Ifrs Tax Accounting Methods 0209

IFRS: What you need to know
IFRS, US GAAP, and

US tax accounting
methods*
Comparing IFRS & US GAAP and
assessing the potential implications
on US tax accounting methods
February 2009
Table of contents
The heart of the matter 02

How will changes in accounting policy
resulting from a conversion to IFRS affect
tax accounting methods?
An in-depth discussion 04
Will changes in accounting policy required
upon the conversion to IFRS necessitate
US tax accounting method changes?
US tax accounting method considerations 05
US tax accounting method change procedures 07
A closer look 08
IFRS, US GAAP, and
US tax accounting methods—a detailed
comparative assessment
February 2009
The heart of the matter
How will changes in

accounting policy
resulting from a
conversion to IFRS
affect tax accounting
methods?
02 IFRS, US GAAP, and US tax accounting methods

Converting to International Financial Reporting Standards (IFRS) will be a
significant undertaking for many companies and could result in the adoption
of several new accounting policies in the United States and in each foreign
jurisdiction in which the organization operates.
Assessing the tax implications of each of these newly adopted accounting

policies will also be a labor intensive effort and will require a deep under-
standing of the differences between a jurisdiction’s local GAAP and IFRS, as
well as its local tax laws. As part of this assessment, companies will need
to consider whether each new accounting policy change necessitates a tax
accounting method change or, alternatively, creates an opportunity for a
tax accounting method change that is strategic in light of the organization’s
overall tax planning objectives.
PricewaterhouseCoopers (PwC) has developed this IFRS publication, which

compares the current US GAAP and IFRS treatment of several key pretax
issues to help companies:
• Determine whether tax accounting method changes will be required or

desired in the United States with respect to the computation of taxable
income for domestic companies and of earnings and profits (E&P) for
foreign subsidiaries.
• Assess the impact of each new accounting policy change on the

computation of book-tax differences (also known in the United States as
“Schedule M” adjustments) and E&P computations.
This document serves as a companion piece to the following PwC IFRS

publications: IFRS and US GAAP, similarities and differences, which
provides a more comprehensive overview and analysis of the significant
pretax accounting similarities and differences between IFRS and US GAAP
and Implications of IFRS Conversion on US Tax Accounting Methods, which
provides an in-depth discussion of the potentially significant cash tax and
tax compliance implications that conversion to IFRS may have on key US
tax accounting method issues.
We are hopeful that this document will provoke strategic thinking and assist
companies in identifying and prioritizing many of the key US tax accounting
method implications that may result upon the conversion to IFRS.
The heart of the matter PricewaterhouseCoopers 03

An in-depth discussion
Will changes in
accounting policy
required upon the
conversion to IFRS
necessitate US tax
accounting method
changes?

US tax accounting method considerations
Newly adopted IFRS accounting policies may impact a company’s tax

accounting methods, and possibly its cash tax liabilities. To identify the
potential implications accounting policy changes may have on US tax
accounting methods, companies likely will need to consider the following:
• Can the current US GAAP method of accounting continue to be followed

under US tax law?
• Can the newly adopted IFRS method of accounting be followed under

US tax law?
• If both the current US GAAP and the newly adopted IFRS accounting
methods are permissible, which is the most strategic or preferable for
US tax purposes?
• What if neither the current US GAAP nor the newly adopted IFRS
accounting methods are permissible under US tax law?
• Will changing the tax accounting method have a significant impact on

taxable income, E&P, or deferred taxes?
• Will the company be able to compute the adjustments required for tax?
• Will systems need to be updated? For example, as new accounting

policies are adopted, will book data used to calculate book-tax
differences be captured properly within the existing tax systems?
An in-depth discussion PricewaterhouseCoopers 05

It is critical that tax executives be involved throughout the selection of
new accounting policies to ensure that these and other tax considerations
are properly addressed and that any resulting tax accounting method
changes and compliance issues are managed appropriately both within the
organization and with the taxing authority.
As will become more evident in the detailed analysis contained in this

publication, newly adopted IFRS accounting policies typically are not
expected to result in tax accounting method changes for many companies.
Rather, due to the specific tax law requirements that should be followed,
it is expected that the adoption of new IFRS accounting policies primarily
will change the computation of, or possibly eliminate, many book-tax
differences. Nonetheless, tax accounting method changes will most likely be
required or preferred under the following circumstances:
• The current tax accounting method requires book-tax conformity and

IFRS does not permit the use of the current GAAP accounting method
(e.g., the Last In, First Out (LIFO) inventory method);
• Costs are recharacterized as inventoriable for books, resulting in a change

in the characterization of costs between §471 and §263A;
• A review of the book accounting method uncovers circumstances where

tax should not have followed the book method, such as with revenue
recognition for multiple deliverable contracts or the characterization of
leases; and
• A review of the current tax accounting method identifies more favorable

tax accounting method options, such as with respect to bad debts or
cash discounts.

US tax accounting method change procedures
To the extent tax accounting method changes are required or desired in the
United States, it is important to be aware of the relevant procedural rules. In
general, the consent of the Commissioner must be obtained to voluntarily
change a tax accounting method for purposes of determining US federal
taxable income or E&P. Such consent generally is obtained by filing Form(s)
3115 with the Internal Revenue Service (IRS) National Office. By voluntarily
filing a Form 3115 with the IRS National Office, a company generally
receives audit protection preventing the IRS from raising the same issue in a
previous year, as well as a one-year spread of a taxpayer-favorable §481(a)
adjustment and a four-year spread of a taxpayer-unfavorable §481(a)
adjustment.
The timeframe and procedures for filing a Form 3115 vary based on
whether the tax accounting method change is an automatic change or a
non-automatic change. Generally, automatic method changes require that a
Form 3115 be filed in duplicate, with the original attached to the taxpayer’s
timely filed (including extensions) federal income tax return for the year
of change, and a copy filed with the IRS National Office pursuant to the
provisions of Rev. Proc. 2008-52. Non-automatic method change requests,
on the other hand, must be filed during the year the change will be effective
in accordance with Rev. Proc. 97-27.
Notwithstanding these general rules for filing tax accounting method

changes, if a company is under IRS examination, then method change
requests generally must be made by:
• Filing under either the “90-day window” (i.e., the first 90 days of the
taxable year if the Company has been under exam for at least 12
consecutive months) or the “120-day window” (i.e., the first 120 days
following the closing of an exam) provisions of Rev. Proc. 97-27 and
Rev. Proc. 2008-52; or
• Requesting the consent of the Director. (Director consent typically only

is requested for tax accounting method change requests resulting in a
taxpayer-favorable §481(a) adjustment.)
An in-depth discussion PricewaterhouseCoopers 07

A closer look
IFRS, US GAAP, and

US tax accounting
methods—a detailed
comparative
assessment

This publication will assist companies that wish to gain a broad
understanding of the significant differences between IFRS and US GAAP
and the implications of these differences on US tax accounting methods
from a US taxable income (and indirectly E&P) perspective. By no means,
however, is it all-encompassing. Instead, PwC has focused on a selection
of the differences and implications most commonly found in practice and
has highlighted only certain aspects of those differences. Moreover, the
publication reflects only preliminary considerations that will no doubt be
modified because interpretations may change as more US companies
convert to IFRS and because US GAAP, IFRS, and the US tax law continue
to evolve. See, for example, the IASB/FASB discussion paper, “Preliminary
Views on Revenue Recognition in Contracts with Customers,” which was
released in December 2008. Accordingly, when applying the individual
accounting frameworks and considering the tax accounting method
implications, companies should consult all of the relevant accounting
standards and tax law in existence at that time.
The goals of this publication are to highlight that conversion to IFRS

could have significant ramifications on an organization’s tax accounting
methods and to encourage early consideration of what IFRS means to your
organization. Specifically, this publication attempts to identify circumstances
where tax accounting method changes may be required or desired and
where Schedule M computations may change. It is assumed within the
analysis of this publication that that the current tax accounting method
being used is permitted under US tax law. Lastly, this publication considers
existing accounting guidance and the US tax law as of November 30, 2008.
A closer look PricewaterhouseCoopers 09

Table of contents
Revenue recognition 13
Revenue recognition (application to specific items) 25
Contra receivables 29
Inventory 31
Property, plant, and equipment (PP&E) 37
Intangible assets and goodwill 43
Impairments 53
Leasing 55
Liabilities 59
Revenue recognition
In December 2008, the FASB and the IASB jointly issued the discussion paper, “Preliminary Views
on Revenue Recognition in Contracts with Customers.” This discussion paper proposes changes
to both US GAAP and IFRS that, if ultimately included in a new standard, would have potentially
significant ramifications to revenue recognition. This publication does not analyze the potential
implications of this discussion paper. We strongly recommend, however, that companies closely
monitor this discussion paper, as well as other emerging guidance, and actively participate in the
analysis during the comment period.
IFRS, US GAAP, and US tax accounting methods
US tax method
Subject US GAAP IFRS US tax method implications Action items
Sale of goods Revenue is recognized Revenue is recognized when all Revenue generally is US tax principles generally No method
when it is realized/ of the following criteria have been recognized under §451 when follow US GAAP and IFRS change.
realizable and earned. satisfied: there is a fixed right to receive principles with respect to
Possible
In addition, the SEC • Significant risks and rewards the income and the amount is when revenue is earned
change in the
has interpreted, through of ownership have been determinable with reasonable from the sale of goods. As
computation
its release of SAB 104, transferred; accuracy. There is a fixed right such, book-tax differences
of Schedule
that revenue is realized/ to receive income upon the likely will occur only if the
• The seller retains neither M.
realizable and earned earlier of the income being income is due or paid in
when the following criteria continuing managerial due, paid, or earned. See, for advance of being earned.
are met: involvement nor effective example, Rev. Rul. 84-31.
control; However, it is uncertain
• Persuasive evidence of With respect to a sale of whether the second criteria
an arrangement exists; • Revenue can be measured
goods, revenue generally is in IAS 18, par. 14 (i.e.,
reliably;
• Delivery has occurred recognized when the goods are the seller retains neither
or services have been • It is probable that the shipped, delivered, or accepted continuing managerial
rendered (i.e., the economic benefits will flow to (i.e., when risks and rewards involvement nor effective
risks and rewards of the company; and of ownership have transferred) control) will have the effect
ownership have been • Costs can be reliably or upon receipt of an advance in certain circumstances
transferred); measured. payment for such goods, of deferring revenue for
unless there is a position to books even though tax
• The price is fixed or [IAS 18, par. 14] defer the advance payment ownership has passed
determinable; and
under Rev. Proc. 2004-34 or and thus revenue must be
• Collectability is Treas. Reg. §1.451-5. recognized for tax.
reasonably assured.
Note that case law also Further, it is expected
[SAB 104, SOP 97-2] recognizes the concept of that US GAAP (and tax)
nonaccrual if collection is not will differ from IFRS with
reasonably assured; however, respect to situations where
this principle may be less a contractual arrangement
applicable in the context of the is required but not signed.
sale of goods. In this case, US GAAP
(and likely tax) would not
With respect to the
allow for the recognition
measurement of costs, the tax
of revenue. However, IFRS
law also arguably recognizes
generally would allow for
that concept because gross
the recognition of revenue
income from the sale of goods,
if it is probable the contract
defined as receipts less
would be signed.
cost of goods sold, must be
reasonably determinable before
it is recognized for tax.
14 PricewaterhouseCoopers
Revenue recognition
US tax method
Sale of goods Assuming that the unit of If goods are shipped subject to Revenue generally is IFRS does not appear No method
subject to accounting includes both installation and the installation is recognized under §451 when to differ substantially change.
installation the equipment and the a significant part of the contract, there is a fixed right to receive from US GAAP and thus
Schedule M
installation (because the revenue is not recognized until the income and the amount is it is expected that the
computation
separation criteria in EITF the installation is complete. determinable with reasonable recognition of revenue
not expected
00-21 have not been met), However, revenue is recognized accuracy. There is a fixed right from goods subject to
to change.
under SAB 104, if goods immediately upon the buyer’s to receive income upon the installation will not change.
are shipped subject to acceptance of delivery when earlier of the income being It is also expected that US
installation, revenue must the installation process is due, paid, or earned. See, for tax principles generally
be deferred if the simple in nature and the example, Rev. Rul. 84-31. will follow IFRS principles.
installation is essential to installation is insignificant. Thus, method changes are
With respect to the sale of
the functionality of the [IAS 18, par. 16 and Appendix] not expected as a result
goods subject to installation,
equipment. Revenue may of IFRS.
revenue is deferred until
be recognized at shipment
the installation is complete
(prior to installation) only
generally only if the taxpayer
if the installation is both
does not have a right to
inconsequential and
receive income from the
non-essential. SAB 104,
provision of goods until the
Topic 13A (3c), Question 3,
installation is complete (e.g.,
provides examples of
installation requires testing
when installation is,
and is substantive).
and is not, essential
to the functionality of
the equipment.
PricewaterhouseCoopers 15
US tax method
Service US GAAP prohibits the When the outcome of a The percentage-of-completion US tax principles are Possible
arrangements use of the percentage- transaction involving the method (PCM) prescribed inconsistent with IFRS as change in the
of-completion (input rendering of services can be under §460 is prohibited for revenue is earned for tax computation
measure-driven) model to estimated reliably, revenue is the recognition of revenue for when the services are of Schedule
recognize revenue under recognized by reference to the services. complete and under IFRS M.
service arrangements stage of completion using the as services are provided
unless the contract percentage-of-completion (POC) Revenue generally is using a PCM. As a result, Consider
is within the scope of method. The outcome of the recognized under §451 when tax recognition generally seeking IRS
specific guidance for contract can be estimated reliably there is a fixed right to receive will be deferred as administrative
construction or certain when all of the following criteria the income and the amount is compared to IFRS, but relief that
production-type contracts. are met: determinable with reasonable accounting systems must would allow
[SOP 81-1] accuracy. There is a fixed right be able to capture data optional use
• The amount of revenue can be to receive income upon the of the IFRS
measured reliably; required to convert IFRS
Generally, companies earlier of the income being revenue recognition into POC method
would apply the • It is probable that economic due, paid, or earned. See, for tax recognition. to recognize
proportional-performance benefits will flow to the example, Rev. Rul. 84-31. service
(based on output company; revenue for
measures) model or the With respect to services, tax purposes,
• The stage of completion can revenue generally is recognized
completed-performance be measured reliably; and which would
model. In limited under §451 when the required result in an
circumstances where • The costs incurred and costs services are complete or upon acceleration
output measures do not to complete can be measured receipt of an advance payment of tax
exist, input measures, reliably. for such services unless there revenue,
which approximate is a position to defer the in light of
The stage of completion may advance payment under Rev.
progression toward be measured using a variety of significant
completion, may be used. Proc. 2004-34. administrative
methods including:
Revenue is recognized Note that case law also burden of
based on a discernible • Surveys of work performed; compliance
recognizes the concept of
pattern and if none • Services performed to date as nonaccrual if collection is not with tax laws
exists, then the straight- a percentage of total services reasonably assured; however, expected
line approach may be to be performed; or this principle may be less after IFRS
appropriate. • Costs incurred as a percentage applicable in the context of the conversion.
The alternative to the of total costs to be incurred. provision of services.

