Appendix E — Differences Between U.S. GAAP and IFRS Accounting Standards

E.1 Background

ASC 740 is the primary source of guidance on the accounting for income taxes under U.S. GAAP, and IAS 12 is the primary source of such guidance under IFRS® Accounting Standards.1

In general, the income tax accounting frameworks in both U.S. GAAP and IFRS Accounting Standards require the application of a balance sheet model, and share the same basic objectives related to the recognition of (1) the amount of taxes payable or refundable for the current year and (2) DTAs and DTLs for future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.

However, differences remain between the accounting for income taxes under U.S. GAAP and that under IFRS Accounting Standards. The table below summarizes some of the significant differences and is followed by more detailed explanations of each difference as well as cross-references to other sections of the Roadmap.2 Note that this appendix should be used in conjunction with the Roadmap’s detailed interpretive guidance and with A13 of Deloitte’s iGAAP publication.

Subject	U.S. GAAP	IFRS Accounting Standards
Initial recognition exception	No “initial recognition” exception under U.S. GAAP.	The International Accounting Standards Board (IASB®) amended IAS 12 in May 2021 to clarify that the initial recognition exception does not apply to transactions that create offsetting taxable and deductible temporary differences. The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. Before the adoption of the amendments: Deferred tax is not recognized for taxable or deductible temporary differences that arise from the initial recognition of an asset or a liability in a transaction that (1) is not a business combination and (2) does not affect accounting profit or taxable income when the transaction occurs. Changes in this unrecognized DTA or DTL are not subsequently recognized. After the adoption of the amendments: Deferred tax is not recognized for taxable or deductible temporary differences that arise from the initial recognition of an asset or a liability in a transaction that (1) is not a business combination, (2) does not affect accounting profit or taxable income when the transaction occurs, and (3) does not give rise to equal taxable and deductible temporary differences when the transaction occurs. Changes in this unrecognized DTA or DTL are not subsequently recognized.
Recognition of DTAs	DTAs are recognized in full and reduced by a valuation allowance if it is more likely than not that some or all of the DTAs will not be realized.	DTAs are recognized at the amount that is probable (generally interpreted to mean more likely than not3) to be realized on a net basis (i.e., the DTA is written down, and an allowance is not recorded).
Tax laws and rates used for measuring DTAs and DTLs	Enacted tax laws and rates are used.	Enacted or “substantively” enacted tax laws or rates are used.
Uncertain tax positions	ASC 740 prescribes a two-step recognition and measurement approach under which an entity calculates the amount of tax benefit to recognize in the financial statements by (1) assessing whether it is more likely than not that a tax position will be sustained upon examination and (2) measuring a tax position that reaches the more-likely-than-not recognition threshold 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 settlement.	If an entity concludes that it is probable that the taxing authority will accept an uncertain tax treatment (including both the technical merit of the treatment and the amounts included in the tax return), recognition and measurement are consistent with the positions as taken in the tax filings. If the entity concludes that it is not probable that the taxing authority will accept the tax treatment as filed, the entity is required to reflect the uncertainty by using (1) the most likely amount or (2) the expected value. “Probable” is defined as “more likely than not.”
Tax consequences of intra-entity sales	Tax effects of intra-entity transfers of inventory are deferred until the related inventory is sold or disposed of, and no deferred taxes are recognized for the difference between the carrying value of the inventory in the consolidated financial statements and the tax basis of the inventory in the buyer’s tax jurisdiction.	No such exception for intra-entity transfers of inventory exists. Any current and deferred tax expense from intra-entity transfers (inventory or otherwise) is recognized at the time of the transfer. Deferred taxes are recognized for the difference between the carrying value of the transferred asset in the consolidated financial statements and the tax basis of the transferred asset in the buyer’s tax jurisdiction, measured by using the statutory tax rate of the buyer’s tax jurisdiction (subject to realization criteria in IAS 12 if a DTA is recognized on the basis difference).
Foreign nonmonetary assets or liabilities for which the functional currency is not the local currency	No deferred tax is recognized on basis differences resulting from (1) changes in exchange rates (i.e., the difference between the carrying amount for financial reporting purposes, which is determined by using the historical rate of exchange, and the tax basis, which is determined by using the exchange rate on the balance sheet date) or (2) the indexing of basis for income tax purposes.	No similar guidance in IAS 12.
Special deductions (e.g., tax benefits for statutory depletion or special deductions for certain health benefit entities, small life insurance companies, or domestic production activities)	An entity is not permitted to anticipate tax benefits for special deductions when measuring the DTL for taxable temporary differences at the end of the current year. Instead, the entity should recognize such tax benefits for financial reporting purposes no earlier than the year in which they are available to reduce taxable income on the entity’s tax returns. In addition, the future tax effects of special deductions may nevertheless affect (1) the average graduated tax rate to be used for measuring DTAs and DTLs when graduated tax rates are a significant factor and (2) the need for a valuation allowance for DTAs.	No similar guidance in IAS 12.
Share-based compensation	For awards that ordinarily give rise to a tax deduction under existing tax law, deferred taxes are computed on the basis of compensation expense that is recognized for financial reporting purposes. Tax benefits in excess of or less than the related DTA are recognized in the income statement in the period in which the amount of the deduction is determined (typically when an award vests or, in the case of options, is exercised or expires).	For awards that ordinarily give rise to a tax deduction, deferred taxes are computed on the basis of the hypothetical tax deduction for the share-based payment corresponding to the percentage earned to date (i.e., the intrinsic value of the award on the reporting date multiplied by the percentage vested). Recognition of deferred taxes could be recorded through either profit or loss or equity.
