4-7-11 Solution

4-7-11 Solution - Q19-21. Both iGAAP and U.S. GAAP use the...

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Q19-21. Both iGAAP and U.S. GAAP use the asset and liability approach for recording deferred tax assets. In general, the differences between iGAAP and U.S. GAAP involve limited differences in the exceptions to the asset-liability approach, some minor differences in the recognition, measurement and disclosure criteria, and differences in implementation guidance. Following are some key elements for comparison. Under iGAAP, an affirmative judgment approach is used by which a deferred tax asset is recognized up to the amount that is probable to be realized. U.S. GAAP uses an impairment approach. In this situation, the deferred tax asset is recognized in full. It is then reduced by a valuation account if it is more likely than not that all or a portion of the deferred tax asset will not be realized. iGAAP uses the enacted tax rate or substantially enacted tax rate (Substantially enacted means virtually certain). For U.S. GAAP the enacted tax rate must be used. The tax effects related to certain items are reported in equity under iGAAP. That is not the case under U.S.GAAP, which charges or credits the tax effects to income. U.S.GAAP requires companies to assess the likelihood of uncertain tax positions being sustainable upon audit. Potential liabilities must be accrued and disclosed if the position is “more likely than not” to be disallowed. Under iGAAP, all potential liabilities must be recognized. With respect to measurement, iGAAP uses an expected value approach to measure the tax liability which differs from U.S. GAAP. The classification of deferred taxes under iGAAP is always noncurrent. As indicated in the chapter, U.S. GAAP classifies deferred taxes based on the classification of the asset or liability to which it relates. Q19-22. The FASB and the IASB have been working to address some of the differences in the accounting for income taxes. Some of the issues under discussion are the term “probable” under iGAAP for recognition of a deferred tax asset, which might be interpreted to mean “more likely than not”. If changed, the reporting for impairments of deferred tax assets will be essentially the same between U.S. GAAP and iGAAP. In addition, the IASB is considering adoption of the classification approach used in U.S. GAAP for deferred tax assets and liabilities. Also, U.S. GAAP will likely continue to use the enacted tax rate in computing deferred taxes, except in situations where the U.S. taxing jurisdiction is not involved. In that case, companies should use iGAAP which is based on enacted rates or substantially enacted tax rates. Finally, the issue of allocation of deferred income taxes to equity for certain transactions under iGAAP must be addressed in order to conform to U.S. GAAP, which allocates the effects to income. At the time of this printing, deliberations on
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This note was uploaded on 03/03/2012 for the course MGMT 351 taught by Professor Staff during the Spring '08 term at Purdue.

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4-7-11 Solution - Q19-21. Both iGAAP and U.S. GAAP use the...

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