The International Accounting Standards Board (IASB) is conducting several short-term convergence projects jointly with the U.S. Financial Accounting Standards Board (FASB). One of those short-term convergence projects focuses on financial accounting for income taxes. The objective of that project is to reduce differences between the two Boards' income tax standards.
Both the IASB and FASB expect to modify their respective standards as a result of the joint income tax project. Specifically, the IASB will revise International Accounting Standard (IAS) 12, while the FASB will revise Statement of Financial Accounting Standards (SFAS) 109.
IAS 12 was originally issued in 1979 and was last updated in 2000. The joint income tax project under which IAS 12 will be further revised has been on the IASB's agenda since 2002. The Boards plan to issue a joint Exposure Draft of their revised standards in the fourth quarter of 2007. The IASB plans to issue its final revised standard in the second half of 2008.
Both IAS 12 and SFAS 109 are based on an approach generally known as the "balance sheet approach" in which deferred tax liabilities (or in some cases, deferred tax assets) are required to be recognized on the balance sheet under specific circumstances that many tax-paying entities face. This approach accurately reflects an entity's reported short-term and long-term income tax obligations that have arisen from the entity's past and present reported Net Income despite differences between tax accounting and "book" accounting.
Although IAS 12 and SFAS 109 are both based on the same fundamental approach to accounting for income taxes, the two standards differ from each other mainly because each incorporates different exceptions to their common approach. The Boards' convergence strategy for the joint income tax project is to eliminate the exceptions without altering the underlying approach.
There are 10 specific income tax topics that the IASB and FASB have identified, discussed, and made tentative decisions on. In some cases, both Boards intend to revise aspects of their existing standards so as to converge on a standard superior to each existing standard. In other cases, only one Board intends to change its standard so as to converge with the other Board's standard. However, in a few minor cases, the Boards have so far chosen to maintain existing differences between their standards or to make non-converging changes to their standards.
For most of income tax topics that the Boards have discussed, the IASB has tentatively decided to make substantive revisions to its standard. Although at this point the IASB appears to be planning to make more changes to IAS 12 than the FASB plans to make to SFAS 109, the FASB appears to be somewhat further away from concluding its deliberations, so the FASB may yet decide on more changes.
Some of the topics that the Boards have discussed could impact -- or could be impacted by -- other joint convergence projects, such as the projects for leases and business combinations. Naturally, the Boards are balancing the advantages of coordinating the projects against the potential disadvantage that useful progress towards converged and improved standards will be delayed if they try to fix all problems at once.
[Last Updated Sep. 25, 2007]
