There’s also a difference between the two standards in the way share-based payments are treated for tax purposes, says Deborah Walker, a Deloitte tax partner. The schism exists because the tax base is different under Topic 718 than it is under IFRS 2. The U.S. GAAP tax calculation for share-based payments is computed on the company’s book expense, which is the GAAP expense recognized in the income statement. The GAAP stock-option expense would only change if the option is considered a liability, and it has to be remeasured every period under fair-values rules. If the stock option is deemed to be equity, it is measured only once at the grant date. (The tests for whether an option is an equity or liability also differ under IFRS from the tests under U.S. GAAP.)
From an IFRS perspective, however, taxes are tied to the deduction the company receives, which is often a moving target. That’s because the deduction is calculated on the spread between the current share price and the stock-option’s strike price (or exercise price), explains Walker. As a result, stock-price volatility causes increased effective tax-rate volatility under IFRS. Add to that the myriad statutory variations that each country imposes on tax deductions, and IFRS 2 becomes a much more complex rule to implement from a tax perspective than Topic 718.
Other accounting standards in their final stages of convergence may also diverge in practice, says David Larsen, a managing director at independent advisory firm Duff & Phelps. They include the boards’ fair-value measurement standards, FASB’s Topic 820 (formerly FAS 157), and the exposure draft on the same topic from the IASB.
Topic 820 and the international proposal are nearly identical in terms of the wording of the principle, in that they both assume that the asset or liability is being exchanged in an orderly transaction between market participants and valued as of the measurement date. Keeping the wording aligned was a deliberate effort on the part of the IASB, which released its draft in May for a four-month public-comment period that closed September 28. “The reason this is interesting is because IASB has proposed the exact same definition for fair value that is used in U.S. GAAP. But then you start digging down underneath the covers a bit and you see that there are some nuances [that create practical differences],” notes Larsen.
For example, Topic 820 requires that when a company looks to markets to establish the fair value of a transaction, it should first consider the “principal market” (the market having the greatest volume and level of activity for the asset or liability). In the absence of a principal market, U.S. GAAP says the company should look to the most advantageous market (defined as the market that maximizes the amount that a company would receive for selling the asset, or minimizes the amount that it would pay to transfer the liability, minus transaction costs).
Under the IFRS proposed standard, a company need only look at the most advantageous market. That subtle variation should not make a big difference in valuation measurement, reckons Larsen. Still, he thinks a case can be made for eliminating the difference before the final IASB rule is issued to avoid confusion on what could turn out to be a highly subjective determination.
IASB chairman David Tweedie may be thinking along the same lines. He told CFO.com that if the Securities and Exchange Commission decides to require U.S. companies to file financial results using IFRS, it will be up to the two boards to “go through the tension points” and tidy up rule disparities that may cause implementation problems. The SEC plans to make its decision in 2011, the same year the IASB and FASB expect to complete the major projects in their convergence effort.