Simplified Income Tax Accounting Requirements Should Lower Accounting Costs

Simplified income tax accounting requirements issued in December 2019 should lower accounting costs in six costly and complex areas. The savings will be realized in 2021 for calendar-year public companies and in 2022 for calendar-year private companies.

The revised accounting standards issued by the Financial Accounting Standards Board (FASB) simplify income tax accounting requirements by:

1. Eliminating the need to analyze whether the following applies in a given period:
   • The exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (e.g., discontinued operations or other comprehensive income),
   • Exceptions to accounting for basis differences when there are ownership changes in foreign investments and foreign equity-method investments, and
   • The exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.
2. Recognizing a franchise tax (or similar tax) that’s partially based on income as an income-based tax and accounting for any incremental amount incurred as a non-income-based tax.
3. Requiring an evaluation to determine whether the step-up in the tax basis of goodwill relates to (1) a previous business combination for which the book goodwill was originally recognized (in which case, a deferred tax asset would not be recognized unless the newly tax-deductible goodwill exceeds the remaining balance of book goodwill) or (2) a separate transaction (in which case, a deferred tax asset would be recognized, subject to valuation allowance considerations) on the basis of certain indicators included in ASU 2019-12.
4. Reflecting the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
5. Making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.
6. Specifying a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax in its separate financial statements.

Furthermore, under the updated guidance, an entity may elect to allocate the consolidated amount of current and deferred tax expense (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.

What about Disclosures?

In addition to these, the FASB has been evaluating the disclosure requirements for income taxes for possible modifications. In 2016 and 2019, the FASB issued controversial proposals that would have required businesses to disclose more details about domestic and foreign tax payments. After receiving negative feedback on both proposals, the income tax disclosure project is back in the redeliberation phase. FASB staff is currently conducting research and outreach on potential alternatives to disclose of certain disaggregated income tax information and other proposed amendments.

Effective Date:

• For public business entities, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period in periods for which financial statements have not yet been issued.
   
• For all other entities, the standard is effective for fiscal years beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period in periods for which financial statements have not yet been made available for issuance.

If an entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all the amendments in the same period.

For information about this change or other income tax accounting issues, contact us. We are here to help.

© 2021