Subsequent changes in deferred taxes (e.g., because of changes in tax laws, rates, status or valuation allowance)	Generally allocated to continuing operations with limited exceptions (i.e., backwards tracing is generally prohibited, regardless of whether the associated tax expense or benefit was originally recognized outside of continuing operations [e.g., in equity]).	IAS 12 requires that the income tax expense or benefit is recognized in the same manner in which the asset or liability was originally recorded. That is, if the deferred taxes were originally recorded outside of profit or loss (e.g., in equity), subsequent changes to the beginning balance will be recorded in the same manner (i.e., backwards tracing is permitted).
Deferred taxes for outside basis differences — investment in a subsidiary or a corporate joint venture that is essentially permanent in duration	A DTL is generally not recognized for financial reporting basis in excess of tax basis in foreign subsidiaries and corporate joint ventures that are essentially permanent in duration unless the difference is expected to reverse in the foreseeable future. For financial reporting basis in excess of tax basis in domestic subsidiaries or corporate joint ventures, a DTL is generally not recognized if the basis difference arose in fiscal years on or before December 15, 1992, unless the temporary difference will reverse in the foreseeable future. However, a DTL must be recognized if the basis difference arose in fiscal years after December 15, 1992, “unless the tax law provides a means by which the investment in a domestic subsidiary can be recovered tax free” and the entity expects that it will ultimately use that means. A DTA is recorded with respect to investments in a subsidiary or corporate joint venture (domestic or foreign) that is essentially permanent in duration only if it is apparent that the temporary difference will reverse in the foreseeable future. Note that according to paragraph 64 of ASU 2015-10, “[t]his exception to recognizing deferred taxes is not applicable for partnerships (or other pass-through entities).”	A DTL is generally recognized for financial reporting basis in excess of tax basis of any form of investee (foreign or domestic, subsidiaries, branches, associates, and interests in joint arrangements) unless both of the following conditions are satisfied: (1) the parent is able to control the timing of the temporary difference’s reversal and (2) it is probable that the temporary difference will not reverse in the foreseeable future. A DTA is generally recognized for tax basis in excess of financial reporting basis of any form of investee to the extent that it is probable (generally interpreted to mean more-likely-than-not) that (1) the temporary difference will reverse in the foreseeable future and (2) taxable income will be available against which the temporary difference can be used. Note that there is no similar prohibition on applying the guidance to partnerships, although meeting the criteria may be difficult because of the flow-through nature of partnerships.
Deferred taxes for outside basis differences — equity method investee that is not a corporate joint venture (foreign and domestic) that is essentially permanent in duration	A DTL is recognized on the excess of the financial reporting basis over the tax basis of the investment. A DTA is recognized for the excess of the tax basis of the investment over the amount for financial reporting and must be assessed for realizability (in most jurisdictions, the loss would be capital in character).	A DTL is recognized on excess book over tax basis unless both of the following conditions are satisfied: (1) the holder of the investment can control the timing of the reversal and (2) it is probable that the difference will not reverse in the foreseeable future. A DTA is recognized only to the extent that (1) it is probable that the temporary difference will reverse in the foreseeable future and (2) there will be taxable income against which the temporary difference can be used.
Other exceptions to the basic principle that deferred tax is recognized for all temporary differences — leveraged leases	For a leveraged lease (commencing before the adoption of ASU 2016-02) exemption, no deferred tax is recognized under ASC 740. See ASC 840-30 for information about the tax consequences of leveraged leases. ASC 842 does not include guidance on leveraged leases. Entities are not permitted to account for any new or subsequently amended lease arrangements as leveraged leases after the effective date of ASC 842.	IFRS Accounting Standards do not address leveraged leases, thus there is no similar exception.
Reconciliation of actual and expected tax rate	Required for public companies only; expected tax expense is computed by applying the domestic federal statutory rates to pretax income from continuing operations. Nonpublic companies must disclose the nature of the reconciling items but are not required to provide the amounts.	Required for all entities applying IFRS Accounting Standards. Entities compute expected tax expense by applying the applicable tax rate(s) to accounting profit and must disclose the basis on which any applicable tax rate is computed.
Interim reporting	Entities are generally required to compute tax (or benefit) for each interim period by using one overall estimated AETR. The estimated AETR is computed by dividing the estimated annual tax (or benefit) into the estimated annual pretax ordinary income (or loss). Entities then apply the estimated AETR to YTD pretax ordinary income or loss to compute the YTD tax (or benefit). The interim tax expense (or benefit) is the difference between the YTD tax (or benefit) and prior YTD tax (or benefit).	To the extent practicable, a separate estimated average annual effective income tax rate is determined for each tax jurisdiction and applied individually to the interim-period pretax income of each jurisdiction. Similarly, if different income tax rates apply to different categories of income (such as capital gains or income earned in particular industries), to the extent practicable, a separate rate is applied to each individual category of interim period pretax income.
Allocation of consolidated tax expense to the separate financial statements of group members	The consolidated amount of current and deferred tax expense for a group that files a consolidated tax return is allocated among the members of the group when those members issue separate financial statements by using a method that is systematic, rational, and consistent with the broad principles of ASC 740. See Section 8.3 for further discussion of acceptable methods.	No similar guidance in IAS 12.