proportional-performance When services are performed by
model is the completed- an indeterminate number of acts
performance model, which over a specified period of time,
is appropriate when: revenue generally is recognized
• A measure of the on a straight-line basis. When
vendor’s performance a specific act is much more
is not available or is significant than any other act,
unreliable; the recognition of revenue is
• The customer’s postponed until the significant act
receipt of value is executed.
from the services When reliable estimation is not
is predominately at possible, revenue is recognized
completion; or only to the extent of the costs
• The customer believes incurred that are recoverable.
they have contracted for [IAS 18, par. 20-28 ]
the vendor to perform a
single significant act.
Revenue recognition
US tax method
Service A right of refund may A right of refund does not Service revenue is earned Although the US tax law No method
arrangements preclude recognition of preclude recognition of service under §451 when the required follows neither US GAAP change.
with right of service revenue until the revenue if the outcome of the services are complete. A right nor IFRS, the IFRS model,
refund right of refund expires. In contract can be reliably measured of refund generally would which allows the potential Possible
certain circumstances, and it is probable the company be considered a condition for revenue recognition, change in the
companies may be able will receive the economic subsequent that would not even though a right of computation
to recognize revenue over benefits related to the services delay the recognition of refund exists, is expected (or elimination)
the service period (net of provided. When reliable revenue. to be more closely aligned of Schedule
an allowance) if the strict estimation is not possible, with the US tax rules. M.
criteria within the guidance revenue is recognized only to
are met. the extent of the costs incurred
[SAB 104 and FAS 48] that are probable of recovery.
[IAS 18, par. 20-28]
Multiple Revenue arrangements The revenue recognition criteria Revenue generally is earned US tax principles generally No method
element with multiple deliverables are usually applied separately under §451 (outside of the follow IFRS principles, not change
arrangements are attributed to separate to each transaction. In certain PCM context) as each good is US GAAP, with respect to (unless
units of accounting only circumstances, however, it provided and/or the required the recognition of revenue erroneously
if the deliverables meet is necessary to separate a services are completed. As a for multiple deliverables. As followed
specific criteria, most transaction into identifiable result, contracts with multiple such, existing tax methods US GAAP
notably that there is components in order to reflect deliverables generally must should resemble IFRS method).
objective and reliable the substance of the transaction. be separated into the relevant principles and book-tax
evidence of the fair value At the same time, two or more deliverables and revenue differences are likely to be Elimination of
of the undelivered unit/ transactions may need to be must be allocated to each eliminated. Schedule M
item. grouped together when they are deliverable. likely.
linked in such a way that the Note, however, it is possible
When an arrangement whole commercial effect cannot that some taxpayers
involving two or more be understood without reference erroneously followed their
deliverables does not meet to the series of transactions as US GAAP book method,
the separation criteria, it a whole. which may have deferred
must be accounted for as revenue from multiple
one unit of accounting. If available, relative fair value deliverable arrangements.
Generally, the recognition should be used. If relative fair These taxpayers will be
pattern of the last item value is not available, it would be required to change to a
to be delivered will appropriate to use the residual proper tax method.
dictate the revenue value or cost plus a reasonable
recognition pattern for margin to estimate fair value. In addition, although it is
the single combined [IAS 18, par. 13 and Appendix] more likely under IFRS than
unit of accounting. If the US GAAP that multiple
deliverables included in In assessing the transaction’s deliverables under a
the single unit of substance, the transaction should contract will be accounted
accounting are services, be viewed from the perspective of for separately, it remains
the above guidance related the customer and not the seller; possible under IFRS
to service arrangements that is, what does the customer to account for multiple
should be followed. believe they are purchasing? If the deliverables as a single
[EITF 00-21] customer views the purchase as unit of accounting. Thus,
one product, then it is likely that an analysis should be
the recognition criteria should be performed to identify any
applied to the transaction as a such circumstances.
whole. Conversely, if the customer
perceives there to be a number
of elements to the transaction,
then the revenue recognition
criteria should be applied to each
element separately.
US tax method
Royalties Royalty revenue is Royalty revenue is recognized on Revenue generally is Similar to the effect under No method
generally recognized when an accrual basis in accordance recognized under §451 when US GAAP, it is anticipated change.
all of the criteria in SAB with the substance of the there is a fixed right to receive that the tax recognition of
104 (as described above in agreement when: the income and the amount is royalty revenue will follow Schedule M
the sale of goods section) determinable with reasonable IFRS, except to the extent computation
• It is probable that the not expected
have been met. economic benefits will flow to accuracy. There is a fixed right of advance payments that
[SAB 104] to receive income upon the generally may be deferred to change.
the entity; and
earlier of the income being for tax purposes only for
• Revenue can be measured due, paid, or earned. See, for one year as provided under
reliably. example, Rev. Rul. 84-31. Rev. Proc. 2004-34.
With respect to royalties,

revenue generally is earned as
the licensed property is used
by the licensee.
Note that case law also

recognizes the concept of
nonaccrual if collection is not
reasonably assured.
Construction SOP 81-1 applies to IAS 11 applies to the accounting Construction and certain No method change No method
contracts— accounting for the for construction contracts in manufacturing contracts must should be required as change.
criteria performance of contracts the financial statements of be accounted for using the the tax specific criteria to
for which specifications contractors. A construction PCM under §460, assuming determine contracts subject Possible
are provided by the contract is one that is specifically certain criteria are met. to PCM under §460 differs change in the
customer for the negotiated for the construction from both the US GAAP computation
construction of facilities, of an asset or a combination of In general, construction and IFRS criteria. of Schedule
the production of goods, assets that are closely interrelated contracts subject to §460 M, particu-
or the provision of related or interdependent in terms of their PCM include contracts for However, the difference larly with
services. SOP 81-1, design, technology, and function construction, building, or between US GAAP and respect to
par. 13 and 14 provide or their ultimate purpose or use. installation of real property IFRS with respect to manufacturing
examples of what types [IAS 11, par. 3] that span a taxable year. contracts eligible for contracts.
of contracts are included, Manufacturing contracts PCM—with IFRS generally
or excluded, respectively, In addition, IAS 11 covers subject to §460 PCM are excluding contracts for the
from the standard. contracts for services that are contracts that span a taxable production of goods—likely
[SOP 81-1, par. 11, 13-14] directly related to the construction year for the production of will mean more contracts
of the asset, contracts for the “unique” property or of will be accounted for
destruction or restoration of property that normally takes using PCM for tax than
assets, and contracts for the more than twelve months IFRS, leading to additional
restoration of the environment. to produce. However, complexities in computing
[IAS 11, par. 3-5] exceptions to mandatory book-tax differences and
PCM are provided for home larger deferred tax assets.
Construction contracts do not construction, residential
include contracts for the recurring construction, small contractor
production of goods, such as construction, and shipbuilding
homes built on speculation or contracts.
goods produced as part of the
seller’s normal inventory. If the contract is not subject
to §460, revenue generally
is recognized under §451 as
the goods are provided or
upon receipt of an advance
payment for such goods unless
there is a position to defer the
advance payment under Rev.
Proc. 2004-34 or Treas. Reg.
§1.451-5.
Revenue recognition
US tax method
Construction SOP 81-1 provides for IFRS utilizes a revenue-approach If the contract is subject to Determination of tax PCM No method
contracts— two methods to deter- method of percentage-of- §460, revenue generally is based on a tax cost-to- change.
recognition mine how, and when, completion. When the final recognized using the PCM, cost formula, and without
revenue and expenses outcome cannot be estimated with completion determined recognition of anticipated Computation
should be recognized: the reliably, a zero-profit method based on costs incurred losses, will continue to of Schedule
percentage-of-completion is utilized (wherein revenue is to total estimated costs to differ under IFRS as it did M likely to
and completed contract recognized to the extent of complete. Certain contractors, under US GAAP. change.
methods. costs incurred if those costs (e.g., home construction, Possible
are expected to be recovered). residential construction, small Inclusion of contingent
Within the percentage-of- revenue in the contract acceleration
The gross-profit approach is not construction, and certain of revenue
completion model there allowed. The completed contract ship builders), however, are price is likely to be
are two different accept- accelerated as a result related to
method is also not permissible. exempt (in whole or in part) contingent
able approaches with from the required use of of IFRS. That is, under
respect to the computation Losses on contracts must be both US GAAP and IFRS, revenue.
PCM and may use another
of earned income. The first recognized in full when they permissible method, including contingent revenue is
approach is performed are anticipated. the completed contract method included in total contract
by taking the calculated [IAS 11, par. 22-35] (in whole or in part). Losses price when it is probable
percent-complete and may not be anticipated under and measurable. However,
applying the percentage Contract revenue includes probable is defined under
amounts agreed in the contract tax PCM.
to contract revenues US GAAP as 75–80%
and costs. The second and contingent revenue that is Under the §460 regulations, and under IFRS as >50%.
approach is performed probable and measurable. contract revenue includes The lower threshold for
by taking the calculated Contract costs include estimated all revenue that the taxpayer including contingent
percent-complete and warranty and claims, and reasonably expects to receive revenue under IFRS is
applying the percentage generally exclude materials under the contract. This must expected to impact tax
to contract gross profit. dedicated to the contract include contingent revenue, no recognition because the
Contract costs incurred until they are installed, used, later than when it is included tax rules provide that
are then added to this or applied. for financial reporting purposes contingent revenue must
calculated gross profit to under US GAAP. be included in the total
determine the amount of contract price no later
earned revenue. Under the §460 regulations, than when such revenue
allocable contract costs is included for financial
The completed contract generally include costs reporting purposes
method is only acceptable allocable to the contract under under GAAP (if “GAAP”
(and must be used) in situ- the §263A principles. Allocable is replaced with—or
ations in which an entity costs exclude warranty costs interpreted to mean—IFRS).
does not have the ability to and include materials that are
make reliable estimates. dedicated to the contract. Similarly, the treatment of
warranty and claims as
For circumstances in allocable contract costs
which reliable estimates under IFRS, as well as not
cannot be made, but there allocating raw materials
is an assurance that no until they are used under
loss will be incurred on a IFRS, will backload costs
contract (e.g., when the under the IFRS cost-to-cost
scope of the contract is formula and have the effect
not well defined, but the of slowing down revenue
contractor is protected recognition for IFRS as
from an overall loss), the compared to tax.
percentage-of-completion
method based on a zero-
profit margin, rather than
the completed-contract
method, is recommended
until more precise esti-
mates can be made.
Losses on contracts must

