Koch’s Corner: Simplifying Accounting for Income Taxes

[vc_row][vc_column][vc_column_text]Koch’s Corner delivers concise, “need to know” summaries of important updates on accounting and assurance issues for privately-held companies.

By Richard Koch, CPA
Director of Quality Control at Gray, Gray & Gray

As part of its initiative to reduce complexity in accounting standards the Financial Accounting Standards Board (FASB) has issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.” This simplification is achieved by removing certain exceptions to the general principles in Topic 740, “Income Taxes,” and amending existing literature to improve the consistent application of and simplify GAAP.

The amendments in this update simplify the accounting for income taxes by doing the following:

  1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax;
  2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized, and when it should be considered a specific transaction;
  3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority;
  4. Requiring that an entity reflect 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 accounting for using the equity method.

The following exceptions were removed:

  1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
  2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
  3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary;
  4. 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.

For public business entities, the amendments in this update are effective for fiscal years (and those interim periods within those fiscal years) beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021; and interim periods within the fiscal years beginning after December 15, 2022.  Early adoption is permitted.

If you have questions about accounting for income taxes or other accounting questions, please contact me at (781) 407-0300 or via email at rkoch@gggcpas.com.[/vc_column_text][/vc_column][/vc_row]

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