IFRS for SMEs — U.S. GAAP Comparison Wiki

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Income Tax

SME Par.IFRS SMEU.S. GAAP
Scope of this section
29.1 For the purpose of this IFRS, income tax includes all domestic and foreign taxes that are based on taxable profit. Income tax also includes taxes, such as withholding taxes, that are payable by a subsidiary, associate or joint venture on distributions to the reporting entity. Unlike IFRS SMEs, the standard on accounting for income taxes does not address accounting for withholding taxes on dividends to shareholders.
29.2 This section covers accounting for income tax. It requires an entity to recognise the current and future tax consequences of transactions and other events that have been recognised in the financial statements. These recognised tax amounts comprise current tax and deferred tax. Current tax is tax payable (refundable) in respect of the taxable profit (tax loss) for the current period or past periods. Deferred tax is tax payable or recoverable in future periods, generally as a result of the entity recovering or settling its assets and liabilities for their current carrying amount, and the tax effect of the carryforward of currently unused tax losses and tax credits. Same except that U.S. GAAP defines deferred tax in different terms (the meaning is the same, however).
Steps in accounting for income tax
29.3 An entity shall account for income tax by following the steps (a)–(i) below:
  1. recognise current tax, measured at an amount that includes the effect of the possible outcomes of a review by the tax authorities (paragraphs 29.4–29.8).
  2. identify which assets and liabilities would be expected to affect taxable profit if they were recovered or settled for their present carrying amounts (paragraphs 29.9 and 29.10).
  3. determine the tax basis of the following at the end of the reporting period:
    1. the assets and liabilities in (b). The tax basis of assets and liabilities is determined by the consequences of the sale of the assets or settlement of liabilities for their present carrying amounts (paragraphs 29.11 and 29.12).
    2. other items that have a tax basis although they are not recognised as assets or liabilities, ie items recognised as income or expense that will become taxable or tax-deductible in future periods (paragraph 29.13).
  4. compute any temporary differences, unused tax losses and unused tax credits (paragraph 29.14).
  5. recognise deferred tax assets and deferred tax liabilities arising from the temporary differences, unused tax losses and unused tax credits (paragraphs 29.15–29.17).
  6. measure deferred tax assets and liabilities at an amount that includes the effect of the possible outcomes of a review by the tax authorities using tax rates that, on the basis of enacted or substantively enacted tax law at the end of the reporting period, are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled (paragraphs 29.18–29.25).
  7. recognise a valuation allowance against deferred tax assets so that the net amount equals the highest amount that is more likely than not to be realised on the basis of current or future taxable profit (paragraphs 29.21 and 29.22).
  8. allocate current and deferred tax to the related components of profit or loss, other comprehensive income and equity (paragraph 29.27).
  9. present and disclose the required information (paragraphs 29.28–29.32).
  1. Same, but see 29.8 and 29.24.
  2. Same.
  3. Same, but see 29.11.
  4. Same.
  5. Generally the same, but see 29.16.
  6. Unlike IFRS SMEs, deferred tax is measured based on rates and tax laws that are enacted at the reporting date.  The method of consideration of uncertain tax positions is also different—see 29.8 and 29.24.
  7. Same.
  8. Same, but see 29.27.
  9. Same, but see 29.29.
Recognition and measurement of current tax
29.4 An entity shall recognise a current tax liability for tax payable on taxable profit for the current and past periods. If the amount paid for the current and past periods exceeds the amount payable for those periods, the entity shall recognise the excess as a current tax asset. Same.
29.5 An entity shall recognise a current tax asset for the benefit of a tax loss that can be carried back to recover tax paid in a previous period. Same.
29.6 An entity shall measure a current tax liability (asset) at the amounts it expects to pay (recover) using the tax rates and laws that have been enacted or substantively enacted by the reporting date. An entity shall regard tax rates as substantively enacted when future events required by the enactment process historically have not affected the outcome and are unlikely to do so. Paragraphs 29.23–29.25 provide additional measurement guidance. Unlike IFRS SMEs, deferred tax is measured based on rates and tax laws that are enacted at the reporting date.
29.7 An entity shall recognise changes in a current tax liability or current tax asset as tax expense in profit or loss, except that a change attributable to an item of income or expense recognised under this IFRS as other comprehensive income shall also be recognised in other comprehensive income. Same.
29.8 An entity shall include in the amounts recognised in accordance with paragraphs 29.4 and 29.5 the effect of the possible outcomes of a review by the tax authorities, measured in accordance with paragraph 29.24. Unlike IFRS SMEs, the evaluation of the effects of uncertain tax positions is a two-step process: determining whether a recognition threshhold is met and measurement.  The benefits of an uncertain tax position are recognized only if it is more likely than not that the uncertain tax position is sustainable based on its merits (i.e., without considering detection risk), unlike IFRS SMEs.  Tax positions that are more likely than not to be sustained, are measured as discussed at 29.24.