be recognized in full when
they are anticipated.
[SOP 81-1]
US tax method
Construction The basic presumption IAS 11 generally applies Section 460 generally applies It is expected that IFRS No method
contracts— is that each contract separately to each construction separately to each contract. could require contracts to change.
combining and is the profit center for contract. However, for a contract However, in certain cases, be severed more often than
segmenting revenue recognition, cost that covers a number of assets, a single contract must be under US GAAP or tax. Tax Possible
accumulation, and income each asset must be treated as a severed, or one or more will need to “unsever” any change in the
measurement. However, separate contract if: contracts must be aggregated, contracts subject to PCM computation
that presumption may be of Schedule
• Separate proposals have been depending on whether there is to determine the amount
M.
overcome if a contract, submitted; independent or interdependent of revenue to recognize
or a series of contracts, pricing, whether there from a tax perspective.
meets the conditions for • Each asset has been subject to is separate delivery and In such circumstances,
combining or segmenting. separate negotiation; and acceptance of the items, and the computation of the
[SOP 81-1, par. 35-42] • The costs and revenues of whether a reasonable business book-tax difference will
each asset can be identified. person would enter into one become more complex,
contract without entering into and it is likely PCM
Conversely, a group of contracts the other. revenue recognition will be
must be treated as a single accelerated for tax.
contract when: However, severing of long-term
• The group of contracts contracts otherwise subject to
is negotiated as a single PCM is allowed only with the
package; consent of the Commissioner.
• The contracts are so closely

interrelated that they are, in
effect, one contract with an
overall profit margin; and
• The contracts are performed
concurrently or in a continuous
sequence.
[IAS 11, par. 8-9]
Revenue recognition
US tax method
Advance Advance payments Advance payments are generally Advance payments generally Specific methods are No method
payments are deferred and deferred and recognized when are recognized upon receipt. prescribed for advance change.
recognized when earned earned in accordance with the See, for example, Schlude payments for tax purposes
in accordance with the applicable IFRS criteria described and Rev. Rul. 84-31. However, and those methods will not Possible
applicable US GAAP in the above sale of goods and certain administrative excep- change as a result of IFRS change in the
criteria described in the service arrangements sections. tions allow limited deferral of adoption. computation
above sale of goods and [IAS 18 Appendix, par. 3-4] advance payments, including, of Schedule
service arrangements for example, Treas. Reg. However, adoption M.
sections. §1.451-5 (advance payments of IFRS could result
in acceleration of the Acceleration
[SAB 104] for goods, services, licenses of of revenue
certain IP, etc), to the extent of recognition of advance
payments deferred under possible,
the book deferral. particularly in
the methods prescribed
Under Treas. Reg. §1.451-5, in Treas. Reg. §1.451-5 or the software
advance payments generally Rev. Proc. 2004-34 due to industry.
may be deferred until earned the fact that revenue could
(or for two years following the be recognized sooner for
receipt of substantial advance book purposes under IFRS
payments) as long as they are (see, for example, multiple
deferred for book purposes. element arrangements,
Similarly, under Rev. Proc. which is discussed above)
2004-34, qualifying advance and tax deferral is only
payments generally may be allowed to the extent of
deferred for one year to the book deferral.
extent they are deferred for
book purposes.
Note, the deferral provisions

under §455 and §456 do not
contain book conformity rules.
Non-refundable Unless the upfront A non-refundable upfront fee An upfront fee is generally Because the tax law No method
upfront fees payment is in exchange should be recognized when recognized as revenue upon generally only allows the change.
for a product, service, or earned in accordance with the receipt under §451 unless deferral of upfront fees to
right and represents the applicable IFRS criteria described there is a position to defer the the extent that the book Possible
culmination of a separate in the above sale of goods and upfront fee under Rev. Proc. method defers the fee, change in the
earnings process, the service arrangements sections. 2004-34 (for one year) or Treas. a change to recognize computation
upfront fee should be [IAS 18] Reg. §1.451-5 (for at least two upfront fees under IFRS will of Schedule
deferred over the longer years). result in earlier recognition M.
of the contractual life of of the fees for tax. Possible
the arrangement or the acceleration
customer relationship life. of revenue.
However, in circumstances
where the contractual
period is sufficiently long
and the customer has a
substantive decision to
make about renewal at
the end of the contract
term, the upfront fee may
be amortized over the
contract term. Revenue
should be recognized
systematically over the
periods that the fees are
earned (generally on a
straight-line basis).
[SAB 104, Topic 13A (3f)]
US tax method
Gross vs. net EITF 99-19 clarifies under Revenue includes only the gross Determination of gross or No significant implications No method
reporting (agent which circumstances a inflows of economic benefits net reporting generally is are expected to result from change.
vs. principle) company should present received and receivable by governed by agency and cost conversion to IFRS.
revenue based on: the entity on its own account. reimbursement principles as No change
in the
• The gross amount billed Accordingly, in an agency developed under case law.
computation
to a customer because relationship, the gross inflows That is, amounts collected
of Schedule M
it has earned revenue of economic benefits include on behalf of third parties in
amounts collected on behalf of an agency relationship are expected.
from the sale of the
goods or services; or the principal and which do not not revenue.
result in increases in equity for
• The net amount retained the entity. The amounts collected In addition, amounts received
(i.e., the amount billed on behalf of the principal are not as a fixed reimbursement for
to the customer less revenue. Instead, revenue is the an expenditure are not income
the amount paid to a amount of commission. under the cost reimbursement
supplier) because it has [IAS 18, par. 8] doctrine. Similarly,
earned a commission or expenditures made subject to
fee from the supplier or a fixed right of reimbursement
service provider. are not deductible.
There are at least 11

indicators that should
be considered in this
evaluation. While the
EITF concluded that no
one factor should be
determinative, the SEC
staff has indicated that
they believe the first
indicator (i.e., who the
primary obligor in the
transaction is) will be
very important in the
assessment of the gross
versus net presentation.
[EITF 99-19]
Revenue recognition
US tax method
Barter In order for barter In an exchange of dissimilar Under general tax principles, It appears that tax will No method
transactions transactions to be nonmonetary assets (not involving the amount realized from a more closely align with change.
recognized at fair value, advertising services), revenue barter transaction generally IFRS reporting of revenue
sufficient evidence of the is measured at the fair value of is determined based on from non-advertising Schedule
fair value of the items the goods or services received the fair value of the goods barter transactions, under M could be
being exchanged must (adjusted by the amount of received and such amount which revenue generally is changed or
exist. In addition, an any cash or cash equivalents generally must be recognized determined based on the eliminated
exchange must also have transferred). If this value is not upon consummation of the value of assets received. with respect
commercial substance reliably measurable, then entities transaction. As such, it is likely that to recognized
and not be for products in can use the fair value of the goods a Schedule M related barter
the same line of business or services given up (adjusted Certain exceptions to to recognized barter transactions.
to facilitate sales to by the amount of any cash or recognition exist, however, with transactions could be
respect to exchanges of similar eliminated. Possible
customers. [APB 29, par. cash equivalents transferred) to impact on
25 and FAS 153] measure the transaction. goods. For example, §1031
provides for non-recognition However, tax may not align effective tax
[IAS 18, par 12] rate related to
For other than advertising- treatment for certain like-kind with IFRS with respect
to-advertising barter An exchange of similar exchanges (not including to the non-recognition of exchange of
transactions, it should nonmonetary assets (whether exchanges of inventory). an exchange of similar advertising
be presumed that the fair for advertising or not) is not Another similar exception nonmonetary assets, unless services
value of the nonmonetary a transaction that generates arguably is found in Treas. the transaction qualifies (i.e., non-
asset exchanged is more revenue under IAS 18. Regs. §1.1001-1(a), which for a specific exception recognition
clearly evident than the [SIC 31, par. 3 and IAS 18, par. 12] provides that where property to recognition for tax transaction
fair value of the asset is disposed of in exchange purposes. for IFRS;
received and that the A seller that provides advertising for money or other property recognition
transaction should be services in its ordinary course differing materially either in Tax also may not align with transaction
reported at the fair value of business recognizes revenue kind or in extent, gain or loss IFRS with respect to the for tax).
of the nonmonetary from a barter transaction involving would be realized, implying that provision of advertising
asset exchanged. advertising when, among other when property is disposed of services in exchange for
[EITF 93-11 ] criteria, the services exchanged in exchange for property which similar advertising services
are dissimilar and the amount of is similar in kind or in extent, as this is a non-recognition
With respect to revenue can be measured reliably. there is a non-realization event. transaction for IFRS
advertising-for-advertising [IAS 18, par. 12 and 20a] Finally, an exchange of identical but likely a recognition
barter transactions, products could be viewed transaction for tax
revenue and expenses Revenue from a barter transaction purposes.
involving advertising cannot be as a loan of the product with
should be recognized repayment in-kind, assuming
at fair value if the fair measured reliably at the fair value
of advertising services received, the arrangement has sufficient
value of the advertising indicia of a loan including, but
surrendered in the but rather only at the fair value
of advertising services provided, not limited to, an unconditional
transaction is determinable promise to pay.
based on the entity’s by reference to non-barter
own historical practice. advertising transactions that TAM 200147032 provides that
If the fair value of the meet specified criteria. advertising revenue in a barter
advertising surrendered [SIC 31, par. 5] transaction must be recognized
in the barter transaction as the advertising services are
is not determinable, the provided.
barter transaction should
be recorded based on the
carrying amount of the
advertising surrendered,
which likely will be
de minimis.
[EITF 99-17]
Revenue recognition
(application to specific items)
In December 2008, the FASB and the IASB jointly issued the discussion paper, “Preliminary Views
on Revenue Recognition in Contracts with Customers.” This discussion paper proposes changes
to both US GAAP and IFRS that, if ultimately included in a new standard, would have potentially
significant ramifications to revenue recognition. This publication does not analyze the potential
implications of this discussion paper. We strongly recommend, however, that companies closely
monitor this discussion paper, as well as other emerging guidance, and actively participate in the
analysis during the comment period.
US tax method
Software EITF 00-21 (as discussed IFRS does not provide specific An analysis must be performed It is expected that IFRS No method
deliverables— in the sale of goods guidance on software related to determine whether the will allow unbundling change.
multiple subject to installation, transactions, other than to indicate transfer of the software is a sale of software licensing
element service arrangements that fees from the development (generally when all substantial agreements, resulting Computation
arrangements with right of refund, of customized software are rights are transferred) or a in an earlier recognition of Schedule
and multiple element recognized as revenue by reference license (generally when less of income under IFRS. M likely to
arrangement sections to the stage of completion of than all substantial rights As a result, to the extent change.
above) applies when the development, including are transferred). advance payments are Acceleration
a transaction has completion of services provided received with respect to of revenue
deliverables that are for post-delivery service support. Revenue is generally licensing agreements,
recognized under §451 as the related to
covered by revenue Accordingly, the general principles revenue will be accelerated advance
recognition guidance related to the sale of goods and software is provided (if sale) for tax, as well.
or used (if licensed) or upon payments
that provides no provision of services as described likely. Consider
guidance for separation above in the revenue recognition receipt of an advance payment
for such software, unless seeking
and allocation. section must be applied. IRS relief to
[IAS 18 Appendix, par. 19] there is a position to defer the
For a transaction with advance payment under Rev. spread effect
multiple deliverables In addition, software arrangements Proc. 2004-34 or Treas. Reg. of revenue
solely within the scope that contain multiple deliverables §1.451-5. acceleration
of SOP 97-2 with should be assessed based on the even though
respect to software, separation principles described Under Treas. Reg. §1.451-5, no method
revenue recognition is above in the multiple element advance payments for goods change
complicated and will vary arrangements section (e.g., relative generally may be deferred required.
with the nature of each of fair value). VSOE, which is not a until earned (or for two years
the deliverables and how, defined concept in IFRS, is a following the receipt of
if at all, each deliverable higher threshold than fair value substantial advance payments)
relates to, or impacts under IFRS. Accordingly, under as long as they are deferred for
another element. IFRS, an entity may meet the fair book purposes. Similarly, under
value threshold earlier than under Rev. Proc. 2004-34, qualifying
In general, SOP 97-2 US GAAP. advance payments (including
requires vendor specific payments for goods, services,
objective evidence and certain IP licenses)
(VSOE) of the fair generally may be deferred for
value for each element one year to the extent they are
if an arrangement deferred for book purposes.
were to be unbundled
(with the appropriate
revenue recognition
criteria applied to
each separately
identifiable element). If
the prescribed level of
evidence (e.g., VSOE of
fair value) is not available
to the vendor, all revenue
from the arrangement
generally must be
deferred (unless specific
exceptions are met or
the residual method
can be applied).
[SOP 97-2]
Revenue recognition (application to specific items)
US tax method
Service There is no direct US Under IFRIC 12, “operators” of The construction element Due to the specific No method
concession GAAP guidance on public infrastructure (e.g., roads, of the contract generally is rules prescribed for tax change.
arrangements service concession bridges, tunnels, prisons, and recognized using the cost-to- purposes to account for the
(infrastructure arrangements. hospitals) that are contractually cost percentage-of-completion construction and service Computation
deals) obligated to construct, operate, method under §460. elements of the contract, of Schedule
maintain and upgrade such no method change is M likely to
infrastructure for the grantor The operation and maintenance expected as a result of the change.
(typically a governmental body) elements of the contract conversion to IFRS.
are treated as service providers generally are carved out from
and revenue is recognized in the contract under the §460 However, the recognition
accordance with IAS 11 and regulations and recognized of the service element
IAS 18. as service revenues when the of the contract using the
all-events test of §451 is met POC method under IFRS
If the operator performs more than (i.e., the earlier of when due, could create significant
one service (e.g., construction or paid, or earned with earned administrative burdens
upgrade services and operations), being determined based for taxpayers that must
consideration must be allocated to on completion of required convert from POC under
each deliverable by reference to the services). However, see IFRS to an accrual method
relative fair values of the services Koch Industries. for tax purposes.
delivered, when the amounts are
separately identifiable. Generally,
for construction or upgrade
services, revenue is recognized
under IAS 11 using the percentage-
of-completion (POC) method. For
operation services, revenue is
recognized under IAS 18 using
the POC method.
Contra receivables
US tax method
Allowance Companies are required Determination of a provision for Tax law under §166 allows a It is more likely under Possible
for doubtful to record accounts bad or doubtful debts is based on bad debt deduction for wholly IFRS than US GAAP that method
accounts receivable at net the impairment rules for financial worthless debt, or for partially companies will establish change.
realizable value (or the assets in IAS 39, which generally worthless debt that has been bad debt reserves for
amount expected to requires objective evidence of charged off the books. Some specific receivables, in Possible
be received in cash). impairment. taxpayers treat the write off which case tax will be able change in the
Accordingly, companies of the allowance account to follow book and deduct computation
often establish an IFRS prohibits the recognition as charging the debt off the the related allowance (or elimination)
allowance for doubtful of a provision for unplanned books, while others follow case account to the extent the of Schedule
accounts in which an or unexpected losses. Such law that treats debt as charged debt is wholly or partially M.
estimate is made of the assessment of impairment is off the books when the debt is worthless.
performed individually for financial Possible
expected uncollectible specifically reserved. See, for acceleration
accounts from all sales assets that are individually example, Brandtjen & Kluge, If the taxpayer currently is
significant, and individually or disallowing the entire bad of tax
made on account or from Inc. v. CIR, 34 T.C. 416. deductions.
the total of outstanding collectively for financial assets that debt reserve, a method
receivables. are not individually significant. change would be required
to change to a method
If an entity determines that no that deducts bad debt in
objective evidence of impairment accordance with §166.
exists for an individually assessed
financial asset, whether significant
or not, it includes the asset in
a group of financial assets with
similar credit risk characteristics
and collectively assesses them
for impairment.
Assets that are individually

