Income Tax Considerations
The key areas for companies to consider are: 1) financial accounting for income taxes - converting from FAS 109 to IAS 12, 2) what will come first, conversion or convergence, 3) IAS 12 provides no guidance for income tax uncertainty (IFRS generally follows IAS 37), 4) tax compliance processes, 5) tax accounting methods, and 6) global tax planning.
The change from FAS 109 under U.S. GAAP to IAS 12 will involve various computational and disclosure changes. While these changes will require a thorough understanding by all companies, there are some areas that specifically impact the consumer products industry (i.e. intercompany transfer of assets remaining within the group).
Whether it is income, sales, property, business, value-added or other taxes, consumer products companies are familiar with the tax compliance obligations of operating in numerous jurisdictions. With respect to income taxes, because taxable income in many non-US jurisdictions is based on financial statement earnings, the underlying methodology to determine taxable income can change and provide the consumer product company with a better cash tax result. In addition, non-income taxes are frequently based on amounts derived from the financial statements.
The accounting standards under IFRS may impact tax compliance processes. A few examples:
The consolidation regime of IFRS may require that additional operations be included within the financial statements that are not currently included. Thus the starting point to compute taxable income may include entities or operations that would not be included for income tax purposes. Many companies have customized electronic record processing (ERP) and reporting systems to provide data tailored to tax reporting requirements. Current systems may need to be recalibrated under IFRS as a result.
Under IFRS fixed asset accounting will become more complex due to component depreciation and the revaluation method as discussed earlier in this document. Tax departments will need to work with accounting and IT to assess their current systems and how to track fixed assets, including the calculation of depreciation for tax purposes on an asset by asset basis.
State income tax apportionment is generally computed by a combination of property, payroll, and sales information that will likely change under IFRS. Tax departments will need to revisit the processes used to extract this information and determine the cash tax impact.
Property taxes for real estate and business personal property are often based on U.S. GAAP amounts. Several open questions include (i) whether IAS 16 will be adopted by local tax jurisdictions as a measure for computing property tax, and (ii) whether existing accounting systems will maintain this information or whether tax departments will need to maintain separate records.
It is important to address the tax consequences of the pre-tax differences between IFRS and GAAP because a conversion to IFRS requires changes to several financial accounting methods. Consequently, companies may need to re-evaluate their existing tax accounting methods. As mentioned above, the starting point for calculating U.S. taxable income is book income as reported in accordance with GAAP (IRC §446). Companies should consider these changes as they would any other financial accounting method changes.
Tax considerations are an essential part of an IFRS strategy. Exploring opportunities to increase after-tax cash flow and managing the organization’s overall corporate effective tax rate are important aspects of developing a comprehensive IFRS strategy. There are transactions prior to adoption that may create value to the organization such as intercompany transactions. Companies that make the most of a conversion to IFRS will approach the undertaking as more than a mere “IAS 12 vs. FAS 109” exercise. If the tax accounting and reporting components are overlooked or not properly brought into the fold, unintended adverse tax consequences may occur. Exploring and analyzing the tax consequences early – including the impact on systems and processes – can help inform and determine the optimal path toward a successful IFRS conversion.
More Than Accounting
Without question, IFRS will impact the general ledger and the financials. But in a relative sense, the accounting and financial reporting may be the easy part. How you handle the nonfinancial aspects of the conversion may be a far more accurate indicator of your success. Among the areas warranting your attention are human resources, legal, regulatory, treasury, contract management, and technology.
Human Resources: As noted, IFRS involves much more than reorganizing the chart of accounts. It represents a change that cascades well beyond the finance department. Consequently, human resources issues may be a major concern. A conversion project will place increased demands on your personnel, which may come at a time when you are least able to handle it. Finance organizations have streamlined in recent years, downsizing accounting functions through reduced hiring, layoffs, and attrition, as well as outsourcing or offshoring key functions. Unfortunately, these personnel reductions may mean that the people who could best help with your IFRS efforts are no longer available.
Recruiting may pose another challenge, particularly in the United States. College accounting programs across the country represent an important pipeline for keeping finance functions staffed and operating. Yet, most U.S. university accounting programs are only now beginning to develop comprehensive instruction on IFRS.
This issue can be addressed through training programs in the U.S. and internationally, to help key personnel become proficient in both IFRS and U.S. GAAP.