Introduction: The present literature attempts to study the need for the adoption of IFRS as global accounting standards and its impact on the current tax planning strategies followed in the United States.
What is IFRS: To begin with it becomes inevitable to develop a basic understanding of what exactly does the term IFRS convey. International Financial Reporting Standards (IFRS) was formed by International Accounting Standards Board with an intention to serve the growing needs of public companies on a global platform to prepare their financial statements according to a global standard in order to ensure transparency and uniformity in the projection of financial affairs of the company. The private companies too in most countries are fast adopting this new set of financial reporting standards to reap its universal benefits. Almost 12,000 public companies from over 100 countries have already espoused IFRS to report their financial statements. In view of the waning market share of the United States in the global capital markets, the United States Securities and Exchange Commission had always extended its favor towards the adoption of newly set high quality reporting standards. The regulatory authorities in the United States therefore identify the significance of conforming to such global standards while preparation of their financial statements. In spite of the recognition of the magnitude of the positive effects that IFRS can bring to a country, it is still not mandatory in the United States to follow IFRS. The companies in the United States follow IFRS for reporting purposes only under following circumstances:
1. When an international parent company or investor company makes it mandatory that IFRS be followed.
2. When the foreign subsidiaries need to essentially conform to the IFRS.
3. When the companies operate from a country where law makes it mandatory to follow IFRS for reporting of financial statements.
Current Tax Planning Strategies in United States: The main aim of tax planning is to minimize the payment of taxes by organizing the relevant financial statements accordingly in an acceptable manner. The adoption of IFRS might result in resorting to various new accounting methods that appear more coherent with the local jurisdiction. The concern that the adoption of IFRS shall result in a certain change in the tax accounting methods that the companies follow and consequently their cash tax liabilities too is yet to be adequately answered. However, it is observed that a change in the tax accounting methods might not be the consequence for most of the companies; rather, the conforming to IFRS might result in a change in the computation methods. The major differences that can be encountered while enforcing IFRS in place of US GAAP both in short term and long term are grouped in the following three major categories.
Revenue: the concept of income or revenue differs in IFRS when compared to the concept on income in GAAP. Such differences arrive while considering the revenue recognition, hedging, contra receivables, leases, asset impairments, inventory, property, plant & equipment etc. the items listed above may see a change in the computation of deferred taxes under the IFRS as a result of time difference in acknowledging such items.
LIFO Accounting: One major difference that is sure to be consequent of the adoption of IFRS is the acceptance of the LIFO accounting method that is not recognized and hence not allowed by the IFRS. Such non allowance results in the increased tax burden to the firms that have previously followed the LIFO accounting method. Further there could be a difference arising in the state/local taxes.
Share payments: for technology industry, share based payments are not alien, as such the US GAAP and IFRS follow a more or less identical way of treating the share based payments i.e. The fair value approach. However there seems to be a difference of opinion when it comes to the method to be followed for attribution and calculation of income tax expense. While US GAAP gives a choice of following either a straight line method or Accelerated Amortization, IFRS essentially leaves no choice except to follow accelerated amortization.
Conclusion: Therefore it is more or less evident that there could be some potential losses during the adoption of IFRS as a global reporting standard. The Internal Revenue service therefore in the light of the above findings shall try to adjust some relevant tax rules so as to ensure a smooth transition of the financial statement reporting system from US GAAP to IFRS. Providing tax credits to the firms that currently follow LIFO valuation method could be one of such adjustments. Such adjustments therefore lead to a transition cost on the part of both Internal Revenue Service and the companies. Hence it becomes unavoidable for the companies to take a close look at IFRS and the potential changes that are in store as a result of the transition and be prepared timely to handle the vital implications consequent on the company’s tax accounting methods.
References
1. William C. White IV. (2012). The LIFO Conundrum: Convergence of US GAAP with IFRS and Its Implications on US Company Competitiveness. QFINANCE. Retrieved from http://www.qfinance.com/accountancy-best-practice/the-lifo-conundrum-convergence-of-us-gaap-with-ifrs-and-its-implications-on-us-company-competitiveness?page=1
2. Robert Bloom & William J. Cenker. (2009). The Death of LIFO? Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2009/Jan/DeathOfLIFO
3. Bae, K.-H., H. Tan, and M. Welker. (2008). International GAAP Differences: The Impact on Foreign Analysts, The Accounting Review 83, 593–628.
4. Daske, H. (2006). Economic Benefits of Adopting IFRS or US-GAAP – Have the Expected Costs of Equity Capital Really Decreased?, Journal of Business Finance and Accounting 33, 329–373.
5. De Jong, A., M. Rosellón, and P. Verwijmeren, (2006). The Economic Consequences of IFRS: The Impact of IAS 32 on Preference Shares in the Netherlands, Accounting in Europe 3, 169–185.
6. Lang, M., J. Smith Raedy, and M. Higgins Yetman, 2003, How Representative Are Firms That Are Cross-Listed in the United States? An Analysis of Accounting Quality, Journal of AccountingResearch 41, 363–386.