assessed for impairment and for
which an impairment loss is or
continues to be recognized are
not included in a collective
assessment of impairment.
[IAS 39, par. 64]
Rights of return FAS 48 specifies strict Revenue is generally recognized at Tax requires recognition of Existing difference between No method
criteria that must be the time of sale provided the seller revenue under §451 even when US GAAP and tax expected change.
met in order for revenue can reliably estimate future returns a right of return exists to the to continue under IFRS.
to be recognized when and recognizes a liability for returns extent ownership is transferred Possible
a buyer has the right based on previous experience and (e.g., not a consignment sale) change in the
(either explicit or implicit) other relevant factors. as the possibility of a return computation
to return a product. [IAS 18, par. 17] generally is viewed as a of Schedule
[FAS 48] condition subsequent. M.
To the extent the return is fixed

at year-end (e.g., sometimes
occurs when the taxpayer
has been notified of the return
by year-end), the amount is
reasonably determinable and
payment is made within eight
and a half months under the
recurring item exception, a
return liability may be accrued
for tax.
Inventory
US tax method
Scope of Inventory does not Inventory may include intangible Inventory generally includes Book classification should N/A
inventory include intangible assets. assets that are produced for resale tangible personal property held not impact tax methods.
(e.g., software that is produced for sale (e.g., software held
for resale). for sale that is embodied in a
tangible medium).
Consistency The cost formula can The same cost formula is applied Cost is defined under §471, The IFRS requirement Method
of group differ by product or to all inventories having a similar but determination of cost under for a consistent cost changes likely.
policies for region. For example, the nature and use to the entity. §471 for tax purposes generally formula likely will result in
cost formulas same product may be follows financial statements. changes in the costs that Consider
costed differently if it is are inventoried for book seeking
produced in two different Uniform capitalization rules purposes. IRS relief in
locations. under §263A effectively require the form of
consistency of cost formula Because reclassifications automatic
across all locations. between §471 (book) costs consent for
and §263A (tax) costs such changes.
are considered changes
in accounting method by Computation
the IRS, method changes of Schedule
likely will be required even M likely to
though the same costs change.
continue to be capitalized
for tax purposes. Currently,
a change between
§471 and §263A is a
non-automatic method
change that requires the
advance consent of the
Commissioner.
Determination Cash consideration Trade discounts, rebates, and The cost of inventory must Generally, tax will follow Possible
of cost—trade, received from a vendor other similar items, including cash be reduced by trade or other book under IFRS as it did method
cash, and other is presumed to be discounts for early payment, are discounts. In comparison, a under US GAAP. change will be
discounts a reduction of the deducted in determining the costs taxpayer has the option of desired.
inventory price unless: of purchases. either reducing inventory costs However, the IFRS
or recognizing income for requirement to reduce Possible
• Payment can be inventory cost for reduction in
specifically identified cash discounts (i.e., discounts
provided by vendors for anticipated cash discounts cash tax.
with separate assets could create an opportunity
or services to be early payment), provided a
consistent course is followed. for a cash discount method
delivered to the change if the taxpayer
vendor; or currently is recognizing
• Payment is shown to cash discounts as income
be a reimbursement (as opposed to a reduction
of costs. in inventory cost) for tax.
[EITF 02-16]
Inventory
US tax method
Inventoriable Cost is defined to The cost of inventories shall In general, the cost of Certain costs (such as Method
costs mean acquisition and comprise all costs of purchase, inventory under §471 and offsite storage and handling changes likely.
production cost. Offsite costs of conversion, and other §263A includes direct costs costs necessary to bring
storage and distribution costs incurred in bringing the and indirect costs that are inventories to their present Consider
costs are deducted. inventories to their present location directly related to or incurred location and condition) seeking
G&A costs are normally and condition. by reason of the production or that are not inventoriable IRS relief in
treated as current period resale activity. Indirect costs under US GAAP will be the form of
costs, unless such Requires expensing of offsite generally include distribution inventoriable under IFRS. automatic
expenses can be clearly storage and holding costs, except and transportation costs, other In general, these costs consent for
related to production. those necessary to hold inventories than costs to distribute directly also are inventoriable such changes.
Selling expenses during the production process. to a customer. In addition, for tax purposes under Computation
are never treated as storage and handling costs §263A and thus have been of Schedule
inventory costs. (including offsite storage and treated as additional §263A M likely to
handling not at a retail sales costs. Thus, there will be change.
facility) generally are required to no change in the ending
be capitalized under §471 and/ inventory value following an
or §263A. Selling costs are not IFRS conversion.
inventoriable costs.
However, because
reclassifications between
§471 (book) costs and
§263A (tax) costs are
considered changes in tax
accounting methods by
the IRS, method changes
likely will be required even
though the same costs
continue to be capitalized
for tax purposes. Currently,
a change between
§471 and §263A is a
non-automatic method
change that requires the
advance consent of the
Commissioner.
US tax method
Asset Under US GAAP, AROs The costs of obligations for Restoration costs that Because the tax law No method
retirement are added to the carrying dismantling, removing, and materially enhance the value has special rules to change
obligations amount of the related restoring the site on which an item of property, substantially determine the treatment of should be
(AROs) and item of property, plant is located that are incurred as a prolong the life of property, dismantling, removal and required.
environmental and equipment. The consequence of having used the or adapt property to a new or restoration costs, as well as
remediation resulting depreciation item to produce inventories during different use are treated as environmental remediation Computation
costs is treated as an the period are not added to the capital improvements to the costs that differ from both of Schedule
inventoriable cost if carrying amount of the property, property under §263(a) and are US GAAP and IFRS, no M likely to
the asset relates to plant, and equipment. Rather, such capitalized and depreciated. method change should be change.
the production. costs are accounted for as costs The resulting depreciation is required.
to produce the inventory and are treated as an inventoriable cost
Environmental either capitalized or expensed in if the improved asset relates to The computation of the
remediation costs are accordance with the inventories production or resale. Removal book-tax difference likely
distinguished from asset standard, IAS 2. costs generally are deductible. will change under IFRS,
retirement obligations. however, because future
A liability is recorded Environmental remediation costs Rev. Rul. 2005-42 requires AROs and environmental
if it is probable that a are not distinguished from AROs. certain otherwise deductible remediation costs must
liability has been incurred environmental remediation be removed from book
and the amount can be costs, that may include inventory directly (and
reasonably estimated. decommissioning and under US GAAP, AROs
Guidance for the restoration costs, to be treated typically are removed from
application of “probable” as an inventoriable production book inventory as part of
and “reasonably cost. However, such costs may the book-tax depreciation
estimated” in relation not be included in inventory adjustment while
to environmental costs until they have been environmental remediation
obligations is located in properly incurred under §461 costs are not included in
SOP 96-1. Such costs (i.e., the liability is fixed and inventory).
are not inventoriable. determinable and economic
performance has occurred).
Abnormal costs The allocation of fixed The allocation of fixed production A taxpayer is not permitted The IFRS rules are Generally,
production overhead overhead is based on the normal to deduct fixed overhead expected to follow US no method
is based on the range capacity of the production facility. costs that may be expensed GAAP. Tax prescribes change
of “normal capacity.” The amount of fixed overhead for book purposes for below specific rules that differ required.
Normal production allocated to each unit of production normal capacity (i.e., practical from both. Accordingly,
capacity is the is not increased as a result of low capacity). An exception is no method change should Possible
production expected production or an idle plant. provided, however, that allows be required as long as change in the
over a number of the depreciation of temporarily the taxpayer is properly composition
periods or seasons under idle equipment to be expensed. applying the tax rules. of Schedule
normal circumstances A taxpayer generally is not M.
taking into account loss permitted to deduct abnormal
of capacity. production costs.
Abnormal costs such

