Accounting rulemakers on both sides of the Atlantic are finishing a proposal that they hope will shore up many of the differences in how companies report the effect of deferred income tax liabilities and assets in their financial statements.
Inevitably, however, differences will remain—most notably, how the International Accounting Standards Board and the Financial Accounting Standards Board want companies to report any uncertainty they sense about positions they’ve taken on their tax returns.
The two boards expect to issue an exposure draft later this year that will amend International Accounting Standard No. 12, Income Taxes and Financial Accounting Standard No. 109, Accounting for Income Tax. While the principles underlying the two standards themselves are not significantly different, the exceptions that have developed as a result of different tax rules in different jurisdictions have led to differences in the way otherwise comparable circumstances are reported, says Anne McGeachin, IASB senior project manager.
Bugg
The joint project to converge rules regarding income tax reporting is one of several the two boards are undertaking as they try to eliminate many of the differences in International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles. Katie Bugg, a senior manager at Deloitte & Touche and a former project manager for IASB on the income tax project, says the tax project represents a true convergence effort on the part of both boards.
“This is a little different from other short-term projects where either one board or the other has made changes to make their standards converge to the other,” she explains. “This is two boards working together, and as a result of the decisions they’ve made we expected changes to both FAS 109 and IAS 12.”
An underlying goal for IASB included not only eliminating differences, but also making its standard easier to apply, McGeachin says. “IAS 12 is considered a difficult standard for people to use. A major driver as well as convergence is to make it clearer as to what people should be doing.”
So far, the two boards have reached a number of agreements that eliminate rule differences in scope exceptions, acquired temporary differences, recognition and measurements, intra-period tax allocation, and disclosures, Bugg says. The boards also have a tentative decision to eliminate differences in whether taxes are measured using the distributed or undistributed rate, but the issue is scheduled for further discussion in July, she adds. Observers say getting the two boards to agree to use the undistributed rate was challenging, so both sides hope the agreement will stick.
CONVERGENCE
Below is an update from FASB and IASB on differences in accounting for uncertain tax positions, and what changes the boards have considered.
IASB’s Original Stance:
The issue of uncertain tax positions addresses uncertainty in the amounts underlying current and deferred tax. IAS 12 is silent on this matter.
What FASB Proposed:
Deductions claimed should not be recognised unless they are highly probable of being sustained. Recognised deductions should be derecognised if they become not more likely than not to be sustained.
Deductions that meet the recognition threshold should be measured at a single point best estimate.
No disclosures beyond those required by SFAS 5
IASB’s Subsequent Decisions:
In respect of current tax, the entity has a stand-ready liability to pay but the amount is uncertain. Consistent with the approach in the proposed amendments to IAS 37 on recognition, no probability threshold should be applied to the recognition of the stand-ready liability. Rather than adopting an IAS 37 settlement value measurement objective within the constraints of the objectives of IAS 12, the IASB decided on an expected outcome measure (ie the probability weighted average of the possible outcomes).
In respect of deferred tax, uncertainty could exist in both the amount of the underlying deferred tax balances and the tax rates expected to apply. As with current tax, no probability threshold should be applied to the recognition of additional (or reduced) deferred tax. An expected outcome measure determined by the probability-weighted average of the possible amounts and possible rates should be used. The expected rates should be based on rates substantively enacted at the balance sheet date. Only adjustments related to the level of income (eg graduated tax rates) and to the type of income (eg the use of different rates depending on the entity’s activities should be anticipated). Other possible deductions or rate differences should not be anticipated.
The proposed amendments to IAS 37 included consequential amendments to the disclosure of uncertainties relating to income taxes. Those disclosures should be retained.
Source
IASB (March, 2007)
The debate over distributed or undistributed rates focuses on rules that apply in some tax jurisdictions where corporate income is taxed at different rates, depending on whether the income is or is not distributed to shareholders. In some jurisdictions, entities pay taxes based on a calculation that takes both rates into account, leading to a debate between the two boards over which rate is the more appropriate measure for deferred tax assets or liabilities.
The FIN 48 Challenge
A significant and persistent difference, however, is in how companies will be asked to disclose uncertainties they face in their tax positions. In the United States, FASB adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Tax, to require companies to assess outstanding tax positions as if they expected it to be scrutinized in an audit and to give a percentage likelihood of winning a tax challenge.
Under FIN 48, companies only show a liability or asset related to a particular tax position if they deem the position more than 50 percent likely to win a challenge by the taxing authority, such as the Internal Revenue Service. Companies have appealed the approach to FASB, saying it turns their financial statements into a detailed roadmap for tax authorities looking to audit a tax return.
IASB, however, has selected a different approach. The Board has an outstanding exposure draft related to IAS 37, Provisions, Contingent Liabilities and Contingent Assets, that proposes the removal of a probability recognition threshold, McGeachin says. “IASB wanted an approach that was more consistent with the proposed amendments to IAS 37,” she explains. “The proposed amendments say first you focus on whether there’s a present obligation; if so, recognize the liability, and any uncertainty about the outcome is reflected in the measurement.”
The difference between those two approaches will lead to different recognition of uncertain positions. Under FASB’s FIN 48 approach, companies that are not at least 50 percent certain of a particular position will record no related tax liability or asset. Under IASB’s approach, even a low level of uncertainty will result in some recognition, but the recognition will correlate to the level of uncertainty.
McGeachin says IASB has not yet exposed the approach to tax uncertainty, so it doesn’t yet know how the market will react to the concept or whether companies might worry—as they have in the United States—that the reporting model will draw a roadmap for tax auditors. “It would depend on how detailed the disclosures were about the uncertainties,” she says. Under IFRS, a major uncertainty surrounding an estimate that would be material to the financial statements must be disclosed.
Pounder
Bruce Pounder, president of accounting and audit education firm Leveraged Logic, says one of the benefits of the convergence project will be a clear, uniform definition of tax base or tax basis. Under GAAP, the notion of tax basis, or the amount that is generally thought to be deductible for tax purposes, is contained in literature from FASB’s Emerging Issues Task Force.
“It's a change in the definition that was in IFRS, and it’s the introduction of a definition in GAAP,” Pounder says. “It's an improvement for both boards and they’re going to be in agreement, which makes everyone happy.”
No comments yet