3.3 Income Taxes | DART – Deloitte Accounting Research Tool

In general, the income tax accounting frameworks in both IFRS Accounting Standards and U.S. GAAP 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) deferred tax assets (DTAs) and deferred tax liabilities (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 IFRS Accounting Standards and U.S. GAAP. The table below highlights some of the key differences on topics such as the recognition of DTAs, the accounting for uncertain tax positions, and the treatment of income tax related to share-based payments.

Topic	IFRS Accounting Standards (IAS 12, IFRIC Interpretation 23)	U.S. GAAP (ASC 740)
Initial recognition exception	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 profit 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.	No “initial recognition” exception principle exists.
Recognition of DTAs	DTAs are recognized at the amount that is probable (interpreted to mean more likely than not) to be realized on a net basis (i.e., the DTA is written down, and an allowance is not recorded).	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.
Tax laws and rates used for measuring DTAs and DTLs	Enacted or “substantively” enacted tax laws or rates are used.	Enacted tax laws and rates are used.
Uncertain tax positions	If an entity concludes that it is probable (interpreted to mean more likely than not) 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.	U.S. GAAP 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 each individual 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.
Foreign nonmonetary assets or liabilities for which the functional currency is not the local currency	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) and (2) the indexing of basis for income tax purposes.	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.
Tax consequences of intra-entity inventory sales	No exceptions for intra-entity transfers of inventory exist. 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).	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.
Share-based compensation	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 award 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.	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).
Subsequent changes in deferred taxes (e.g., changes in tax laws, rates, status, or the valuation allowance)	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).	Subsequent changes in deferred taxes are 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]).