Recognition of deferred tax
 General recognition principle
29.9 An entity shall recognise a deferred tax asset or liability for tax recoverable or payable in future periods as a result of past transactions or events. Such tax arises from the difference between the amounts recognised for the entity’s assets and liabilities in the statement of financial position and the recognition of those assets and liabilities by the tax authorities, and the carryforward of currently unused tax losses and tax credits. Same.
 Assets and liabilities whose recovery or settlement will not affect taxable profit
29.10 If the entity expects to recover the carrying amount of an asset or settle the carrying amount of a liability without affecting taxable profit, no deferred tax arises in respect of the asset or liability. Therefore, paragraphs 29.11–29.17 apply only to assets and liabilities for which the entity expects the recovery or settlement of the carrying amount to affect taxable profit and to other items that have a tax basis. Same.
 Tax basis
29.11 An entity shall determine the tax basis of an asset, liability or other item in accordance with enacted or substantively enacted law. If the entity files a consolidated tax return, the tax basis is determined by the tax law governing the consolidated tax return. If the entity files separate tax returns for different operations, the tax basis is determined by the tax laws governing each tax return. Unlike IFRS SMEs, deferred tax is measured based on rates and tax laws that are enacted at the reporting date.
29.12 The tax basis determines the amounts that will be included in taxable profit on recovery or settlement of the carrying amount of an asset or liability. Specifically:
  1. the tax basis of an asset equals the amount that would have been deductible in arriving at taxable profit if the carrying amount of the asset had been recovered through sale at the end of the reporting period. If the recovery of the asset through sale does not increase taxable profit, the tax basis shall be deemed to be equal to the carrying amount.
  2. the tax basis of a liability equals its carrying amount less any amounts deductible in determining taxable profit (or plus any amounts included in taxable profit) that would have arisen if the liability had been settled for its carrying amount at the end of the reporting period. In the case of deferred revenue, the tax base of the resulting liability is its carrying amount, less any amount of revenue that will not be taxable in future periods.
 Same.
29.13 Some items have a tax basis but are not recognised as assets and liabilities. For example, research costs are recognised as an expense when they are incurred but may not be permitted as a deduction in determining taxable profit until a future period. Thus, the carrying amount of the research costs is nil and the tax basis is the amount that will be deducted in future periods. An equity instrument issued by the entity may also give rise to deductions in a future period. There is no asset or liability in the statement of financial position, but the tax basis is the amount of the future deductions. Same.
 Temporary differences
29.14 Temporary differences arise:
  1. when there is a difference between the carrying amounts and tax bases on the initial recognition of assets and liabilities, or at the time a tax basis is created for those items that have a tax basis but are not recognised as assets and liabilities.
  2. when a difference between the carrying amount and tax basis arises after initial recognition because income or expense is recognised in comprehensive income or equity in one reporting period but is recognised in taxable profit in a different period.
  3. when the tax basis of an asset or liability changes and the change will not be recognised in the asset or liability’s carrying amount in any period.
  1. Same.
  2. Same.
  3. Same.
 Deferred tax liabilities and assets
29.15 Except as required by paragraph 29.16, an entity shall recognise:
  1. a deferred tax liability for all temporary differences that are expected to increase taxable profit in the future.
  2. a deferred tax asset for all temporary differences that are expected to reduce taxable profit in the future.
  3. a deferred tax asset for the carryforward of unused tax losses and unused tax credits.
 Same.
29.16 The following are exceptions to the requirements of paragraph 29.15:
  1. An entity shall not recognise a deferred tax asset or liability for temporary differences associated with unremitted earnings from foreign subsidiaries, branches, associates and joint ventures to the extent that the investment is essentially permanent in duration, unless it is apparent that the temporary difference will reverse in the foreseeable future.
  2. An entity shall not recognise a deferred tax liability for a temporary difference associated with the initial recognition of goodwill.
 Same.  However, U.S. GAAP also provides exceptions for certain undistributed earnings of a domestic subsidiary or a domestic corporate joint venture and for “policyholders’ surplus” of stock life insurance companies, unlike IFRS SMEs.
29.17 An entity shall recognise changes in a deferred tax liability or deferred tax asset as tax expense in profit or loss, except that a change attributable to an item of income or expense recognised under this IFRS as other comprehensive income shall also be recognised in other comprehensive income. Same.
Measurement of deferred tax
 Tax rates
29.18 An entity shall measure a deferred tax liability (asset) using the tax rates and laws that have been enacted or substantively enacted by the reporting date. An entity shall regard tax rates as substantively enacted when future events required by the enactment process historically have not affected the outcome and are unlikely to do so. Unlike IFRS SMEs, deferred tax is measured based on rates and tax laws that are enacted at the reporting date.
