IFRS Update
p
and
Accounting
Implications for Tax
Departments
Tax Executives Institute
Mayy 7,, 2012
Scope

Any advice provided herein is based on tax laws prevailing at the date this document is
issued. KPMG has no duty of care in respect of tax law changes subsequent to the date of
issuance. Subsequent advice provided during implementation of the proposed transaction
steps will take into account tax law changes through the date such advice is rendered
rendered.

You (and each of your employees, representatives, or other agents) are expressly authorized
to disclose the structure and tax aspects of any of the transactions referred to herein to any
and
a
da
all pe
persons,
so s, without
t out limitation
tat o of
o any
a y kind
d on
o such
suc disclosure.
d sc osu e

IN COMPLIANCE WITH US STANDARDS OF TAX PRACTICE PRESCRIBED BY THE US
TREASURY UNDER CIRCULAR 230 THAT APPLY TO ALL US TAX ADVISERS, PLEASE BE
ADVISED THAT ANY US TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR
WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (I) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAX PAYER OR (II) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN

The presentation herein represents ideas that each require further evaluation and tax analysis
before implementation.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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1
Status of the potential for
i
incorporation
ti
off IFRS into
i t
the financial reporting
system for U
U.S.
S issuers
Ashby Corum
Partner
Washington National Tax
acorum@kpmg.com
(313) 230-3361
SEC staff report – Exploring a method of incorporation
May 26, 2011
Possible Approaches

Full adoption of IFRS on a specified date, without any endorsement mechanism;

Full adoption of IFRS following staged transition over several years;

Optional adoption of IFRS for certain issuers; or

Retain U.S. GAAP with continued convergence/endorsement.
g
“Condorsement” Approach

Shares characteristics of the Endorsement Approach that has been used by other
jurisdictions However,
jurisdictions.
However during the transitional period
period, the framework would employ aspects of
the Convergence Approach to address existing differences between IFRS and U.S. GAAP.
Objective

Having a single set of high
high-quality,
quality globally accepted accounting standards and providing for a
U.S. issuer being able to assert compliance with both U.S. GAAP and IFRS as issued by
the IASB.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Next steps

SEC staff is expected to issue a comprehensive report on the IFRS Work Plan in 2012

Timing of Commission action uncertain
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Accounting for income
taxes
Ashby Corum
Partner
W hi t National
Washington
N ti
lT
Tax
acorum@kpmg.com
(313) 230-3361
Accounting for income taxes under IFRS
IAS 12 Income Taxes provides guidance on accounting for income taxes under IFRS

Similar to ASC Topic 740, IAS 12 is based on a balance sheet approach
Differences between the income tax amounts under U.S. GAAP and IFRS generally are
a result of:

Tax-effects of pretax adjustments to the financial statements

Differences between IAS 12 and ASC Topic 740
–
Recognition and measurement differences
–
Presentation and disclosure differences
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Exceptions to the temporary difference approach
Exceptions in ASC Topic 740, not contained in IAS 12:

Intercompany transfers of assets

Foreign nonmonetary assets and liabilities

Excess of tax-deductible goodwill over the reported amount of goodwill acquired in fiscal
years beginning before December 15, 2008

Leveraged leases

Statutory reserve funds of U.S. steamship enterprises

Additional exceptions apply for bad debt reserves and policyholders’
policyholders surplus
Exception in IAS 12, not contained in ASC Topic 740:

Initial recognition of assets acquired in a transaction not constituting a business combination
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Exceptions to the temporary difference approach (continued)
Investments in subsidiaries, branches and associates, and interest in joint ventures

U.S. GAAP
–
A deferred tax liability is recognized for investments in foreign subsidiaries and corporate
joint ventures unless evidence overcomes the presumption that one is needed (indefinite
reversal criteria ASC 740-30-25-18). There is no exception for other equity method
investments
–
A deferred tax asset is only recognized if it is apparent that the temporary difference will
reverse in the foreseeable future
–
The exception
p
for recognizing
g
g a liability
y related to domestic subsidiaries and domestic
corporate joint ventures only applies to earnings that arose in fiscal years beginning on or
before December 15, 1992
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Exceptions to the temporary difference approach (continued)

IFRS
–
A deferred tax liability is recognized except to the extent it is “probable” that the temporary
difference will not reverse in the foreseeable future and the investor is able to control the
timing of the reversal of the temporary differences
–
The exception allows recognition of a deferred tax asset, to the extent, and only to the
extent, it is probable that the temporary difference will reverse in the foreseeable future
and taxable profit will be available against which the deferred tax asset can be utilized
–
The exception includes branches and associates; however, control of timing of reversal of
the temporary differences is required to avoid recognition of a deferred tax liability
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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9
Recognition of deferred tax assets
Recognition of deferred tax assets

Under IAS 12, a deferred tax asset is not recognized unless it is probable that it will
be realized

Under ASC Topic 740, all deferred tax assets are recognized and a valuation allowance is
recognized to the extent that it is “more likely than not” that the deferred tax assets will not
be realized
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Measurement of income taxes

