
over book value acquired may no longer
be simply allocated to goodwill without
further investigation. Instead, all intan-
gible assets must be separately recog-
nized. These allocations have significant
tax implications. For example, transfer
pricing policies could be used by tax au-
thorities to question transfer pricing al-
locations performed for tax purposes.31
In the same way, a taxable gain may be
determined on the sale of a subsidiary
to which a low value has been allocated.
Conversely, where an excessively high
value is allocated to a subsidiary, it is
possible that the cashflow generated by
the subsidiary will not support the allo-
cated value. For these reasons, the alloca-
tion of intangible assets and goodwill for
accounting purposes should also take tax
considerations into account.32
Conclusion
More than 12,000 companies in almost
100 nations have adopted IFRS, including
listed companies in the European Union.
Other countries, including Canada and
India, are expected to transition to IFRS
by 2011. Japan and Mexico have plans
to converge their national standards with
IFRS. The number of countries requiring
or accepting IFRS could grow to 150 in
the next few years.
Many people believe that SEC accep-
tance of IFRS for public companies in
the United States is inevitable. For many
years the SEC has been expressing its
support for a core set of accounting stan-
dards that could serve as a framework
for financial reporting in cross-border of-
ferings. In recent years it has supported
FASB and IASB efforts to develop a com-
mon set of high-quality, global standards.
While there are differences, the IASB and
FASB are working to bring the two stan-
dards closer together. One example is the
exposure draft on income tax recently
released by the IASB. As originally ad-
opted, IAS 12 had a significant number
31 See Bjørn, Lund, and Tseng, “Financial Report-
ing May Create Transfer-Pricing Issues,” Int’l
Tax Rev. (July-August 2007, transfer pricing
supp.)
of differences from U.S. GAAP. The re-
cently issued draft standard eliminates a
great many of these differences.
After these changes, it seems that tax-
paying entities would not experience the
same degree of upheaval if FASB were to
adopt the new IFRS standard for income
tax as a replacement for FAS 109. How-
ever, entities should still assess the effect of
these amendments across the entire spec-
trum of their tax function. These changes
would still affect tax planning, tax pro-
visions, tax compliance, and tax contro-
versy. Perhaps the largest impact in terms
of expanded data gathering—on docu-
mentation and support—may stem from
the requirements in the exposure draft for
uncertain tax positions. These require-
ments will affect entities as they interact
with both domestic and foreign tax au-
thorities. The U.S. move toward interna-
tional accounting rules may have slowed
momentarily, but some major corpora-
tions report that they have not paused in
their preparation for the eventual shift
in the standards for financial reporting.33
Tax departments across the United States
should investigate and prepare for the
possible implementation of IFRS.
TTA
EditorNotes
John McGowan is a professor
of accounting in the John Cook
School of Business at Saint
Louis University, St. Louis,
MO. Matt Wertheimer is an
associate at KPMG, LLP, in St.
Louis, MO. For more informa-
tion about this article, contact
Dr. McGowan at mcgowanjr@
slu.edu.
32 Id. at 66.
33 See Whitehouse, “Companies Dive into IFRS to
Prep for Eventual Adoption,” Compliance Week
(June 4, 2009), http://tinyurl.com/IFRSprep.