as idle facility expense
or excessive spoilage
should be included in
current period charges
rather than deferred as
a portion of inventory
costs.
Inventory
US tax method
Cost flow Methods of determining The LIFO method is prohibited. Section 472 allows the use Because a LIFO method Method
the cost of inventory Available methods of determining of LIFO, but only if a LIFO generally cannot be used change will
include LIFO, FIFO, the cost of inventory include FIFO, method will be used for for tax purposes unless be required
weighted average weighted average, and specific reporting income to partners, a LIFO method is used for companies
cost, and specific identification. shareholders, and creditors. for financial reporting using LIFO.
identification. (However, see special rules purposes, a method change
in Rev. Rul. 78-246 related to likely will be required for Increase in
foreign-owned companies.) companies using a LIFO cash tax.
Other permissible methods inventory method.
include FIFO, average cost,
and specific identification.
Valuation Inventory is stated at the Inventory is stated at the lower of Inventory can be measured No method change should Generally,
lower of cost or market cost or net realizable value. Net under §471 at either cost or be required because tax no method
(LCM). Market is defined realizable value is the estimated LCM. Market for normal goods LCM is generally different change.
as current replacement selling price less the estimated for tax purposes generally than LCM as applied for
cost, provided that: costs to complete the item and is defined as replacement either US GAAP or IFRS. Possible
to complete the sale. or reproduction cost and is Market for tax purposes change in the
• “Market” should computation
not exceed the net determined on an item basis. is defined as replacement
Market may not be determined cost, irrespective of of Schedule
realizable value (i.e., M.
estimated selling price on an aggregate basis. whether net realizable
in the ordinary course value is less than
The regulations under §471 replacement cost.
of business less also provide for subnormal
reasonably predictable good write-downs to net
costs of completion realizable value. Note that the
and disposal); and determination of net realizable
• “Market” should value for tax purposes may
not be less than differ from both US GAAP
net realizable value and IFRS.
reduced by an
allowance for an
approximately normal
profit margin.
Depending upon
the character and
composition of the
inventory, this rule is
either applied to each
item, each class, or in
the aggregate.
Reversal of US GAAP prohibits the If the net realizable value of an Tax requires the reversal of No method change should No method
write downs reversal of a write-down. item that has been written down write downs if market is higher be required because tax change.
increases subsequently, then the than cost as inventory must rules are not impacted
write-down is reversed (limited be valued at the lower of cost by financial accounting Possible
to the amount of the original or market at the balance treatment. change in the
write-down). sheet date. computation
Possible elimination of of Schedule
book-tax differences M.
because both tax and
IFRS require reversal of
write-downs.
Property, plant, and equipment (PP&E)
US tax method
Valuation Requires historical cost Permits historical cost or fair Cost generally must be used No method change will No method
accounting. value accounting. Thus, allows as the basis of PP&E. See, be required because tax change.
revaluation of PP&E at fair value for example, §167(c), which will continue to follow the
Possible
(FV). However, use of FV model is provides that the basis for historical cost model.
change in the
expected to be rare and if used, depreciation is the adjusted
Moreover, it is anticipated computation
will only be for significant asset basis provided in §1011;
that very few taxpayers of Schedule
classes, such as buildings. §1011, which provides that the
will choose to use the FV M.
adjusted basis for determining
model for book purposes
gain or loss shall be the basis
under IFRS and that even
as determined by applicable
if the FV model is chosen,
sections, including §1012;
it will be used only for
and §1012, which provides,
certain asset classes that
generally, the basis of property
will not be too difficult to
is the cost.
track for tax purposes.
Nonetheless, a taxpayer
that chooses the FV model
under IFRS should maintain
records that show the cost
of the property acquired
and disposed of for tax
purposes.
Deferred In accordance with FASB The cost of the PP&E is the cash Cost generally must be used No method change should No method
payment for Concepts Statement price equivalent at the recognition as the basis of PP&E. See, be required because tax change.
asset No. 5, PP&E is reported date. If payment is deferred beyond for example, §167(c), which should continue to follow
No change
at its historical cost, normal credit terms, the difference provides that the basis for the tax specific rules
in the
which is the amount of between the cash price equivalent depreciation is the adjusted with respect to deferred
computation
cash, or its equivalent, and the total payment is recognized basis provided in §1011; payments.
of Schedule M
paid to acquire an as interest over the period of credit §1011, which provides that the
In the event the actual cost expected.
asset. Payments unless such interest is capitalized in adjusted basis for determining
of an asset is discounted
deferred beyond normal accordance with IAS 23. The core gain or loss shall be the basis
to reflect the cash price
credit terms would be principle in IAS 23 is that borrowing as determined by applicable
equivalent for IFRS, but
measured at the present costs that are directly attributable sections, including §1012;
should not be discounted
value of the future to the acquisition, construction, and §1012, which provides,
for tax, the taxpayer will
payments discounted or production of a qualifying asset generally, the basis of property
need to track and adjust
using a market rate form part of the cost of that asset. is the cost.
tax basis.
of interest. Therefore, any deferred payment
However, the cost of property
terms are effectively a financing
acquired with debt is
mechanism and interest should
determined based on the issue
be recognized over the period of
price of the debt if payment is
credit—either in the P&L or as part
deferred. If the debt does not
of the cost of the PP&E.
have adequate stated interest,
interest will be imputed such
that the issue price (and thus
the cost of the property) will be
lower than the face amount of
the debt. Note that exceptions
to this general rule exist,
including, for example, for
certain debt with a term of less
than one year and certain
small loans.
US tax method
Components Permits the “separate Requires separate significant Must follow the unit of property The determination of a No method
of assets— significant component” components of an item of PP&E (UOP) principles established UOP for tax purposes will change.
aggregation/ method, but does not to be recorded and depreciated under case law until the final be significantly different
Significant
separation require it. separately. tangible regulations under from book under IFRS as
change in
§263(a) are effective. compared to US GAAP.
For example, an airplane likely Schedule M
As a result, taxpayers
will be treated as several units Generally, under case law, the computations
theoretically will need
of property, including airframe, UOP is determined considering regarding
to analyze separate
engines, landing gear, etc. the functional interdependence depreciation,
significant components to
of one component with gain/loss on
determine the appropriate
another component. Separate disposals, and
tax treatment under
significant components repairs.
UOP rules, and where
typically are not treated as
required, combine Taxpayers
separate units of property.
separate components may want
See, for example, FedEx.
into a single UOP. to seek IRS
relief to
The differences between
allow a book
tax and IFRS UOP will
conformity
necessitate tracking
safe harbor in
different assets, different
determining
placed in service dates,
the UOP
and different disposal
before the
dates. The different rules
tangible
also will significantly
regulations
complicate the analysis
are finalized.
of whether a “repair” is
a capital improvement
and must be capitalized
under §263(a) because
such determination must
be made considering the
relevant UOP. In general,
a smaller UOP under IFRS
could result in earlier placed
in service dates, more
frequent disposals, and
more frequent capitalization
of repairs.
US tax method
Components US GAAP allows Subsequent expenditures are Under Rev. Rul. 2000-7, if the No method change should No method
of assets— for capitalization of covered by the same recognition retirement and removal of a be required assuming change.
removal costs subsequent expenditures principles as the original PP&E depreciable asset occurs in removal costs are
Possible
if the expenditure purchase. An entity should connection with the installation deducted, as allowed for
change in the
benefits future periods recognize, in the carrying amount or production of a replacement tax purposes.
computation
by extending the useful of PP&E, the cost of replacing part asset, the costs incurred in
Moreover, tax appears to of Schedule
or productive life of the of an asset when that cost is removing the retired asset are
be more similar to IFRS M.
asset. However, there is incurred if the recognition criteria not required to be capitalized
than US GAAP with respect
no requirement that the are met. The carrying amount of the under §263(a) or §263A as part
to removal costs that relate
carrying amount of the parts that are replaced should be of the cost of the replacement
to a separate UOP that also
parts that are replaced written off to expense at the asset. Any remaining basis
is being written-off for tax
be expensed. time of replacement. in the retired asset also is
purposes. Thus, book-tax
[IAS 16] recognized as a loss.
differences associated with
removal costs capitalized
for book purposes under
US GAAP likely will be
eliminated. However, due
to significant differences
between IFRS and tax
regarding the determination
of a UOP, book-tax
differences generally
will continue.
Asset Under US GAAP, AROs The cost of an item of PP&E AROs included in the basis Book-tax difference No method
retirement are added to the carrying includes the initial estimate of the of fixed assets for financial continues and possibly change.
obligations amount of the related costs of dismantling and removing statement purposes need to be increases under IFRS.
Possible
(AROs) item of PP&E and the item and restoring the site on removed for tax purposes.
Taxpayers should adjust change in the
depreciated over the which it is located if the obligation
A tax deduction is allowed the book basis of fixed computation
useful life of the asset. to dismantle or restore is incurred
when the ARO is actually assets for tax purposes by of Schedule
either when the item is acquired
The ARO is remeasured incurred under §461. removing the estimated M.
or is incurred as a consequence of
when there is a change future retirement obligation
using the item for purposes other
in the estimated future in order to avoid over
than to produce inventories.
cash flows. depreciating the
[IAS 16, par. 16]
associated asset.
The obligation is remeasured when
Taxpayers also should take
there is a change in cash flows
the deduction for the asset
required to settle the obligation or a
retirement liability once it
change in the current market-based
is actually incurred for
discount rate.
tax purposes.
Remeasurement of ARO
under IFRS could occur
more frequently than under
US GAAP, giving rise to
more frequent book-tax
differences.
US tax method
UNICAP interest FAS 34 requires Beginning January 1, 2009, Interest capitalization is Taxpayers must continue No method
capitalization, capitalization of interest borrowing costs that are directly required under §263A(f) during to capitalize interest costs change.
in general costs while an asset is attributable to the acquisition, the production period of as required under §263A(f)
Possible
being prepared for its construction, or production of a designated property, which and thus a method change
change in the
intended use. qualifying asset are required to be generally is: should not be required. A
computation
capitalized as part of the cost of • Real property; book-tax difference would
Generally, the use of the of Schedule
that asset. Prior to January 1, 2009, continue to result, though
avoided cost approach is • Tangible personal property M.
capitalization of borrowing costs the difference likely will
required to determine the with an estimated
was optional. be less beginning in 2009
capitalization of interest. production period exceeding when interest is required to
Generally, a weighted To the extent that an entity borrows two years; or be capitalized under IFRS
average borrowing rate is funds specifically for the purpose
• Tangible personal property for certain property that is
applied for capitalization of obtaining a qualifying asset
with an estimated expected to substantially
of interest. However, (e.g., inventory, manufacturing
production period exceeding overlap with designated
when it is clear that a plants, power generation facilities,
one year and estimated property.
specific new borrowing intangible assets, and investment
costs of production
can be identified with properties), the entity shall
exceeding $1M.
a qualifying asset, determine the amount of borrowing
that association may costs eligible for capitalization as The determination of
be made for interest the actual borrowing costs incurred capitalized interest generally
capitalization purposes. on that borrowing during the period is based on the avoided cost
less any investment income on method, but the application of
the temporary investment of specific rules with respect to
those borrowings. eligible debt, related party debt,
etc. differ between US GAAP/
If borrowings cannot be directly
IFRS and tax.
attributed to the asset, then a
weighted-average borrowing rate
may be used.
Interest Investment income is Investment income reduces Investment income earned Taxpayers must continue No method
capitalization, recognized in the P&L. borrowing costs eligible for on borrowed funds may not to capitalize interest costs change.
effect of capitalization. reduce interest expense as required under §263A(f)
New Schedule
incidental subject to capitalization under and thus a method change
M may arise
income §263A(f). Rather, investment should not be required.
or a new
income must be recognized
Conversion to IFRS adjustment
as income in accordance
will create a book-tax to the current
with §451.
difference because interest
incidental income should be capitalization
recognized for tax purposes Schedule M
in accordance with §451 as may result.
opposed to being an offset
to borrowing costs subject
to capitalization under
§263A(f).
Intangible assets and goodwill
US tax method
Intangible US GAAP provides no As with all assets, for an intangible Treas. Reg. 1.263(a)-4 requires No method change should No method
assets specific criteria that must asset to be recognized it must be capitalization of the following be required as tax has change.
separately be met in order for an probable that future economic intangibles: specific capitalization rules
acquired asset to be recorded benefits attributable to the asset that are not affected by No change
• Acquired intangibles; in the
as an intangible asset, will flow to the enterprise and the the financial accounting
other than that outlined cost of the asset can be reliably • Certain self-created treatment. computation
in FASB Concepts measured. The probability criterion intangibles; of Schedule M
Statement No. 6 for is always considered to be satisfied • Separate and distinct The intangible regulations expected.
recognition of an asset. for separately acquired intangible intangibles assets; under §263(a) do not
assets under IFRS. If an intangible have the same criteria to
An intangible asset • Future benefits identified in consider for capitalization
asset is acquired separately, cost is published guidance (none as of intangible assets
that is acquired either measured as the amount paid plus
individually or with a of the date of publication); as IFRS. Instead, the
any directly attributable expenses. and
group of other assets See the cost of intangibles section intangible regulations set
(but not as part of a for examples of directly attributable • Facilitative costs related to out specific items that
business combination) expenses. the above. require capitalization, such
should be initially as acquired intangibles,
recognized and An entity must also have control Thus, separately acquired prepaid expenses, and
measured at its fair value. over the intangible asset in order intangibles always must be certain contract rights.
[FAS 142, par. 9] to recognize it. In other words, capitalized for tax purposes. However, the intangible
the entity should be able to Separately acquired intangibles regulations are based
Under US GAAP, an exclude other parties from using on the same underlying
assembled workforce are amortizable over their
the asset to obtain economic useful life or under a 15 year principles as IFRS, and
may be recognized if it benefit. This control is usually thus it is expected that
is separately acquired safe harbor in Treas. Reg.
accomplished through contractual §1.167-3, as applicable. in many circumstances,
(i.e., not as part of a or other legal restrictions. costs required to be
business combination). [IAS 38, par. 13] capitalized for IFRS must
be capitalized for tax.
Under IFRS, an assembled
workforce may not be recognized Note, an acquired
as an intangible asset. workforce-in-place may be
capitalized and amortized
under §197 (see the
intangible assets purchased
as part of a business
combination section for
more information).
US tax method
Intangible When an intangible asset Recognition criteria for intangible Under Treas. Reg. No method changes No method
assets is purchased as part of assets acquired as part of a §1.263(a)-4(c), the cost of are expected due to change.
purchased a business combination, business combination under IFRS acquired intangibles must specific capitalization and
as part of in order to recognize are the same as under US GAAP. always be capitalized. amortization rules that Schedule M
a business it apart from goodwill, Intangible assets acquired in must be followed for tax computation
combination it must be identifiable. When an intangible asset is the acquisition of a trade or purposes. not expected
An intangible asset purchased as part of a business business generally are §197 to change.
is identifiable if it is combination, in order to recognize intangibles. See §197(d) and Book-tax differences with
separable or if it arises it apart from goodwill, it must be Treas. Reg. §1.197-2(b)(3) for respect to basis differences
from contractual or identifiable. An intangible asset definitions. In general, §197 (e.g., as a result of the
legal rights. is identifiable if it is separable or intangibles are capitalized and assumption of contingent
if it arises from contractual or amortized over 15 years. liabilities and inclusion
Intangible assets are legal rights. of transaction costs) and
separable if they can Other acquired intangibles are amortization are expected
be sold, transferred, Intangible assets are separable amortizable over their useful to continue under IFRS.
licensed, rented, or if they can be sold, transferred, life or under a 15 year safe
exchanged separately licensed, rented, or exchanged harbor in Treas. Reg. §1.167-3,
or together with a separately or together with a as applicable.
related contract, related contract, asset, or liability.
asset, or liability. Intangible assets can also arise
Intangible assets from contractual or other legal
can also arise from rights, regardless of whether those
contractual or other rights are transferable or separable.
legal rights, regardless
of whether those
rights are transferable
or separable.
US tax method
Internally Under US GAAP, costs To qualify for capitalization under Treas. Reg. §1.263(a)-4(d) The lack of certain of the Generally,
generated of internally developing, IFRS, internally generated assets requires the capitalization IFRS requirements (e.g., no method
intangible maintaining, or restoring must meet the definition of an of the following created control and probable change.
assets intangible assets that intangible asset—that is, the asset intangibles: future economic benefit)
are not specifically must be identifiable, the entity under US GAAP allowed Possible
• Financial interests; change in the
identifiable, that have must have control over the asset, certain intangibles to
indeterminate lives, or and future economic benefit must • Prepaid expenditures; be recognized for US computation
that are inherent in a exist. Under IFRS, most internally • Certain memberships and GAAP that will not (or elimination)
continuing business generated intangible assets should privileges; be recognized under of Schedule
and related to an be recognized if the criteria in IAS IFRS, including certain M.
• Certain rights acquired from
entity as a whole, 38 is met. a governmental agency; intangibles related to
are recognized as an advertising (e.g., catalogs),
expense when incurred. Internally generated brands, • Certain contractual rights; contract transition,
mastheads, publishing titles, • Certain contract start-up, pre-opening,
US GAAP does not customer lists, and items similar in terminations; and pre-operating
specify how the costs of substance shall not be recognized costs. Because these
specifically identifiable, as intangible assets. • Certain benefits arising from
real property owned by intangibles (other than
internally-developed start-up) generally are
intangible assets that another; and
not capitalized for tax
have finite lives should • Costs to defend title to purposes, conversion
be treated. Other than property. to IFRS could eliminate
those situations where book-tax differences
specific authoritative or highlight intangibles
literature addresses the capitalized for books that
accounting for certain were not required to be
types of specifically capitalized for tax, in which
identifiable internally case method changes will
developed intangible be desired.
assets (e.g., internally
developed computer
software and advertising
costs), practice is
generally to expense
these costs as incurred.
US tax method
Internally Under US GAAP, Under IFRS, the determination as Research or experimental costs No method change will be No method
generated both research and to whether an internally generated may be expensed currently required because the tax change.
research and development costs intangible asset should be under §174(a), or capitalized treatment of R&E costs
development generally are charged to recognized depends on the phase and amortized over five years will not change following New Schedule
costs expense as incurred. of development in which the cost under §174(b). an IFRS conversion. M likely.
is incurred. Internally generated
assets are created in two phases: Development costs
capitalized under IFRS
• The research phase likely will be eligible for
• The development phase immediate deduction for
tax under §174(a). However,
Expenditures for research shall be analysis likely will be
recognized as an expense when required to substantiate
incurred. all such deductions
An intangible asset arising from under §174. Moreover,
development shall be recognized consideration should
if the entity can demonstrate all of be given to modifying
the following: accounting systems
to capture deductible
• The technical feasibility of R&E costs to avoid the
completing the intangible asset administrative burden of
so that it will be available for use identifying them separately
or sale; for tax.
• Its intention to complete the
intangible asset and use or sell it;
• Its ability to use or sell the
intangible asset;
• How the intangible asset will
generate probable future
economic benefits;
• The availability of adequate
technical, financial and other
resources to complete the
development and to use or sell
the intangible; and
• Its ability to measure reliably
the expenditure attributable to
the intangible asset during its
development.
Capitalization in the development

