The Effect of International Financial Reporting Standards on Current Tax Planning Strategy

Introduction

The adoption of Tax Reporting is termed as one of the most obvious and immediate impacts of International Financial Reporting Standards. As a result, this affects the adoption of the International Accounting Standard 12 -IAS 12- directly due to the financial statements that have been published (Chen & Gavious, 2017). According to IAS 12 implementation, all transactions together with their tax consequences must be identified in the financial statements. Furthermore, this process will need full identification of deferred taxation and not that of current taxation. Also, all enterprises are often faced by the reality that their tax position cannot be carried out by their financial accounting treatments (Christensen, Lee, Walker, & Zeng, 2015). This paper aims to examine the effects of IFRS on the adoption of tax planning strategy both on a short-term and long-term basis. Furthermore, it will also address how and to what extent this adoption affects current tax planning strategy in the United States.

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Despite the slower pace of the transition from GAAP (generally accepted accounting principles) to IFRS, most United States companies have managed to converge their standards by adopting the IFRS tax planning strategy (Donelson, McInnis, & Mergenthaler, 2016). As such, various standards such as the standards for accounting income taxes are predicted to happen in the near future as a result of the transition. Nevertheless, the transition of IFRS has been regarded as one of the most effective means of tax planning strategy due to the kind of impact it generates. For instance, the United States companies that are currently considered to be under GAAP will be able to calculate and report their income taxes on an effective basis (Donelson et al., 2016). Both the Financial Accounting Standards Board and International Accounting Standards Board tend to consider income tax as a viable tool for convergence. In FAS No. 109, Accounting for Income Taxes, FASB developed a temporary difference approach for income taxes to eliminate all kinds of differences experienced within the United States. However, later on, the project was suspended indefinitely due to its slow progress. In 2009, an exposure draft was published to initiate a new standard to replace IAS 12 regarding income tax.

In most cases, tax reporting and financial statement tend to differ in a variety of ways. For instance, each has their objectives regarding the jurisdiction (Gupta, Mills, & Towery, 2014). As such, this often can result in sets of reporting rules which may appear to be similar more or less profound way. Based on the relationship between tax and accounting, worldwide tax collections tend to make up most of the sources that are in greatest demand in relation to accounting services. Regarding the relationship that exists between individual and enterprise level from taxes on income to cash flow point of view, most governments can acquire a large source of revenue with the literate population.

Tax systems are often categorized according to the degree to which tax regulations determine the measurements of accounting, vice versa (Gupta et al., 2014). For instance, the problem of deferred tax in the United States has widely affected the amount of accounting standard documentation. According to recent researches that have been carried out, financial reporting may be categorized as deliberate with the balance sheet reporting of historical cost gradually shifting away, thus enabling the report of current values which may be considered as fair. As a representative of financial accounting, the US GAAP, as well as US tax reporting, has managed to acquire a greater a greater adherence in relation to the historical cost principle in comparison to IFRS (Donelson et al., 2016). In turn, this kind of implementation has been considered to be of great importance regarding the analysis of tax calculations.

The dynamic relationship between tax and financial accounting and reporting has been a subject of debate similar to other jurisdictions in the literature (Dudin et al., 2015). As a result, academics, professionals, standard setters among others are required to be consistent with both accounting and reporting regimes. Furthermore, they must constantly update and maintain information technology to support both US GAAP and tax calculations. When considering this regarding a technical standpoint, accounting rules must always be a constant effect (Warren & Jones, 2018). The reason for this is because they determine which rules will be changing since both IFRS and US GAAP serve an important purpose in tax computation in the United States. Furthermore, it will also assist the U.S Internal Revenue Service to make important decisions regarding tax revenues.

Conclusion

Over the recent years, the IFRS adoption decision has had a profound impact regarding tax reporting. As a result, many countries have considered the need for transparency and comparability to be of great significance regarding financial statements. For instance, Emerging Capital Markets which contribute significantly to the global market can engage in competition with their counterparts. Furthermore, the adoption has also enabled the emergence of globalization and integration of businesses and capital markets. The demand for high-quality reporting has widely encouraged both the developed and emerging capital markets to be intact with the adoption of IFRS, as well as their national accounting standards.

References

Chen, E., & Gavious, I. (2017). The roles of booktax conformity and tax enforcement in regulating tax reporting behavior following International Financial Reporting Standards adoption. Accounting & Finance, 57(3), 681-699.

Christensen, H. B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), 31-61.

Donelson, D. C., McInnis, J., & Mergenthaler, R. D. (2016). Explaining RulesBased Characteristics in US GAAP: Theories and Evidence. Journal of Accounting Research, 54(3), 827-861.

Dudin, M., Prokofev, M., Fedorova, I., Frygin, A., & Kucuri, G. (2015). International Practice of Generation of the National Budget Income by the Generally Accepted Financial Reporting Standards (IFRS).

Gupta, S., Mills, L. F., & Towery, E. M. (2014). The effect of mandatory financial statement disclosures of tax uncertainty on tax reporting and collections: The case of FIN 48 and multistate tax avoidance. The Journal of the American Taxation Association, 36(2), 203-229.

Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.