On December 18, 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes. The amendments are intended to reduce the cost and complexity of the accounting for income taxes.
Following is an overview of the revisions, exceptions, and key implications for you and your business.
The amendments in ASU 2019-12 were issued as a part of the FASB’s simplification initiative. This effort aims to identify, evaluate, and improve areas of Generally Accepted Accounting Principles (GAAP) where cost and complexity can be reduced while still maintaining the usefulness of information in the financial statements. Here are the key provisions.
The amendments remove the following exceptions to the general principles in Topic 740, Income Taxes.
Intraperiod Tax Allocation
Under Topic 740, the tax effect of income from continuing operations is generally determined without considering the effect of items that aren’t included in continuing operations, such as discontinued operations or other comprehensive income. Prior to ASU 2019-12, GAAP provided an exception to this approach by requiring that an entity with a loss from continuing operations consider all items—including discontinued operations and other comprehensive income—when determining the tax benefit from continuing operations.
The amendments remove this exception to the incremental approach for intraperiod tax allocation and require that the effect of items outside continuing operations aren’t considered when calculating the tax effect on continuing operations, even when there’s a loss.
Deferred Tax Liabilities
The amendments remove certain exceptions related to outside basis differences when there’s an ownership change in a foreign investment. Under legacy GAAP, entities weren’t allowed to recognize a deferred tax liability on outside basis differences of a foreign subsidiary that became an equity method investment for which the indefinite investment assertion had been made. Entities were also required to freeze a deferred tax liability for a foreign equity method investment that became a subsidiary.
The amendments remove these exceptions and more closely align the accounting for deferred tax liabilities related to changes in ownership of foreign subsidiaries to that of other equity investments.
Interim-Period Tax Calculation
Under the interim-period income tax model in Subtopic 740-270, an entity is required to make its best estimate of the annual effective tax rate for the full fiscal year at the end of each interim period. The guidance specifies that an entity should apply the annual effective tax rate to the year-to-date income or loss as long as the tax benefits for any losses are expected to be realized during the year, or would be recognizable as a deferred-tax asset at the end of the year.
Legacy GAAP provided an exception to that guidance, which required an entity that has an ordinary loss for the year-to-date interim period that exceeds the anticipated ordinary loss for the year to limit the income tax benefit recognized for the year-to-date period to the income tax benefit determined based on the year-to-date ordinary loss.
The amended guidance removes the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments simplify the accounting for income taxes by providing the following clarifications:
- Franchise taxes. Franchise taxes—or similar taxes—partially based on income are required to be recognized and accounted for as income-based taxes.
- Transactions. Transactions with a government that result in a step up in the tax basis of goodwill are required to be evaluated to determine whether they relate to the business combination in which the goodwill was originally recognized or to a separate transaction.
- Allocations. The consolidated amount of current and deferred tax expense isn’t required to be allocated to a legal entity that isn’t subject to tax in its separate financial statements.
- Annual effective tax rate. The effect of a change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the new legislation.
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
For all other entities, the amendments are 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.
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For more information on how these changes to the accounting for income taxes may affect your business, contact your Moss Adams professional.