phase is required if the above
criteria are met, it is not a choice.
US tax method
Cost of An intangible asset For separately acquired intangible Cost is determined under No method change should No method
intangibles that is acquired either assets, cost is defined as purchase §263(a) as purchase price, be required because the tax change.
individually or with a price. inducement costs, and specific costing rules under
group of other assets facilitative costs. Under §263(a) and §263A must Possible
(but not as part of a Directly attributable costs of §263(a), facilitative costs are continue to be followed. change in the
business combination) separately acquired intangible costs incurred in the process computation
should be initially assets include employee costs, of investigating or otherwise Note that book-tax of Schedule
recognized and professional fees arising directly pursuing the transaction. differences may arise M.
measured at its fair value. from bringing the asset to its However, exceptions are related to employee
working condition, and testing provided for the following compensation and benefit
Under both IFRS and costs. Directly attributable costs otherwise facilitative costs in costs, which are not
US GAAP, intangible generally do not include costs certain acquisitions: internal required to be capitalized
assets acquired as of introducing a new product or costs (employee compensation for tax under the §263(a)
part of a business service, costs of doing business in and overhead) and de minimis regulations but are required
combination should a new location or with a new class costs. to be capitalized under
be recognized at their of customers, and administrative or IFRS.
estimated fair value at other general overhead costs. Certain intangibles (e.g.,
the acquisition date. creative property, such as In addition, fees to register
Both IFRS and US For internally generated intangible films, sound recordings, and a patent are deductible for
GAAP specify that in assets, cost includes the cost of manuscripts) also are subject tax under §174, and interest
determining the value materials and services used or to §263A. costs are not capitalizable
to be allocated to consumed plus directly attributable unless attributable to the
intangible assets in costs of preparing the asset for its production of designated
the purchase price intended use. property under §263A(f),
allocation, buyer-specific which for intangibles only
Directly attributable costs of includes certain creative
assumptions (including internally generated intangible
the expected use of the property, such as films.
assets include employee costs,
intangible asset) should fees to register a legal right,
not be considered. amortization of patents and
licenses that are used to generate
the intangible asset, the costs
of materials and services used
or consumed in generating the
intangible asset, and certain
interest. Directly attributable
costs generally do not include
selling, administrative, and other
general overhead costs; identified
inefficiencies and initial operating
losses incurred before the asset
achieves planned performance;
and training costs.
Under both IFRS and US GAAP,

intangible assets acquired as part
of a business combination should
be recognized at their estimated
fair value at the acquisition date.
Both IFRS and US GAAP specify
that in determining the value to be
allocated to intangible assets in the
purchase price allocation, buyer-
specific assumptions (including
the expected use of the intangible
asset) should not be considered.
US tax method
Intangibles An intangible asset Intangible assets, such as these, Under §118, gross income Basis differences will No method
acquired via may sometimes be may be recognized either at fair does not include any continue if the fair value change.
a government acquired free or for a value or nominal value. This is an contribution to the capital of model is chosen for IFRS
grant nominal amount by accounting policy choice. Assets a corporate taxpayer, whether because government Schedule M
way of a government that have been received for free or coming from a shareholder or contributed intangibles that computation
grant. Examples include for a nominal amount are recorded nonshareholder. In general, are excluded from income not expected
allocations of airport at zero or the nominal amount, if government grants that under §118 have no basis to change.
landing rights and the entity has chosen that policy. are not a prerequisite for under §362(c).
import quotas. Any expenditure incurred by the services, but provide only
entity that is directly attributable indirect, intangible benefits Book-tax differences will
Under US GAAP, to preparing the asset for its to the government, such as continue with respect to the
intangible assets that intended use is also included in a benefit to the community book recognition of income
are purchased from the initial measurement of cost. at large, are excluded from and tax exclusion to the
third parties, including If the entity chooses to recognize income as nonshareholder extent §118 applies.
grants from government the asset at fair value, that fair contributions to the extent
entities, are recognized value is determined using an they satisfy the five-part test
following the provisions appropriate method. outlined in Chicago, Burlington,
of FAS 142. Such assets & Quincy. Most notably, the
should be recorded at grant must be bargained for,
fair value, and amortized become a permanent part of
over their economic working capital, and not be a
useful lives. prerequisite for services.
The basis of property that is

