This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Accounting for uncertainty in income taxes — Potential differences between U.S. GAAP and IFRSs

U.S. GAAP Accounting

ASC 740 requires a two-step approach for determining the amount, if any, of a tax benefit that should be recognized in an entity's financial statements.

The first step is recognition: the entity determines whether it is more likely than not that a tax position will be sustained upon examination. This step includes resolution of any related appeals or litigation processes that are based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the entity should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.

IFRS Accounting

IAS 37, Provisions, Contingent Liabilities and Contingent Assets, is a one-step approach requiring the recognition of a provision when "(a) an entity has a present obligation . . . as a result of a past event; (b) it is probable . . . that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation." The term "probable" is defined in IAS 37 as "more-likely-than-not." If these conditions are not met, no provision is recognized. According to paragraph 39 of IAS 37, "Uncertainties surrounding the amount to be recognized as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is 'expected value.'" Paragraph 39 of IAS 37 goes on to explain that "[w]here there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used." Furthermore, paragraph 40 states that "[w]here a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the entity considers other possible outcomes. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount."

Difference Between U.S. GAAP and IFRSs — Recognition

Under ASC 740, a tax position must meet the more-likely-than-not recognition threshold for the associated tax benefit to be recognized in an entity's financial statements. If a tax position does not meet the recognition threshold, a liability or other adjustment would be recognized for the full amount of the tax benefit. IAS 37 does not include a separate recognition threshold; rather, it provides a single threshold for the recognition and measurement of the provision. Therefore, the liability recognized under IAS 37 may not be the same amount as that recognized under ASC 740.

For example, assume an entity takes a deduction of $100 on its tax return (resulting in a $40 tax benefit) and concludes that it is not more likely than not that the deduction would be sustained upon examination by the taxing authority. Under ASC 740, the entity would recognize a liability or other adjustment for an unrecognized tax benefit for the full amount of the tax benefit ($40) in its financial statements. Under IAS 37, the entity would recognize the most reliable estimate that can be made of the amount of the obligation. This amount likely would be less than the full amount.

Difference Between U.S. GAAP and IFRSs — Measurement

Under ASC 740, a tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement (cumulative-probability approach). The entity would recognize a liability for an unrecognized tax benefit for the difference between the full amount of the benefit and the largest amount of the benefit that is more than 50 percent likely to be realized. IAS 37 does not include a separate measurement threshold; rather, it provides a threshold for the recognition and measurement of the provision. Under IAS 37, the entity would recognize the most reliable estimate that can be made of the amount of the obligation.

For example, assume an entity takes a deduction of $100 on its tax return (resulting in a $40 tax benefit) and concludes that it is more likely than not that the deduction would be sustained upon examination by the taxing authority. Under ASC 740, the entity would measure the associated tax benefit at the largest amount of benefit that is more than 50 percent likely to be realized upon ultimate settlement. The entity concludes that the following table of values accounts for all possible outcomes and probabilities:

Possible Estimated Outcome

Individual Probability of Occurring (Percent)

Cumulative Probability of Occurring (Percent)

$40

31

31

$30

20

51

$20

20

71

$10

20

91

$0

9

100

Under ASC 740, the entity should recognize a tax benefit of $30 because this is the largest benefit with a cumulative probability of more than 50 percent. Accordingly, the entity should record a $10 income tax liability that is based on ASC 740 (assuming that the tax position does not affect deferred taxes).

IAS 37 does not provide explicit guidance on which method to use in determining the best estimate of the liability to recognize. There are many acceptable methods. Applying any of these methods may not result in a difference in the amount of recognized liability as compared with ASC 740. One acceptable method would be a weighted-average method that results in a $16 liability in accordance with the example above since the weighted average of all possible outcomes is $24.

Other Differences

ASC 740 also provides guidance on subsequent recognition, derecognition, measurement, recognition of interest and penalties, classification, and disclosure. This guidance will probably create additional differences between U.S. GAAP and IFRSs.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.