When it comes to complying with complex accounting, financial, statutory and tax reporting requirements under both U.S. GAAP and IFRS, even innocent mistakes can be deadly. One U.S. based global provider of oil field technology and supplies found that out the hard way. The company was forced to restate its financials twice within six months, and each one resulted in a roughly $500 million adjustment in its financial statements, including penalties, fees and other costs.
April Little, CPA, Partner and IFRS Tax Practice Leader at Grant Thornton LLP, helps global corporations navigate GAAP vs. IFRS compliance issues. She shares two examples that illustrate the challenges corporate tax professionals face:
- Reporting on uncertain tax positions. “A lot of companies are under the mistaken impression that there is no accounting for tax uncertainties under IFRS because there’s no FIN 48 (FASB Interpretation No. 48, Accounting for Uncertainties in Income Tax) corollary,” Little says. “That’s technically correct, companies using IFRS should be reporting contingent income tax obligations under IAS 37 (Contingencies).”
- Fixed asset componentization. Under U.S. GAAP, you might simply depreciate “Building A” for 40 years, she says, but IFRS requires breaking assets down to their separately replaceable parts. “Companies should account for the building structure, roof, HVAC system or flooring separately, with different useful lives.”
On the positive side, recent IRS “repair regulations” regarding expenditures related to tangible property change the way you account for U.S. taxes on plant, property and equipment depreciation. “If you follow them to the letter it will ultimately look a lot like the componentization required under IFRS, so that becomes a very leverageable activity,” Little says. Modify your fixed asset reporting now, she says, and you will be fine under U.S. GAAP, the new IRS regulations and IFRS, as well. A proactive approach allows companies to maximize cash flow for income taxes, leverage costs associated with compliance and componentization and more effectively utilize an organization’s resources.
Little sees two basic strategies companies can use to deal with U.S. GAAP and IFRS reporting. One is to opt for accounting methods that result in fewer differences between the two. “That simplifies financial reporting but does not optimize either tax or financial planning,” she says. Better: Adopt IFRS reporting in a way that optimizes long-term results for your company. “That typically results in reconciling more differences between U.S. GAAP and IFRS, but delivers more bang for your buck.”
You can learn more in the webcast, “IFRS vs. GAAP Reporting: Implications for Multinational Corporations.”