Question

Computation of deferred taxes under IFRS is slightly different from GAAP. For example, in the United Kingdom (which follows IFRS), companies use the crystallization approach. An equivalent concept in the United States is “realization.”

The concept underlying this “crystallization” approach is that companies recognize deferred income taxes only if the taxes are expected to crystallize. Therefore, if liability is deferred indefinitely, then the present value of that liability is zero. No deferred tax liability is recognized if the accumulated deferred tax amount is expected to increase each year, thereby delaying indefinitely the ultimate liquidation of this obligation.

1. Compare and contrast the theory behind the “crystallization” approach with the inter-period allocation approach used in the U.S.
2. How might this same concept be applied to the recognition of a liability for accounts payable? That is, if accounts payable are expected to increase each year, should the crystallization concept apply to this liability? Why or why not?
3. How reasonable does this approach seem? Explain.

Answer 1

Under crystallization approach, basically taxes are recognized only when they are expected to realize. Hence, it is assumed in the method that, in case of such deferred liability, present value of liability is zero since it is indefinite.

Unlike crystallization approach, allocation approach requires deferred asseys & liabilities to be recognized in balance sheet immediately against the enacted tax rates.

Comparison between two

Crystallization approach	Allocation approach
1) In the present year, it shows that present value of deferred taxes is zero. 2) Liability is realized immediately. No further recording in nest years is made.	1) Taxes are allocated in the present financial year. 2) Liability gets carried to next years, hence it will be recorded over years unless settled.

For accounts payable that will get increase, crystallization method cannot be followed, this method will simply not let the balance increase, it will write off the balance & will not carry to the next year, which in turn will show wrong creditors than actual & will impact company's performance.

It will be reasonable not to follow crystallization approach for accounts payable. They should be recorded appropriately for a particular year & should be carried forward if not realized in the current year.