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Both frameworks require a provision for deferred taxes, but there are differences in the methodologies, as set out in the table below.

Issue IFRS US GAAP

General considerations

General approach Full provision. Similar to IFRS.

Basis for deferred tax assets and liabilities

Temporary differences – ie, the difference between carrying amount and tax base of assets and liabilities (see exceptions below).

Similar to IFRS.

Exceptions (ie, deferred tax is not provided on the temporary difference)

Non-deductible goodwill (that which is not deductible for tax purposes) does not give rise to taxable temporary differences.

Initial recognition of an asset or liability in a transaction that: (a) is not a business

combination; and (b) affects neither accounting profit nor taxable profit at the time of the transaction.

Other amounts that do not have a tax consequence (commonly referred to as permanent differences) exist and depend on the tax rules and jurisdiction of the entity.

Similar to IFRS, except no initial recognition exemption and special requirements apply in computing deferred tax on leveraged leases.

Measurement of deferred tax

Tax rates Tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date.

Rate used is the applicable rate for expected manner of recovery – eg, dependent on whether asset is to be used or sold – or a combination of these.

Use of substantively enacted rates is not permitted. Tax rate and tax laws used must have been enacted.

Similar to IFRS.

Recognition of deferred tax assets

A deferred tax asset is recognised if it is probable (more likely than not) that sufficient taxable profit will be available against which the temporary difference can be utilised.

A deferred tax asset is recognised in full but is then reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realised.

Discounting Prohibited. Prohibited.

Presentation of deferred tax

Current/non-current Deferred tax assets and liabilities are classified net as non-current on the balance sheet, with supplemental note disclosure for: (a) the components of the temporary differences, and (b) amounts expected to be recovered within 12 months and more than 12 months of the balance sheet date.

Deferred tax assets and liabilities are either classified as current or non-current, based on the classification of the related non-tax asset or liability for financial reporting. Tax assets not associated with an underlying asset or liability are classified based on the expected reversal period.

Specific applications

Unrealised intra-group profits – for example, on inventory

Deferred tax recognised at the buyer’s tax rate. The buyer is prohibited from recognising deferred taxes. Any income tax effects on the seller (including taxes paid and tax effects of any reversal of temporary differences) as a result of the inter-company sale are deferred and recognised upon sale to a third party. Revaluation of PPE and

intangible assets.

Deferred tax recognised in equity. Not applicable, as revaluation is prohibited. Intra-period tax

allocation (backwards tracing)

Deferred tax is recognised in the income statement unless changes in the carrying amount of the assets are taken to equity. In this case, deferred tax is taken to equity (the ‘follow-up principle’).

Similar to IFRS for initial recognition, but certain subsequent changes (rate changes and valuation allowance) are recognised in the income statement.

Liabilities

Issue IFRS US GAAP

Foreign non-monetary assets/liabilities when the tax reporting currency is not the functional currency

Deferred tax is recognised on the difference between the carrying amount determined using the historical rate of exchange and the tax base determined using the balance sheet date exchange rate.

No deferred tax is recognised for differences related to assets and liabilities that are re- measured from local currency into the functional currency resulting from changes in exchange rates or indexing for tax purposes. Investments in

subsidiaries – treatment of undistributed profit

Deferred tax is recognised except when the parent is able to control the distribution of profit and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is required on temporary differences arising after 1992 that relate to investments in domestic subsidiaries, unless such amounts can be recovered tax-free and the entity expects to use that method. No deferred taxes are recognised on undistributed profits of foreign subsidiaries that meet the indefinite reversal criterion.

Uncertain tax positions While not specifically addressed within IFRS, an entity reflects the tax consequences that follow from the manner in which it expects, at the balance sheet date, to be paid to (recovered from) the taxation authorities. The tax position is measured using either an expected value approach or a single best estimate of the most likely outcome. The cumulative probability model is not permitted under IFRS.

A tax benefit from an uncertain tax position may be recognised only if it is more likely than not that the tax position is sustainable based on its technical merits. The tax position is measured, using the cumulative probability model, as the largest amount of tax benefit that is greater than 50% likely of being realised upon ultimate settlement.

Share-based compensation

If a tax deduction exceeds cumulative share- based compensation expense, deferred tax calculations based on the excess deduction are recorded directly in equity. If the tax deduction is less than or equal to cumulative share-based compensation expense, deferred taxes arising are recorded in income. The unit of accounting is an individual award.

If changes in the stock price impact the future tax deduction, the measurement of the deferred tax asset is based on the current stock price.

If the tax benefit available to the issuer exceeds the deferred tax asset recorded, the excess benefit (known as a ‘windfall’ tax benefit) is credited directly to shareholders’ equity. If the tax benefit is less than the deferred tax asset, the shortfall is recorded as a direct charge to shareholders’ equity to the extent of prior windfall tax benefits, and as a charge to tax expense thereafter.

Changes in the stock price do not impact the deferred tax asset or result in any adjustments prior to settlement or expiration. They will, however, affect the actual future tax deduction (if any).

Business combinations – acquisitions

Step-up of acquired assets/liabilities to fair value

Deferred tax is recorded unless the tax base of the asset is also stepped up.

Similar to IFRS.

Previously unrecognised tax losses of the acquirer

A deferred tax asset is recognised if the recognition criteria for the deferred tax asset are met as a result of the acquisition. Offsetting credit is recorded in income, not goodwill.

Similar to IFRS, except the offsetting credit is recorded against goodwill.

Tax losses of the acquiree (initial recognition)

Similar requirements as for the acquirer except the offsetting credit is recorded against goodwill.

Similar to IFRS.

REFERENCES: IFRS: IAS 1, IAS 12, IFRS 3.

Liabilities