Write
a brief essay highlighting the difference between IFRS and accounting standards
for private enterprises noted in this chapter, discussing the conceptual
justification for each.
There are many
differences between IFRS and PE
GAAP with respect to measurement and reporting for income taxes. Primarily, PE GAAP has been written to keep
recognition and measurement issues simple and therefore requiring less cost and
time to calculate and report. This
concept is reflected in private enterprises having a choice of using either the
taxes payable method or the future taxes method. The taxes payable method is definitely much
simpler since temporary differences do not have to be measured, and only the
actual amount of taxes payable needs to be reported as an expense. However, private enterprises can also choose
to adopt the future income taxes method, which is similar to the IFRS method. Finally, there are differences in
disclosure. Given that private
enterprise reports have a limited number of users who are primarily creditors,
then disclosure is simplified in comparison to IFRS .
These differences are highlighted below:
·
There is a difference in terminology – PE GAAP has retained terms used
in practice in Canada for many years, including: accounting
income (accounting profit under IFRS ), future
income taxes (deferred taxes
under IFRS ), tax benefit (tax income
under IFRS ) and taxable income (taxable profit under IFRS ).
·
With respect to the accounting for loss carryforwards, PE GAAP requires
an assessment as to whether the loss is “more likely than not” going to result
in a benefit. (Again, this results from
the practice that has been used in Canada for many years.) IFRS uses the
assessment of “probable” ie. is it
probable that the loss carryforwards will result in a benefit. It is generally agreed that the terms have
the same meaning and that the losses reported as benefits would be the same
under both definitions. One difference
is that PE GAAP allows full recognition of all future income tax assets arising
from losses and temporary differences, and then a valuation allowance can be
used to adjust these future tax assets to the amount more likely than not to be
realized. Under IFRS, there is no
valuation allowance that can be recorded, but the company is required to record
the probable amount of future income tax assets to be realized.
·
Under IFRS , backward
tracing is required for adjustment to future income taxes where the original
transactions were posted directly to equity, either through OCI or retained
earnings. This is not required under PE
GAAP. The reason for the difference is
due to generally accepted Canadian practice.
It is likely that this will change under IFRS ,
to be similar to the PE GAAP requirements.
·
Under PE GAAP, future tax accounts can be classified as current or
non-current, based on either the underlying asset or liability, or on the
expected time of reversal. Under IFRS,
only non-current classification is available.
Again, PE GAAP is based on practice accepted in Canada, and it is likely
that IFRS will adopt this classification with future changes to IAS 12.
·
Under PE GAAP, intraperiod tax allocation is only between discontinued
and continued operations and equity items.
IFRS would also have income taxes allocated to other comprehensive
income items, which are not used under PE GAAP.
·
Finally, the disclosure is quite extensive under IFRS, and much more
limited under PE GAAP. Generally PE GAAP only requires disclosure on tax rates
(if using the taxes payable method) and loss carry forwards. IFRS requires disclosure to include
reconciliations of the deferred tax accounts and the income tax accounts and
calculation of rates, just to name a few.