obtained by a corporation
through a nonshareholder
contribution to capital is zero
under §362(c).
US tax method
Subsequent Intangibles with finite IAS 38 provides for intangibles Intangibles must be valued Similar book-tax differences No method
measurement lives other than goodwill (other than goodwill) to be using the historical cost model with respect to basis and change.
(and are carried at historical measured either at: under §1012, which likely will amortization under US
amortization) cost, amortized, and differ from cost determined GAAP will continue under Change in
• Cost, less accumulated Schedule M
subject to impairment amortization and impairment; or under IFRS (as it does for IFRS. No method change
testing when there US GAAP) due to differences should be required because computation
is an indictor that an • The revaluation model, if an in purchase accounting the tax specific rules must is expected
impairment may exist. active market exists. rules, contingent liabilities, continue to be followed. if the
capitalizable transactions revaluation
Goodwill and other The revaluation model can only be Taxpayers will need to model is
used if there is an active market for costs, etc.
indefinite lived maintain records that used.
intangibles are not the intangible asset. Intangibles generally may be show the allocation of
amortized but are subject In practice, we expect few amortized for tax purposes tax purchase price and/
to annual impairment intangibles to qualify for this to the extent they are or the cost of the property,
testing as well as treatment. §197 intangibles, have an which is used as tax basis,
impairment testing when ascertainable useful life, or are particularly if the revaluation
there is an indication The concepts behind amortization eligible for the 15 year safe model is used for IFRS
of impairment. of intangible assets are generally harbor provided under Treas. purposes.
the same under IFRS and Reg. §1.167-3. Impairment
The amortizable amount US GAAP. write downs are not permissible
of an intangible asset for tax purposes.
should be allocated
on a systematic basis
reflecting the best
estimate of its useful life.
Amortization of the asset
should reflect the pattern
in which the asset’s
economic benefits are
consumed by the entity.
If that pattern cannot
be determined reliably,
the straight-line method
should be used.
Assessment of There is no explicit Under IAS 38, a company must Treas. Reg. §1.167(a)-3 Taxpayers should consider No method
amortization requirement for a review assess the amortization method, generally provides that an any changes in the useful change.
method of the amortization residual value, and period used for intangible asset may be life under either US GAAP
method or residual value amortizing a finite-life intangible amortized over its useful life. or IFRS to assess the
used for intangible assets asset at least annually. While there is no requirement impact on the tax useful
under US GAAP, but for a periodic review of the life. A method change is
an annual review of the useful life, due consideration not required as any
remaining useful life is should be given to whether the resulting change in the tax
carried out to determine useful life has changed. useful life is not a change
if there are events or in method of accounting
circumstances that Note that a change in useful life for tax purposes.
warrant revision thereof. is not a change in method of
accounting under Treas. Reg.
§1.446-1(e)(2)(ii)(d)(3)(i).
US tax method
Software Under US GAAP, Under IFRS, capitalized software Under Rev. Proc. 2000-50, No method change will be No method
amortization amortization is the costs are amortized on a costs properly attributable to required as the tax specific change.
greater of the amount systematic basis over the useful internally developed software rules must continue to be
that would be recognized life of the asset. The accumulated can be treated as current followed. No change
on a straight-line basis or amortization shall rarely, if ever, be expenses or capitalized and in the
the ratio of current gross lower than the amount that would amortized over three years. Moreover, the book-tax computation
revenues of the product be recognized if the straight-line difference related to the of Schedule M
to the total of current and method was applied. Under §167(f) and Treas. Reg. current deduction and/or expected.
anticipated future gross §1.167(a)-14(b), capitalized amortization periods will
revenues of the product. computer software may be continue.
amortized using a straight line
method over three years.
Negative Recognized as an If the net of the identifiable assets Section 1060 and the No method change is No method
goodwill extraordinary gain. acquired and the liabilities assumed regulations thereunder required because existing change.
exceeds the consideration provide specific allocation book-tax differences
Effective January 1, transferred, before recognition of a rules applicable to asset will continue. That is, No change
2009, a bargain purchase gain, the acquirer should: acquisitions. In the context of a similar to US GAAP, IFRS in the
is no longer recognized bargain purchase, the basis of creates an initial book-tax computation
as an extraordinary gain • Reassess whether it has acquired assets will be reduced difference for income of Schedule M
as it had been under correctly identified all of the expected.
assets acquired and all liabilities below fair value so that no recognized under IFRS
the previous business negative goodwill is created that is not taxable for US
combination standard. assumed and recognize any
additional assets or liabilities that (and no gain is recognized). tax purposes, which is
Bargain purchases will offset by additional basis
be treated similar to the are identified in that review
reported under IFRS as
IFRS treatment. • Review the procedures used to compared to tax basis
measure the amounts required to determined under §1060.
be recognized at the acquisition
date for all of the following:
– The identifiable assets acquired

and liabilities assumed
–T
he noncontrolling interest in
the acquiree, if any
– For a business combination
achieved in stages, the
acquirer’s previously held
equity interest in the acquiree
– The consideration transferred
If an excess amount remains after

applying the requirements above,
the acquirer should:
• Recognize the resulting gain in
the P&L on the acquisition date;
and
• The gain should be attributed to
the acquirer.
US tax method
Acquired Acquired IPR&D is Acquired IPR&D is recognized as a Acquired IPR&D must be For tax purposes, the prior No method
in-process expensed immediately separate intangible asset if it meets capitalized, and is amortized treatment of acquired R&D change.
research and unless it has an the definition of an intangible asset over its determinable useful is continued and thus a
development alternative future use. and its fair value can be reliably life or the 15 year safe harbor method change is not Eliminate
(IPR&D) measured, subject to amortization provided under Treas. Reg. required. Schedule M
Upon the adoption upon completion or impairment. §1.167-3 (unless §197 applies). for basis
of FAS 141(R), US IFRS will eliminate the differences,
GAAP will be similar book-tax basis differences but possibly
to IFRS. IPR&D will in connection with IPR&D create
initially be recognized that is written-off under Schedule M
and measured at fair US GAAP (prior to the for recovery
value and treated adoption of FAS 141(R)). differences.
as indefinite lived, However, there likely will
subject to amortization continue to be book-tax
upon completion or differences under IFRS
impairment. for the difference in
recovery lives.
Impairments
US tax method
Noncurrent US GAAP does not allow IAS 16 and IAS 38 permit fixed In general, a loss is taken under No method change will No method
non-financial assets to be carried assets and certain intangible assets §165 when assets are retired, be required as losses will change.
assets— at revalued amounts. to be carried at revalued amounts. sold, abandoned, destroyed, continue to be recognized
revaluation Noncurrent assets are Revaluation of assets should be or otherwise permanently in accordance with §165 for No change
method subject to impairment made with sufficient regularity such withdrawn from use. tax purposes. in the
testing pursuant to FAS that the carrying amount does not computation
142 or FAS 144. All differ materially from that which Impairment losses are not Impairments that are of Schedule M
impairment losses are would be determined using fair permissible for tax purposes. recognized on the P&L expected.
recorded in the P&L. value at the balance sheet date. will continue to create
book-tax differences.
Impairment losses on revalued
assets are charged directly to
the revaluation surplus account
in equity to the extent that it
reverses a previous revaluation
increase related to the same asset
previously recorded in equity. Any
revaluation decrease in excess of
the previously recognized surplus,
if any, is recognized directly in
the P&L.
Reversals of Under US GAAP, IAS 36 requires that at each In general, a loss is taken under No method change will No method
impairments the recording of an balance sheet date an entity §165 when assets are retired, be required as losses will change.
impairment loss results shall assess whether there is any sold, abandoned, destroyed, continue to be recognized
in a new carrying indication that an impairment or otherwise permanently in accordance with §165 No change
amount of the long- loss recognized in prior periods withdrawn from use. for tax purposes. in the
lived asset. Reversal of for any asset other than goodwill computation
any impairment loss is may no longer exist or may have Impairments generally are Impairment adjustments of Schedule M
prohibited. decreased. If any such indication non-recognition events for tax. will continue to create expected.
exists, the entity shall estimate the book-tax differences.
recoverable amount of the related
asset or cash-generating unit to
determine if all or only a portion
of the prior impairment should
be reversed.
Leasing
US tax method
Classification Applies only to PP&E Broader scope of application The classification of a The similar scope of No method
of leases purported lease as a true lease, application of the leasing change.
a financing transaction, or as rules under IFRS and
a service contract, has broad tax, as well as similar Possible
application to all types of classification principles, elimination of
property. could eliminate book-tax Schedule M.
differences that existed
under US GAAP.
Finance lease— Form-driven IAS 17 applies substance over Generally, the tax law requires No method change will No method
indicators requirements (e.g., the form to determine classification. the determination of sale be required because tax change.
75% economic life test A lease is classified as a finance vs. lease to be based on a substance-over-form
and the 90% FV test) lease if it transfers substantially all substance over form analysis rules must continue to Possible
are applied to determine the risks and rewards incidental of which party has the benefits be followed, unless it change in the
lease classification. to ownership. A lease is classified and burdens of ownership. is determined that the computation
[FAS 13] as an operating lease if it does not book GAAP classification (or elimination)
transfer substantially all risks and The determination of tax inadvertently was followed of Schedule
rewards. Quantitative thresholds ownership must be made for tax purposes. M.
are not provided in the standard. based on all of the facts and
circumstances considering IFRS is more similar to Possible
Examples of situations that case law (see, for example, the tax law than US GAAP acceleration
individually, or in combination, Grodt and McKay), as well as because tax looks to of income
could lead to a lease being the IRS factors outlined in Rev. substance over form to if business
classified as a finance lease Proc. 2001-28, which provides determine tax ownership practices
include: guidelines the IRS will use and thus whether the change to
for advance ruling purposes transaction is a sale structure
• The lease transfers ownership sales
to the lessee at the end of the in determining whether (because ownership is
transactions purporting to be transferred) or a lease transactions
lease term for IFRS that
leases are in fact leases for (because ownership is
• A bargain purchase option exists tax purposes. In general, the not transferred). also are sales
• The lease term is for the major factors used to assess tax transactions
part of the asset’s economic life ownership are very similar to The substance-over-form for tax.
the factors outlined in IAS 17; approach under IFRS could
• The present value of the eliminate book-tax planning
minimum lease payments but for tax purposes, no single
factor is determinative. that took advantage of
amounts to substantially all of the US GAAP objective
the FV of the asset rules to allow a transaction
• The asset is of a specialized to be treated as a sale
nature such that only the for book purposes (thus
lessee can use it without allowing recognition of
major modifications gain for book) and a lease
for tax purposes (thus
preventing recognition
of gain and allowing tax
depreciation). However,
it is possible that IFRS
interprets factors indicating
a lease consistent with the
FAS 13 objective measures
(e.g., if the present value
of the minimum lease
payments are greater than
or equal to 90% of the
property’s value, then it is
characterized as sale) such
that IFRS will in practice be
similar to US GAAP.
Leasing
US tax method
Initial direct Deferred and amortized Added to the carrying amount of Lease inducement costs No method change is No method
costs/lease over the lease term the leased asset in an operating and related facilitative costs expected as specific tax change.
acquisition of an operating lease lease and recognized as an are capitalized under Treas. rules must continue to be
costs in proportion to the expense over the lease term on the Reg. §1.263(a)-4 and may be followed.
recognition of rental same basis as the lease income. amortized under Treas. Reg.
income. [IAS 17, par. 52] §1.167-3 generally over the No book-tax difference
[FAS 13, par. 19c] lease term, but considering is expected unless the
Included in the initial measurement the amortization period rules amortization period differs.
Shall be accounted for as of a finance lease receivable. under §178.
part of the investment in [IAS 17, par. 38]
a direct financing lease. For a financing lease
[FAS 91, par. 23] Initial direct costs incurred by (installment sale), lease
a manufacturer/dealer lessor acquisition costs are recovered
In a sales-type lease, any in a finance lease should be through depreciation of the
initial direct costs shall recognized as an expense at the assets acquired.
be charged to income in commencement of the lease term.
the period that the sales- [IAS 17, par. 46]
type lease profit or loss
is recognized.
[FAS 13, par. 17c]
Renewal Exercise of renewal If option is ultimately exercised Renewal options are a factor No method change will be No method
options option beyond the based on the contractually stated to consider in determining the required because specific change.
original lease term is terms of the lease, the original initial classification of a lease, tax rules will continue to
normally considered a lease classification continues into which carries into any renewal be followed. Possible
new agreement. the extended term of the lease; it is periods. change in the
not revisited. Any US GAAP-tax computation
Renewal options also are difference associated with (or elimination)
factors to be considered in different classifications of of Schedule
determining the useful life renewed leases likely will M.
of a lease. Under §178 (in be eliminated under IFRS
determining the amount of the because the IFRS treatment
deduction allowable to a lessee of renewed leases is
for exhaustion, amortization, consistent with the tax law.
etc.), in respect of any cost
of acquiring a lease, the term
of the lease shall be treated
as including all renewal
options if 75% of such cost is
attributable to the period of the
term of the lease remaining on
the date of its acquisition.
Sale-leaseback, Any profit or loss Gain or loss is deferred and To the extent the transaction No method change will be No method
finance lease on the sale shall be amortized over the lease term. is characterized as a sale or required as the tax specific change.
deferred and amortized [IAS 17, par. 59] financing transaction, gain or rules regarding recognition
in proportion to the loss is recognized since the of gain or loss will continue. No change
amortization of the transaction is effectively a sale in the
leased asset, unless the for tax purposes. The book-tax difference computation
fair value of the property under US GAAP associated of Schedule M
is less than its carrying with a deferred gain from a expected.
value, in which case a sale-leaseback will continue
loss is recognized for under IFRS.
the difference.
[FAS 28, par. 3]
US tax method
Sale-leaseback, If the seller relinquishes Gain or loss is recognized Gain or loss recognition occurs No method change will be No method
operating lease substantially all of the immediately when the sale occurs at the time of sale for a true required as the tax specific change.
use of the asset, gain or at fair value. If the sales price is sale-leaseback agreement. rules regarding recognition
loss is recognized at the below fair value, any profit or loss of gain or loss will continue. No change
date of sale. should be recognized immediately, in the
unless the favorable price is US GAAP and IFRS both computation
If the seller retains more compensated for by future lease defer gains or losses in of Schedule M
than a minor part, but payments at below-market rates. certain circumstances expected.
less than substantially In that case, the impact would and thus to the extent
all of the use of the be deferred and amortized in IFRS requires deferral
property, any profit in proportion to the lease payments of gain/loss, a book-tax
excess of the present over the lease period. difference will be
value of the minimum [IAS 17, par. 61-63] created or continued.
lease payments is
recognized at the date
of sale. A loss must be
recognized immediately
by the seller-lessee to
the extent that the net
book value exceeds the
fair value.
Rent step-ups Lease payments under Lease payments under an Under §467, rental income No method change is No method
an operating lease are operating lease are recognized on or expense generally must required as the tax specific change.
recognized on a a straight-line basis over the lease be recognized based on the rules under §467 must
straight-line basis over term unless another systematic allocation of rents provided continue to be followed. No change
the lease term unless basis is more representative of in the agreement (i.e., generally in the
another systematic basis the user’s benefit. based on cash receipts and Because both US GAAP computation
is more representative of [IAS 17, par. 33] payments). and IFRS require straight of Schedule M
the user’s benefit. There lining of rent, book-tax expected.
is specific guidance Note that in the case of differences will continue
requiring free rent and disqualified leasebacks or following an IFRS
rent step-ups to be long-term agreements (with tax conversion.
recognized on a avoidance purposes), rent is
straight-line basis over recognized on a constant rental
the lease term. accrual basis for tax purposes.
Liabilities
US tax method
Contingent An accrual for a loss A contingent liability is: Under §461, a liability is No method changes are No method
liabilities/ contingency is required • A possible obligation that arises incurred and generally taken expected as the tax specific change.
provisions if it is probable that there from past events and whose into account when: rules as to when a liability
is a present obligation is taken into account must Possible
existence will be confirmed • All the events have occurred change in the
resulting from a past only by the occurrence or to establish the fact of the continue to be followed.
event and that an outflow computation
non-occurrence of one or more liability; Moreover, the specific of Schedule
of economic resources is uncertain future events not
reasonably estimable. • The amount of the liability tax requirements under M.
wholly within the control of the is determinable with §461 differ from both
[FAS 5] entity; or reasonable accuracy; and US GAAP and IFRS, and
Guidance uses the term • A present obligation that arises • Economic performance has thus book-tax differences
probable to describe a from past events but is not occurred with respect to the will continue. The lower
situation in which the recognized because: liability, or if the recurring threshold in IFRS with
outcome is likely to – It is not probable that item exception is applicable, respect to establishing
occur. While a numeric an outflow of resources economic performance a liability and the IFRS
standard for probable embodying economic benefits occurs within eight and a requirement to book the
does not exist, practice will be required to settle the half months of year-end. midpoint of the range, as
generally considers obligation; or opposed to the minimum
an event that has In certain cases (e.g., tort and amount, likely will result in a
an approximately – The amount of the obligation breach of contract) economic change in the computation
75%–80% or greater cannot be measured with performance requires payment of Schedule M.
likelihood of occurrence sufficient reliability. to the person to whom the
to be probable. [IAS 37, par. 10] liability is owed.
When some amount A provision is a liability of uncertain

