USA IFRS vs local GAAPs - Deferred tax impact - ALL COUNTRIES

Aug 6, 2019
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United Kingdom
Hi all,

First time poster as I cannot get my head around an aspect of deferred tax that I'm hoping you kind souls will be able to help with.

Lets suppose I have a company and in local GAAP it has an asset of $100 and liability of $100. The future tax deduction of the asset is $100 so the tax base is also $100 and there is no temporary difference on the asset so no deferred tax arising on it. There are no future tax deductions for the liability so the tax base is also $100 (local GAAP carrying value less $0 future deductions) and there is no temporary difference on the asset so no deferred tax arising on it.

Suppose, for some reason, there is now a GAAP reclass adjustment to get to the IFRS accounts that moves the asset to $80 and the liability to $80. The tax base of the asset would remain at $100 since future tax deductions are not impacted by GAAP differences and so this would give rise to a $20 temporary difference on the asset (IFRS carrying value of $80 less $100) which will create a deferred tax balance adjustment. However, the liability still has no future deductions so the tax base would now change to $80 (being IFRS carrying value of $80 less $0 future deductions) so there is no temporary difference on the liability. Overall there would be a net change to deferred tax.

Is my understanding correct? It just seems odd that effectively an asset/liability reclass could create a deferred tax balance. You also get a similar oddity that an increase in an asset causes a deferred tax balance but an equal reduction in a liability would not.

I'm probably thinking about it the wrong way but I can't grasp my head around it in a way that is in line with IAS12. Perhaps I shouldn't be changing the tax base of the liability but seems odd that you would use the tax base of the local GAAP for the IFRS accounts.

Thanks for any help you all can give.

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