The survey, carried out between January and March 2005, involved telephone interviews with 192 tax directors and CFOs implementing IFRS in Australia, Belgium, China/Hong Kong, France, Germany, Italy, South Korea, the Nordic countries, The Netherlands, Spain, Switzerland and the United Kingdom.

In terms of implementing IFRS from a tax perspective, the survey revealed that the top three areas of concern for the respondents are interpretation of the technical standards, the process or methodology used for implementing IFRS conversion, and risk analysis and impact modelling of the conversion.

When asked their greatest areas of tax concerns in the actual implementation of IFRS, 54% of those polled mentioned calculation and explanation of deferred taxes, 44% cited overall impact on effective tax rate, 42% said impact on tax treatment of financial instruments such as derivatives and 37% said impact on the tax treatment of intangible assets.

“In many countries, IFRS involves a conceptual change in accounting for income tax, which may have a significant impact on the effective tax rate of companies and their reported tax balances. For example, IFRS requires a ‘balance sheet’ method regarding the calculation of deferred taxes that many companies may struggle with due to its complexity," noted Ernst & Young, adding that:

“The conversion to IFRS for many comes at a time when tax directors are already struggling under increased regulatory and compliance requirements and heightened sensitivity towards tax risk management and effective corporate governance."

“IFRS brings greater transparency and enables management to more readily compare their results with those of their competitors. However, there is the very real possibility that this will increase the pressure on tax directors to more proactively manage their effective tax rates but at a time when the effective tax rate is being viewed by some regulatory authorities as an indication of aggressive tax planning. The pressure from the financial markets to deliver a strong performance in terms of managing taxes needs to be balanced against perception and reputation issues associated with the effective management of tax risks.”

E&Y also observed that one of the most prominent tax risk consequences arising from the introduction of IFRS involves meeting the high standards set by International Accounting Standard (IAS) 12 and, in particular, arriving at a consistent interpretation of the standards.

The objective of IAS 12 is to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. While the tax consequences of most events affecting taxable income for the year are recognized in the financial statements, some consequences are deferred and affect taxable income in future years.

Events that have deferred tax consequences give rise to temporary differences. IAS 12 requires that current tax liabilities and assets be recognized for tax payable for the current year and that an entity recognize deferred tax assets or liabilities for temporary differences.

E&Y continued:

“Applying IAS 12 in a relatively simple situation involves quantifying the cumulative temporary differences, including carrying forward unused tax losses existing at the reporting date, and multiplying them by the applicable tax rate."

“Under IAS 12, deferred tax liabilities must be recognized but deferred tax assets may be recognized only if it is probable that the amount will be recoverable."

“Not all deferred tax represents deferred tax expense in the profit and loss statement for the period. Deferred tax that relates to an item in the equity section of the balance sheet must also be directly debited (or credited) to equity. Deferred tax expense and current tax expense are disclosed separately in the financial statements but aggregate to total tax expense.”