Introduction
The issue of deferred tax differs greatly under International Financial Reporting Standard and US Generally Accepted Accounting Principles. The main aim of this paper is to compare the differences that arise between reporting of deferred tax using International Financial Reporting Standard and US Generally Accepted Accounting Principles. It should be noted that differences in the reporting of the issue is majorly influenced by the laws of the country. International Financial Reporting Standard is principle based accounting and has raised many questions relating to interpretations of the same entries by different people (AICPA, 2011). According to the study made in AICPA Survey Tracks IFRS Readiness, it is emphasized that each year, more and more companies adapt its principles (JofA, 2011). The rules of International Financial Reporting Standard require to avoid the crisis and find some solution for creating a global market (Knowledge@Wharton, 2007). While principle based accounting can interpret same cases in different ways thus increases chances of misconduct and fraud (Fullerton and Lyon, 1987). The tax system in the US is keeps separate legal entity as an important code and does not come under accounting provisions. The company that has been chosen for analysis is Diageo plc which prepares their financial statement in accordance with International Financial Reporting Standard.
Materiality
In reporting for deferred tax using International Financial Reporting Standard, is recognized as non current item and the tax is charged on both permanent and temporary differences, while in the US Generally Accepted Accounting Principles it’s recognized on the temporary differences only. The permanent difference may be material to the decision maker. A company using International Financial Reporting Standard like in our case may report a profit while using US Generally Accepted Accounting Principles may report a loss bringing materiality to the whole issue. In the financial statement of Diageo, deferred tax has been adjusted to include 53,000,000 and 181,000,000 which is a deduction from the reported profits of the company. The amount of 53million and 181 million are material and can influence a decision maker in deciding whether to invest in the company or not (Deloitte, 2007).
Under the liability method above when a new tax law is enacted, its effects must be recognized immediately. Thus, lower tax rates will reduce deferred tax liabilities and assets, increases equity, and affect income tax expense for the year. The larger the net deferred tax liability, the greater the impact of the tax cut, as previous year deferrals are adjusted to the lower rate. For analytic purposes, one need not wait for the actual tax change to be enacted; estimates can be made when legislation is proposed (Epstein, 2011).
Accounting history of the deferred tax
Accounting for the deferred tax has been controversial since 2006 some companies have been reporting deferred using International Financial Reporting Standard while others have been using US Generally Accepted Accounting Principles. However, due to convergence IFRS and Generally Accepted Accounting Principles, accounting for deferred tax has changed. Multinational were finding it difficult to report in to two accounting regimes one resulting in a loss. Indeed even US. Securities and exchange solution found it necessary to approve the adaption of International Financial Reporting Standard to different public companies that were multinationals. This has eliminated the major differences which were experienced 2008 and below. However, because of difference in tax regime it’s difficult to combine the accounting reporting standard for the deferred tax with IFRS. The adoption of International Financial Reporting Standard by some multinationals has enabled the world prevents occurrences of arbitrage between standards and eliminates political interference in the process preparing financial statements (Christensen and Nikolaev, 2008).
Consistence has been achieved in processing and presenting financial information relating to deferred tax making it more understandable to world’s population. It is easier for companies now to transparently manage their tax liability and distribute profits in a foreign country with little fear of making a loss during the conversion of financial statement. The issue of deferred tax had made some companies to report losses during the period of conversion from International Financial Reporting Standard to Generally Accepted Accounting Principles (Deloitte, 2007).
Conclusion
Changes in from GAAP to IFRS can also significantly impact deferred taxes and have materiality effect on financial statement. Thus, realization of deferred tax asset or liability depends on the realization of the temporary and permanent differences in assets and expenses that created it. The IFRS operating structure for entities based in diverse commercial faculties, and economic settings among others, including the segmental awareness is an effectual executive instrument. Since it can improvise the production analysis, as well as assigns funds and devise trade along with commercial aspects (Trabelsi, 2010). International Financial Reporting Standard obligates such directive details to be available globally so that groups such as investors, among other engrossed contributors might evaluate corresponding firm’s proceedings from the very insight as its executive. This is considerably a diverse model which exhibits the probability of outlining insightful details to contenders alongside other clients of monetary statements. Finally the directors should be acquitted to the policies of International Financial Reporting Standard, in order to legitimately initiate approaches that are supported and corresponds to the respective International Financial Reporting Standard concepts. Nevertheless, there exists no exclusion allowing the directors to manipulate the segments responsive strategies that may result in unmerited competition (Francis and Schipper, 1999).
Shifting to an International Financial Reporting Standard -derived private monetary accounting setting could possibly necessitate fundamental reformations. At least, firms will be compelled to comprehend how the multiplicities imposed by the International Financial Reporting Standard when considered to their private models could decisively determine the Key Performance Indicators. This is among other pertinent evaluations, influential in private monetary direction procedures (James, 2011). Notably the signals as well as metrics might also necessitate modification if the outlooks of the IFRS vary from the firm’s expectations along with standards. Various firms might further alternate their liberal secretarial structure to contain the pressure the IFRS may possibly impose in their entire monetary system. Firms might additionally be obligated to adjust basic make-ups as well as the conservative accounting catalogues to discover any supplementary statistics that could be essential for existing revelation desires. As opposed to the Generally Accepted Accounting Principles which states that it might be distinguished into appraisal stages (James, 2010). To instigate such concepts, firms should consistently modify various policies ranging from expenditure accounting configurations as well as the statement warehouse together with relevant shift-through of expenses. The benefits of IFRS are obvious as you can trace the further development of this issue in IASB seeks views on future work plan (IFRS news, 2011).
References
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