Reporting Income Taxes Just Got Simpler

Businesses have lamented for years that the guidance under Accounting Standards Codification Topic 740, Income Taxes, includes too many mechanical rules and exceptions. As a result, it often yields information that’s challenging for investors to comprehend. These complaints intensified with the sweeping changes made under the Tax Cuts and Jobs Act.

Finally, on September 4th, The Financial Accounting Standards Board (FASB) unanimously voted to finalize a proposal that simplifies the rules.

Where Can You Expect to See Changes?

The FASB expects to publish an updated standard by year-end that will simplify income tax accounting requirements in several areas. To improve consistency in income tax accounting and simplify the practice, the final standard will remove exceptions to:

• The incremental approach for intraperiod tax allocation when there’s a loss from continuing operations and income, or a gain from other items
• The requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
• The ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary
• The general method for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year

The FASB made narrow clarifications for:

• Franchise taxes that are partially based on income
• Transactions that result in a step up in the tax basis of goodwill
• Financial statements of legal entities that aren’t subject to tax
• Enacted changes in tax laws in interim periods

The FASB voted to revise the transition method for franchise taxes, allowing companies a choice in applying the franchise tax amendments retrospectively, or on a modified retrospective basis.

Positive Reaction

The final standard, issued in May, is based on Proposed Accounting Standards Update (ASU) No. 2019-700, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. Response to the proposal was generally positive. Most respondents agreed that the changes would simplify reporting for income taxes, while maintaining or improving information usefulness provided to financial statement users.

The changes will take effect for public companies beginning on or after December 15, 2020. For all other companies, the changes take effect on or after December 15, 2021. However, because the updated standard is simpler and isn’t expected to increase reporting costs, many companies are expected to adopt the standard early.

The FASB has voted to finalize the proposal to simplify existing requirements. For more details on the final rule — to be published by year-end — contact us and we can help guide you.

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