within the range (of loss) timing or amount. [IAS 37, par. 10]
appears at the time to
be a better estimate than Provisions are recorded when three
any other amount within criteria are met:
the range, that amount • A present obligation from a past
shall be accrued. When event exists;
no amount within the • An economic outflow of
range is a better estimate resources to settle the obligation
than any other amount, is probable; and
however, the minimum
amount in the range • A reliable estimate of the amount
should be accrued. of the obligation can be made.
[FIN 14] [IAS 37, par. 14]
The term probable is used for

describing a situation in which the
outcome is more likely than not to
occur (i.e., greater than 50%).
The amount recognized should

be the best estimate of the
expenditure required. Where there
is a continuous range of possible
outcomes and each point in that
range is as likely as any other, the
midpoint of the range is used.
Liabilities
US tax method
Environmental Distinguished from asset Not distinguished from other Under §461, environmental No method change is No method
obligations retirement obligations. decommissioning, restoration, liabilities may not be taken expected as the tax change.
and similar liabilities. Refer to the into account until the liability specific rules as to when
A liability is recorded accounting for asset retirement is fixed and determinable, and an environmental liability Possible
if it is probable that a obligations and environmental economic performance has is taken into account must change in the
liability has been incurred remediation costs section above. been satisfied, generally when continue to be followed. computation
and the amount can be the remediation services occur. of Schedule
reasonably estimated. Moreover, although M.
Guidance for the In addition, environmental the timing of when
application of “probable” remediation costs might be environmental liabilities are
and “reasonably capitalizable under §263(a) or taken into account under
estimated” in relation inventoriable under §263A. US GAAP differs from
to environmental See, for example, Rev. Rul. IFRS, both US GAAP and
obligations is located in 94-38 and Rev. Rul. 2005-42. IFRS differ from the tax
SOP 96-1. rules under §461. Thus,
a book-tax difference will
continue.
Reimbursement If the expected Where some or all of the Under the court-developed No method change is No method
expected reimbursement meets expenditure required to settle cost reimbursement expected as the tax rules change.
for liabilities the definition of a a provision is expected to be doctrine, reimbursements of with respect to reimbursed
recorded contingent gain, the reimbursed by another party, expenditures are excluded expenditures should Possible
guidance for accounting the reimbursement shall be from income if the taxpayer continue to be followed. change in the
for contingent gains recognized when, and only has a right to receive the However, it is possible that computation
is followed. when, it is virtually certain that reimbursement at the time of an IFRS conversion may (or elimination)
[FAS 5] reimbursement will be received the expenditure. Otherwise, highlight where US GAAP of Schedule
if the entity settles the obligation. reimbursements are included in was followed and thus a M.
Otherwise, [IAS 37] income, but not until the right right to reimbursement
reimbursements may to receive such reimbursement was recognized for tax
generally be recognized is fixed and determinable in that was probable but not
when they meet the accordance with §451. fixed (e.g., for an insurance
definition of an asset reimbursement).
(i.e., a probable future An expenditure that is subject
economic benefit to a right to reimbursement A conversion to IFRS
obtained or controlled also is not taken into account could eliminate book-tax
as a result of past for tax purposes. differences with respect to
transactions or events). reimbursements if the IFRS
Probable is generally Note that the courts generally “virtually certain” standard
interpreted to mean a require a fixed right to receive is interpreted to mean the
likelihood of at least reimbursement, but the taxpayer has a right to
75%–80%. IRS only requires that the receive the reimbursement.
reimbursement be reasonably
certain.
US tax method
Contingent A gain contingency is A contingent asset is a possible Income is recognized under No method change as the No method
assets defined as an existing asset that arises from past events §451 when the taxpayer has tax rules with respect to change.
condition, situation, or and whose existence will be a fixed right to receive the the recognition of income
set of circumstances confirmed only by the occurrence income and the amount can should continue to be Possible
involving uncertainty as or non-occurrence of one or more be determined with reasonable followed. change in the
to a possible gain. uncertain future events not wholly accuracy. Therefore, a gain computation
within the control of the entity. contingency typically would not A conversion to IFRS could (or elimination)
Gain contingencies be recognized until it is realized eliminate any book-tax of Schedule
are recognized only Contingent assets are not in accordance with §451. difference arising under M.
when they are realized recognized in the financial US GAAP if the IFRS
or realizable. A gain is statements since this may result “virtually certain” standard
realizable when sufficient in the recognition of income that is interpreted to mean the
evidence exists that the may never be realized. However, taxpayer has a fixed right to
entity has a right to the when the realization of income is the income.
cash, even though it may virtually certain, the related asset
not have been received is not a contingent asset and its
yet. It is often difficult recognition is appropriate.
to meet the “realizable” [IAS 37]
criteria, and therefore
gain contingencies are
often not recorded
until realized.
[FAS 5]
PricewaterhouseCoopers is
committed to helping companies
navigate the conversion from US
GAAP to IFRS. With that in mind,
please visit www.pwc.com/usifrs
to view a complete list of our
comprehensive IFRS thought
leadership, webcasts and additional
tools addressing the business and
technical issues that companies
should be considering in anticipation
of the inevitable move from US GAAP
to IFRS.
pwc.com/usifrs
Contacts
This publication is intended not just to inform but to raise
questions. Clients of PricewaterhouseCoopers may want to open
a dialogue about IFRS with their PwC engagement partner or the
primary authors of this paper who welcome any questions about
the tax accounting method implications of IFRS:
Christine Turgeon
Washington National Tax Services Partner
646.471.1660
Email: christine.turgeon@us.pwc.com
Robert Zarzar
202.414.1705
Email: robert.zarzar@us.pwc.com
Annette Smith
202.414.1048
Email: annette.smith@us.pwc.com
Below are additional national contacts focused on the tax

implications of IFRS:
Ken Kuykendall
Partner
312.298.2546
Email: o.k.kuykendall@us.pwc.com
Jennifer Spang
Partner
973.236.4757
Email: jennifer.a.spang@us.pwc.com
Dean Schuckman
Partner
646.471.5687
Email: dean.schuckman@us.pwc.com
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IFRS: What you need to know

IFRS, US GAAP, and

The heart of the matter 02

How will changes in

02 IFRS, US GAAP, and US tax accounting methods

Assessing the tax implications of each of these newly adopted accounting

PricewaterhouseCoopers (PwC) has developed this IFRS publication, which

• Determine whether tax accounting method changes will be required or

• Assess the impact of each new accounting policy change on the

This document serves as a companion piece to the following PwC IFRS

The heart of the matter PricewaterhouseCoopers 03

04 IFRS, US GAAP, and US tax accounting methods

Newly adopted IFRS accounting policies may impact a company’s tax

• Can the current US GAAP method of accounting continue to be followed

• Can the newly adopted IFRS method of accounting be followed under

• Will changing the tax accounting method have a significant impact on

• Will systems need to be updated? For example, as new accounting

An in-depth discussion PricewaterhouseCoopers 05

As will become more evident in the detailed analysis contained in this

• The current tax accounting method requires book-tax conformity and

• Costs are recharacterized as inventoriable for books, resulting in a change

• A review of the book accounting method uncovers circumstances where

• A review of the current tax accounting method identifies more favorable

06 IFRS, US GAAP, and US tax accounting methods

Notwithstanding these general rules for filing tax accounting method

• Requesting the consent of the Director. (Director consent typically only

An in-depth discussion PricewaterhouseCoopers 07

IFRS, US GAAP, and

08 IFRS, US GAAP, and US tax accounting methods

The goals of this publication are to highlight that conversion to IFRS

A closer look PricewaterhouseCoopers 09

The alternative to the of total costs to be incurred. provision of services.

With respect to royalties,

Note that case law also

Losses on contracts must

• The contracts are so closely

[IAS 11, par. 8-9]

Note, the deferral provisions

There are at least 11

Assets that are individually

To the extent the return is fixed

Abnormal costs such

Capitalization in the development

Under both IFRS and US GAAP,

The basis of property that is

– The identifiable assets acquired

– The consideration transferred

If an excess amount remains after

When some amount A provision is a liability of uncertain

The term probable is used for

The amount recognized should

Below are additional national contacts focused on the tax

This publication is printed on Mohawk Options PC.

Das könnte Ihnen auch gefallen

– The identifiable assets acquired

– The consideration transferred