Footnotes

The IASB issued the IFRS for SMEs® Standard (the “SMEs Standard”) in July 2009. The SMEs Standard is a stand-alone standard and does not require preparers of private-entity financial statements to explicitly refer to full IFRS Accounting Standards. Section 29 of the SMEs Standard is the primary source of guidance on accounting for income taxes for entities applying the SMEs Standard. This appendix does not address the differences between Section 29 and IAS 12 and, therefore, the differences in the accounting for income taxes that might exist between U.S. GAAP and the SMEs Standard.

Differences are based on comparison of authoritative literature under U.S. GAAP and IFRS Accounting Standards and do not necessarily include interpretations of such literature.

While IAS 12 is silent with regard to the meaning of “probable” in the context of paragraph 24 of IAS 12, IAS 37 defines the term as “more likely than not.” The footnote to paragraph 23 of IAS 37 acknowledges that this definition is not necessarily applicable to other IFRS Accounting Standards. However, in the absence of any other guidance, the term probable should be considered to mean more likely than not. In March 2009, the IASB issued an exposure draft containing proposals for an IFRS Standard that would replace IAS 12. Although a replacement standard was not finalized, the exposure draft provided useful guidance on the meaning of “probable” because it used the term “more likely than not” and noted in the Basis for Conclusions that it was consistent with the term “probable” as used in IAS 37 and IFRS 3.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.