FASB Forum Provides Peek into IFRS Tax Implications

FASB Forum Provides Peek into IFRS Tax Implications
IRS’s Ng: Tax Laws May Need to Change

By Colleen Lutolf, Trusted Professional Staff

Frank Ng was in a unique position at a recent Financial Accounting Standards Board forum at Baruch College that focused on the U.S. transitioning to a single set of international accounting standards, known as International Financial Reporting Standards (IFRS).

In a room full of auditing regulators concerned with implementation dates, educational requirements and the affects such a transition could have on small businesses and accounting firms, it was up to Ng, the deputy commissioner of the the IRS’s international large and mid-size business division, to describe the kind of impact a change to international accounting standards might have on tax administration in the U.S.

In a word: “Tremendous,” Ng said.

Ng outlined what he said are major issues the IRS will have to contend with when the U.S. transitions to IFRS, which, according to the Securities and Exchange Commission, will be the standards set by the IASB, the International Accounting Standards Board. (IASB members also participated in the forum.)

The biggest issue, Ng said, is inventory assessment using LIFO (last in, first out) accounting, which allows companies to record sales using the most expensive inventory first, reducing a company’s tax liability.

LIFO is not acceptable under IFRS, however, Ng said. In fact, “it doesn’t exist.

“While that issue is very prevalent in industry sectors, there are tremendous amounts of potential revenue impact on the table,” he said. “And so how that gets resolved [involves] a whole host of discussions and topics. Is it suitable to change the accounting method? Is it a one-time adjustment? There are all kinds of questions on how one would deal with that significant issue.”

Valuations, income recognition and transfer pricing also will be affected by moving to IFRS, Ng said.

Even when these issues are addressed, a “whole host of potential policy [issues] have yet to surface for discussion,” said Ng.
For example, the IRS must consider how these changes will be reflected in tax forms. Ng said many of aspects of the forms are based on U.S. GAAP, and would need to be reconsidered.

He used as an example Form 5471, Reporting of Controlled Foreign Corporations.

“Many of the concepts and requirements of that form are based on U.S. GAAP,” Ng said. “Turning a profit, accounting for balance sheet items. We’ll need a reconsideration in terms of what controlled foreign corporations reporting will look like in the future.”

How these changes are made—either through changes in tax law or through regulation changes—is something else that needs to be considered, he said.

If these changes are made through revisions in the tax law, there will be political implications associated with them, Ng said.

“There are questions of tax policy that our Treasury colleagues must put on the table for discussion,” he said. “The IFRS impact on revenue streams and revenue collection in this country [has] political implications.”

Ng said he believed certain tax policy changes would require legislation; others could be achieved administratively through by the IRS.

“To be candid … it will probably take a little bit of both,” Ng said.

International Taxation Committee member and tax attorney Lawrence E. Shoenthal said changing tax law is not uncommon.

“The tax law changes every year anyway,” he said. “The tax law will change as soon as we get a new administration.”

And corporations already have to keep two sets of records: one for tax purposes and another for financial statements, he said.

“It’s not compatible for financial statements the way they are now,” he said. “The life of assets are different for tax purposes than they are for financial statements. Companies have to keep separate records. The same thing will continue if [U.S. GAAP] is changed to IFRS.”

But Shoenthal said the tax effects for companies transitioning to IFRS will be great.

“The starting figures will be different because of the change in accounting method,” he said. “The income shown on financial statements will be different from what [it is] now.”

Shoenthal said his firm is just beginning to schedule a series of IFRS training classes.

The IRS is at a similar point on the path to IFRS.

“When you talk about implementation, what is important for us is a time certain and a time of adoption,” Ng said. “We at the IRS have not focused a great deal [on] having a prepared staff to deal with IFRS.”

Ng said the IRS could accelerate its training, but the agency won’t be ready for the transition until accounting firms are.

“Your readiness [informs] our ability to assure readiness,” he said.

Shoenthal suggested tax practitioners start talking to their clients about IFRS.

“Both the auditor and the client have to understand what the differences are so they can plan ahead,” he said. “They’re going to have to prepare for [it] because they’re projecting for the future what their taxes are going to be. Certainly to the extent of talking about the future with clients, you have to prepare now.”

Rick A. Gotti, a member of the Partnerships and LLCs Committee, said he’s not planning for IFRS until he has to.

“We don’t have clients who are really affected by it,” he said.

Gotti said he has few international clients.

“It’s not really in the IRS code,” he said. “There are no provisions for IFRS, so why would we get involved in that now? When it becomes part of the code, then we’ll look at it.”

Colleen Lutolf, Editor, can be reached at clutolf@nysscpa.org.