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IFRS and US GAAP, with Website: A Comprehensive Comparison by Steven E. Shamrock

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11

INCOME TAXES

Accounting for income taxes is one of the more pervasive areas under either US GAAP or IFRS. Income taxes touch almost every other area of accounting because results of an entity, except not-for-profits, incur tax liability. Furthermore, income tax strategies and planning occupy the time and budgets of most entities except perhaps for the very smallest. The basic concept underlying income tax is a simple one: to recognize the income tax attributed to the current period’s results. Unfortunately, the inherent differences between income for book and tax bases complicate the measurement of tax expense and balance sheet attributes.

The two drivers of these differences are timing and characterization. Timing refers to the disparity between the periods an item of income or expense is recognized for tax purposes and when it is included in taxable income. Characterization refers to the rate at which an item is taxed, including those items that are excluded from taxable income, which can be looked at as having a rate of zero. The interaction of timing and characterization can also render certain items of income or expense effectively excluded from taxable income. An example is the need to offset capital gains with capital losses. Capital losses go unused if they cannot be matched with a capital gain before a certain time period.

IFRS and US GAAP both use a balance sheet approach to recognizing income tax expense. In other words, tax expense or benefit is merely an outcome ...

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