29.19 When different tax rates apply to different levels of taxable profit, an entity shall measure deferred tax expense (income) and related deferred tax liabilities (assets) using the average enacted or substantively enacted rates that it expects to be applicable to the taxable profit (tax loss) of the periods in which it expects the deferred tax asset to be realised or the deferred tax liability to be settled. Like IFRS SMEs, U.S. GAAP requires the use of an average graduated tax rate if graduated tax rates are a significant factor for the entity.  However, U.S. GAAP specifically permits the use of a single flat tax rate by entities for which graduated tax rates are not a significant factor, unlike IFRS SMEs.
29.20 The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the reporting date, to recover or settle the carrying amount of the related assets and liabilities. For example, if the temporary difference arises from an item of income that is expected to be taxable as a capital gain in a future period, the deferred tax expense is measured using the capital gain tax rate. Unlike IFRS SMEs, deferred tax assets and liabilities are measured on the assumption that the underlying asset or liability will be settled or recovered in a manner consistent with its current use in the business.
 Valuation allowance
29.21 An entity shall recognise a valuation allowance against deferred tax assets so that the net carrying amount equals the highest amount that is more likely than not to be recovered based on current or future taxable profit. Same.
29.22 An entity shall review the net carrying amount of a deferred tax asset at each reporting date and shall adjust the valuation allowance to reflect the current assessment of future taxable profits. Such adjustment shall be recognised in profit or loss, except that an adjustment attributable to an item of income or expense recognised in accordance with this IFRS as other comprehensive income shall also be recognised in other comprehensive income. Like IFRS SMEs, an entity must review the net carrying amount of a deferred tax asset at each reporting date and adjust the valuation allowance to reflect the current assessment of future taxable profits.  Unlike IFRS SMEs, however, changes in the valuation allowance due to such an assessment are recognized in profit or loss with very limited exceptions.
Measurement of both current and deferred tax
29.23 An entity shall not discount current or deferred tax assets and liabilities. Same.
29.24 Uncertainty about whether the tax authorities will accept the amounts reported to them by the entity affects the amount of current tax and deferred tax. An entity shall measure current and deferred tax assets and liabilities using the probability-weighted average amount of all the possible outcomes, assuming that the tax authorities will review the amounts reported and have full knowledge of all relevant information. Changes in the probability-weighted average amount of all possible outcomes shall be based on new information, not a new interpretation by the entity of previously available information. Unlike IFRS SMEs, a tax position that meets the more-likely-than-not recognition threshold (see 29.8) is initially and subsequently measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.
29.25 In some jurisdictions, income tax is payable at a higher or lower rate if part or all of the profit or retained earnings is paid out as a dividend to shareholders of the entity. In other jurisdictions, income tax may be refundable or payable if part or all of the profit or retained earnings is paid out as a dividend to shareholders of the entity. In both of those circumstances, an entity shall measure current and deferred taxes at the tax rate applicable to undistributed profits until the entity recognises a liability to pay a dividend. When the entity recognises a liability to pay a dividend, it shall recognise the resulting current or deferred tax liability (asset), and the related tax expense (income). Under U.S. GAAP, such tax benefits of paying dividends are recognized in the period during which those benefits are included in the entity’s tax return.  Depending on the jurisdiction, that may or may not be the period during which an entity recognizes a liability to pay the dividend.
Withholding tax on dividends
29.26 When an entity pays dividends to its shareholders, it may be required to pay a portion of the dividends to taxation authorities on behalf of shareholders. Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends. Same.
Presentation
 Allocation in comprehensive income and equity
29.27 An entity shall recognise tax expense in the same component of total comprehensive income (ie continuing operations, discontinued operations, or other comprehensive income) or equity as the transaction or other event that resulted in the tax expense. Generally the same.  However, U.S. GAAP contains detailed guidance on allocating tax expense to the components of total comprehensive income.
 Current/non-current distinction
29.28 When an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position, it shall not classify any deferred tax assets (liabilities) as current assets (liabilities). Unlike IFRS SMEs, deferred tax is classified as either current or noncurrent according to the classification of the related asset or liability giving rise to the temporary difference.
 Offsetting
29.29 An entity shall offset current tax assets and current tax liabilities, or offset deferred tax assets and deferred tax liabilities, only when it has a legally enforceable right to set off the amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Like IFRS SMEs, current tax assets and current tax liabilities, or deferred tax assets and deferred tax liabilities, are offset if the entity has a legally enforceable right to set off the amounts.  Unlike IFRS SMEs, however, the entity need not intend to either to settle on a net basis or to realize the asset and settle the liability simultaneously.
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