Abstract

IFRS has brought a prominent effect to corporate taxation. Under the current tax system, taxadjustment is necessary for the computation of taxable income from the accounting net income. However, the emphasis on the fair value under IFRS seriously challenges this procedure and madethe income tax allocation more complicated. Depreciation for tangible assets excluding depreciable realty that requires straight－line methodis one of many practices where IFRS requires a change. Under K－GAAP, most firms applieddeclining－balance method for the depreciation of such assets because the tax deduction ispermitted only when it is also recognized as a cost on the financial statement. However, IFRSprecludes the use of declining－balance method in order to properly match the cost of an assetagainst revenue. In this paper, we compare the asset value of 596 firms under K－GAAP andIFRS as prepared within their 2010 financial statements. We find that switching to IFRS has asignificant impact on the asset value of 527, or 88% of the sample firms. This study demonstrates one of many immediate tax implications of IFRS by conducting severalcase analyses. Specific to the depreciation method, we show that IFRS creates a greater taxburden and a more complicated environment for income tax allocation. This is largely due to thegap between financial and tax accounting resulting from the retroactive application of the changein depreciation method. Our findings also imply that the 2010 Tax Amendment does not fullyeliminate the additional tax burden arising from the change in depreciation method after theadoption of IFRS. This study further shows that the special provision for immediate write－offs enhances thedifficulties associated with the tax adjustment process regardless of the IFRS adoption. Finally,this study demonstrates that the tax burden can be reduced with the use of two－book system forfinancial accounting and tax depreciation. Based on these results, this paper proposes implementing separate depreciation systems for bookand tax purposes in order to mitigate the corporate tax burden.

Keywords

• depreciation
• two－book system
• income tax accounting
• deferred income tax accounting

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