Capital tax developments

Currently, IASB and FASB are making efforts to converge the US GAAP and the IFSR in order to provide a system of financial reporting that would be compatible with international businesses. It is true that during the implementation of IFSR in the insurance industry in 2005, most of the industry that is greatly affected is the insurance companies from the EU. Investments in third party investments which before was considered as intangible property is now considered as property of the company (Murray, 2004).

This means that the taxable capital of the business will go to increase and thus will cut the revenue or the company. With the advent of IFSR in the market, most of the insurance businesses incurred higher property assets. Moreover, under the IFSR, subsidiaries have increased since it is not being measured through equity method, well as; the differences in the foreign exchange due to the transformation of the net investments in subsidiaries in service overseas are not being recorded.

Just like what happened to Merkur Group whose property increased by 1, 941 million and their investment in subsidiaries increased by 30 million due to the implementation of the IFSR in 2005 (merkur. eu, 2006). Receivables and other assets have improved due to the transfer of advances to supplier from inventories. In other words, current assets of the company would increase while their inventories would decrease. Income of the company will rise by the time receivables collected.

In the situation of Merkur Group, their receivable increased by 950 million due to transfer of inventories and other accrued revenue to receivables under IFSR. As for the case of GAAP, it really helped those companies that use the said system of reporting for it cuts the amount of taxable capitals of the company, making the organization having more funds or “profit more on their operation. Just like in the case of the Royal Trust Co. , an insurance firm, wherein they appealed to the court regarding the amount of their taxable capital.

Based from the principles of GAAP, they considered long term lease agreements as direct financing leases and therefore must be included as a receivable and not tangible assets anymore. Because of this, through the aid of GAAP, the taxable capital of Royal Trust Co will be reduced; thus, will only incur fewer costs as compared to when their leased equipment will be included in the total taxable income of their company (Lambert, 2002).

One of the differences of IFSR to GAAP is that IFSR includes the intangible assets in determining the taxable capital while GAAP excludes intangible assets. This would make GAAP advantageous than IFSR in determining the taxable capital of the company. There would be lower taxes under GAAP than with IFSR (merkur. eu, 2006). Another difference would be on the manner of measuring the property, plant and equipment of the company.

Under the IFSR, the manner of measuring the said items would be through either historical costs or revaluation; whereas, the GAAP only uses historical costs as the basis of measuring the property, plant and equipment of the company and not revaluations costs. In effect the company using GAAP could have fewer expenses as compared to the one using IFSR since companies using revaluations always state the true value of their properties whereas there is a tendency for the one using GAAP to overstate their expenses since they are computing for the depreciation of their equipment (Wild, 2007).

There also exists similarities between the said two reporting scheme. One of which is that both of the recording processes are can be used by insurance and any other types of organization. With this, it is up to the company to identify which one of the given two ways of recording transaction would fit to their nature of business. Another similarity would be that IFSR and GAAP both uses historical costs in measuring the current costs of a property.

This helps the company to determine the real value of an economic item. This would help them to increase the costs of their operation and thus, will incur less taxable income.


LAMBERT, P. (2002) Capital tax developments. MERKUR. EU (2006) SUMMARY OF UNAUDITED REPORT ON OPERATIONS OF MERKUR, D. D. AND MERKUR GROUP FOR THE PERIOD FROM JANUARY TO SEPTEMBER 2006. MURRAY, A. (2004) Mind the GAAP: Fitch’s View on Insurance IFRS. WILD, K. (2007) IFSRs and US GAAP- A POcket Comparison.