Question

Which of the following statements is incorrect with regards to IFRS and U.S. GAAP?

a. With regard to uncertain tax positions, under IFRS, all potential liabilities must be recognized.
b. The tax effects related to certain items are reported in equity under U.S. GAAP, under IFRS the tax effects are charged or credited to income.
c. U.S. GAAP uses an impairment approach for deferred tax assets. The deferred tax asset is recognized in full and reduced by a valuation account if it is more likely than not all or a portion of the deferred tax asset will not be realized.
d. U.S. GAAP classifies deferred taxes based on the classification of the assets or liability to which it relates.

Answer 1

The incorrect statement with regards to IFRS and U.S. GAAP is an option (a), as IFRS requires recognition of uncertain tax positions when it is probable that there will be an economic outflow and the amount can be reasonably estimated, not recognition of all potential liabilities regardless of these conditions.

Step-by-step explanation:

When considering the differences between IFRS (International Financial Reporting Standards) and U.S. GAAP (Generally Accepted Accounting Principles), it is essential to recognize the nuanced approaches that they take in various aspects of accounting. To answer the question about the incorrect statement regarding IFRS and U.S. GAAP, let's review each option:

Option (a) suggests that under IFRS, all potential liabilities about uncertain tax positions must be recognized. However, this is not entirely accurate. Instead, IFRS requires recognition when it is probable that there will be a future economic outflow and the amount can be reasonably estimated.

Statement (b) notes the different treatments of tax effects under U.S. GAAP and IFRS. In IFRS, tax effects of items credited or charged directly to equity in the same or different periods as the items to which they relate are also taken to equity. U.S. GAAP similarly requires that tax effects of items recognized in other comprehensive income (OCI) or directly to equity are also allocated to OCI or equity, respectively. However, some specifics may vary, highlighting the importance of referring to the respective standards for each framework.

Option (c) accurately describes the U.S. GAAP approach to recognizing deferred tax assets and the use of a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

Statement (d) correctly reflects U.S. GAAP's balance sheet approach where deferred tax liabilities and assets are classified as either current or noncurrent based on the classification of the underlying asset or liability.

Therefore, the incorrect statement concerning IFRS and U.S. GAAP is an option (a), as IFRS does not require the recognition of all potential liabilities related to uncertain tax positions without assessing the probability of the outflow and the ability to make a reasonable estimate.