How to account for income taxes under IFRS and US GAAP: Deferred tax assets, liabilities, and temporary differences

Income tax accounting requires matching tax consequences to accounting results, often creating temporary differences between book and tax values. Both IFRS (IAS 12) and US GAAP (ASC 740) follow the balance sheet approach to recognize deferred tax assets (DTAs) and deferred tax liabilities (DTLs), but differ in specific recognition thresholds, presentation rules, and treatment of uncertain tax positions. These differences can materially affect net income, equity, and key ratios such as effective tax rate and return on equity.

Deferred tax is based on temporary differences between accounting and tax bases.

Both frameworks recognize deferred tax effects resulting from temporary differences—the difference between the carrying amount of an asset or liability for financial reporting and its tax base.

Examples include:

• Depreciation timing differences

• Revenue recognition differences (e.g., unearned revenue)

• Provisions not deductible until paid

• Goodwill amortization (for tax but not book)

The resulting DTL or DTA reflects future tax payable or recoverable when the asset is recovered or the liability settled.

Difference type	Results in
Tax base < book value	Deferred tax liability (DTL)
Tax base > book value	Deferred tax asset (DTA)

Recognition of deferred tax assets depends on future profitability and certainty.

IFRS (IAS 12):

• Recognizes all deductible temporary differences to the extent that it is probable they will be recovered using future taxable profits.

• Probability threshold: >50% likelihood

• Requires review of evidence supporting recoverability, especially for loss carryforwards.

US GAAP (ASC 740):

• Recognizes DTAs only if more likely than not (i.e., >50%) that they will be realized.

• Requires assessment of positive and negative evidence, including:

  • Historic losses

  • Forecasted income

  • Tax planning strategies

• If realization is uncertain, a valuation allowance is recorded to reduce the DTA.

Aspect	IFRS (IAS 12)	US GAAP (ASC 740)
Threshold for DTA recognition	Probable (>50%)	More likely than not (>50%)
Valuation allowance concept	Not explicit—use of probability filter	Explicit valuation allowance required
Reassessment	At each reporting date	At each reporting period

Deferred tax is measured using enacted tax rates and undiscounted amounts.

Both frameworks require measurement of DTAs and DTLs using the tax rates expected to apply when the temporary differences reverse. They do not allow discounting of deferred tax balances.

• IFRS: Uses the substantively enacted tax rate at the reporting date.

• US GAAP: Uses the enacted tax rate (formal legislation signed into law).

Any changes in tax rates are recognized in the period of enactment, affecting profit or loss, unless they relate to OCI or equity.

Presentation differs for offsetting and classification.

Aspect	IFRS (IAS 12)	US GAAP (ASC 740)
Classification	Non-current only	Current or non-current, based on classification of related asset/liability
Offsetting	Allowed if entity has a legally enforceable right and taxes are levied by same authority	More restrictive, but similar concept
Net presentation	Single net deferred tax line (often)	May show separate DTL and DTA lines

Uncertain tax positions are addressed differently by the two standards.

US GAAP (ASC 740-10):

• Requires a two-step test:

  1. Recognition: Tax benefit is recognized only if more likely than not to be sustained on audit.

  2. Measurement: Amount recognized is the largest amount that is more than 50% likely to be realized.

Uncertain tax positions are shown as liabilities until resolved, with disclosure of nature and potential impact.

IFRS:

• Does not have a separate model like ASC 740-10.

• General provisions guidance (IAS 37) may apply.

• Requires disclosure of uncertain tax risks if material, but no prescribed two-step method.

Tax effects of OCI and equity transactions must be allocated accordingly.

Both frameworks require tax effects of items recognized in other comprehensive income (OCI) or equity to be recognized in the same section of the financial statements, not in profit or loss.

Examples:

• Revaluation gains (IFRS)

• Actuarial gains/losses on defined benefit plans

• Unrealized gains/losses on AFS securities (US GAAP before ASU 2016-01)

This maintains consistency in tracking permanent vs. temporary differences and enhances transparency.

Key differences between IFRS and US GAAP in income tax accounting.

Area	IFRS (IAS 12)	US GAAP (ASC 740)
DTA recognition threshold	Probable (>50%)	More likely than not (>50%)
Valuation allowance	Not explicit; part of recognition filter	Explicit and required
Uncertain tax positions	No specific model; refer to IAS 37	Specific ASC 740-10 two-step model
Tax rate used	Substantively enacted	Legally enacted
Classification (current/noncurrent)	Always non-current	Matches related asset/liability
Offsetting rules	Permitted with legal right and same tax authority	Similar, but more restrictive in application
Disclosures	Focused on deferred taxes and reconciliation	Includes uncertain tax positions and open tax years

Accounting for income taxes plays a critical role in presenting the economic impact of tax obligations and future benefits. Understanding the technical and procedural distinctions between IFRS and US GAAP ensures accurate reporting, avoids misstatements, and provides transparency into the company’s long-term tax strategy and position.

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