U.S. GAAP requires entities to measure deferred taxes using the “enacted” tax rate, while
IFRS uses the “substantively enacted” tax rate – does not result in a difference within the
United States.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Uncertainty in income taxes
U.S. GAAP

ASC Subtopic 740-10 provides guidance on accounting for uncertainty in income taxes
IFRS

No specific guidance provided in IAS 12 or elsewhere in IFRS

KPMG guidance:
g


–
Assess each tax exposure item individually
–
The amount provided for is the best estimate of the tax amount expected to be paid
There is diversity in practice in determining the best estimate in accounting for income tax
uncertainties under IFRS. Two common approaches include:
–
Single point best estimate
–
Probability weighted amount
Accounting is subject to the normal subsequent events guidance under IFRS.
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Uncertainty in income taxes (continued)
Possible
outcome of benefits
Individual
probability (%)
Cumulative
probability (%)
Weighted average
$ 1,000
,
35
35
350
800
20
55
160
100
30
85
30
0
15
100
0
Probability weighted average
$ 540
Single point best estimate
1,000
U S GAAP cumulative probability
U.S.
800
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Share-based payment
U.S. GAAP

A deferred tax asset is recognized based on the grant-date fair value of an equity-classified
share-based
share
based payment award as compensation expense is recognized. The effect of
subsequent changes in the share price is not reflected in accounting for the deferred
tax asset.

Excess tax benefits for share-based compensation are determined under a portfolio approach
IFRS

IFRS requires that deferred tax assets be remeasured based on the share price at each
reporting
p
g date
–

Accordingly, a deferred tax asset is recognized when the share options have intrinsic value
that could be deductible for tax purposes. Therefore, an entity that grants an at-the-money
share option to an employee in exchange for services would not recognize tax effects until
th t award
that
d was in-the-money.
i th
IFRS requires an individual instrument approach in determining excess tax benefits of equity
awards to allocate to paid-in capital
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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14
Intraperiod allocation
U.S. GAAP

U.S. GAAP provides that the effect of a change in the beginning-of-the-year balance of a
valuation allowance concerning the realizability of the related deferred tax asset in future
years ordinarily is included in income from continuing operations

U.S. GAAP provides that the effect of a change in deferred tax liabilities and assets for a
change in tax law or rate is included in income from continuing operations

All items should be considered for purposes of determining the amount of tax benefit that
results from a loss from continuing operations
IFRS

IFRS is generally silent on intraperiod tax allocation, and practice may vary

However, IFRS provides current and deferred tax that relates to items that are recognised, in
the same or a different period:
–
In other comprehensive income, shall be recognized in other comprehensive income
–
Directly in equity, shall be recognised directly in equity
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Presentation
Current taxes

Under U.S. GAAP, an amount is classified as current to the extent the enterprise anticipates
payment (or receipt) of cash within one year or the operating cycle, if longer

Under IFRS, a receivable is classified as current if the entity expects to realize the asset
within 12 months or the normal operating cycle

Under IFRS,
IFRS a payable is classified as current unless the entity has an unconditional right to
defer settlement for at least 12 months
Deferred taxes

Under
U
d U
U.S.
S GAAP
GAAP, d
deferred
f
d ttax assets
t and
d liliabilities
biliti are classified
l
ifi d as either
ith currentt or
noncurrent based on the classification of the related asset or liability for financial reporting

Under IFRS, all deferred tax assets and liabilities are classified as noncurrent and may be
offset when relating to the same tax authority
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Interim financial reporting
U.S. GAAP

ASC Subtopic 740-270 provides guidance on accounting for income taxes in interim periods

The estimated annual effective tax rate is used to allocate expected annual income tax
expense to interim periods
–
When subject to multiple jurisdictions, generally one overall effective tax rate should be
computed unless:

The Company anticipates a loss for which no benefit can be recognized, or

It is unable to make an estimate of ordinary income or related tax
IFRS

IAS 34, Interim Financial Reporting, provides guidance on accounting for income taxes in
interim periods
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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17
Interim financial reporting (continued)
IFRS

Income tax expense is recognized in each interim period based on the best estimate of the
weighted average annual income tax rate expected for the full financial year
–
To the extent practicable, a separate estimated average annual effective income tax rate is
determined for each taxing jurisdiction and applied individually to the interim period pretax
income of each jurisdiction
–
To the extent practicable, a separate rate is applied to each individual category of interim
period pretax income
–
Tax benefits that relate to a one-time event are recognized
g
in computing
p
g income tax
expense in that interim period
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Questions?
Ashby Corum
Partner
Washington National Tax
acorum@kpmg com
acorum@kpmg.com
(313) 230-3361
© 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13169NRL
19
© 2012 KPMG LLP, a Delaware limited liability
partnership and the U.S. member firm of the KPMG
network of independent member firms affiliated with
KPMG International
I t
ti
l Cooperative
C
ti (“KPMG
International”), a Swiss entity. All rights reserved.
13169NRL
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