PORTFOLIO

Accounting for Income Taxes: Fundamental Principles and Special Topics (Portfolio 5001)

BNA Accounting Policy & Practice Portfolio 5001, Accounting for Income Taxes: Fundamental Principles and Special Topics, analyzes the rules in FASB Accounting Standards Codification Topic 740 (ASC 740), Accounting for Income Taxes, and its international counterpart, IASC International Accounting Standard 12, Income Taxes. 

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DESCRIPTION

BNA Accounting Policy & Practice Portfolio 5001, Accounting for Income Taxes: Fundamental Principles and Special Topics, analyzes the rules in FASB Accounting Standards Codification Topic 740 (ASC 740), Accounting for Income Taxes, and its international counterpart, IASC International Accounting Standard 12, Income Taxes. Application of these standards requires a thorough understanding of their conceptual underpinnings, and significant judgment is required in implementation of these decidedly principles-based standards. This Portfolio also discusses associated issues such as the impact of tax-planning strategies, tax-advantaged transactions, and reporting and disclosure requirements.
This Portfolio provides a historical perspective on accounting for income taxes, discusses the conceptual cornerstones of accounting for income taxes under U.S. GAAP, and provides context for understanding the detailed rules on which the rest of the Portfolio focuses. Section II defines, explains, and illustrates temporary differences as well as the related concepts of deferred tax liabilities and deferred tax assets. Section III explains how a company initially should recognize and measure deferred tax liabilities and assets and how to adjust them to account for certain subsequent events. Section IV explains and illustrates how to present and disclose deferred tax assets and liabilities in financial statements. That section covers, compares, and, where necessary, contrasts disclosure requirements under ASC 740 and SEC rules.
Section V discusses accounting for uncertain tax positions. Section VI analyzes numerous situations requiring special treatment, including business combinations, state tax issues, employee compensation and benefits, international operations, intraperiod tax allocations, interim reporting, international reporting standards (including ongoing efforts to achieve global convergence), and other selected topics. The Portfolio includes Worksheets illustrating issues regarding the application of the accounting for income tax rules.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5001, Howell & Walther, Accounting for Income Taxes: Fundamental Principles and Special Topics (Accounting Policy and Practice Series). Within the Accounting Portfolio Series; however, within BNA materials, portfolios are referenced by number and name only, such as APP 5001, Accounting for Income Taxes: Fundamental Principles and Special Topics.


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AUTHORS

PAUL M. HOWELL, MPA, CPA
Paul M. Howell, MPA, CPA, tax partner with Grant Thornton, LLP (national FAS 109 champion); B.B.A., Management/Marketing, Stephen F. Austin State University (1982); M.P.A., University of Texas at Arlington (1985); Certified Public Accountant, Texas; former Director of Taxes for Furmanite Corporation (formerly known as Xanser Corporation); over 20 years of experience in public accounting.

LARRY M. WALTHER, CPA, PH.D.
Larry M. Walther, CPA, Ph.D., Associate Professor, University of Texas at Arlington (Chair of Accounting Department); B.B.A., Accounting, University of Texas at Arlington (1976); M.P.A., University of Texas at Arlington (1977); Ph.D., Accounting, Oklahoma State University (1980); Certified Public Accountant, Texas; former auditor with Ernst & Young; consultant to numerous organizations; author of numerous books and articles on financial accounting.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Purposes, Scope, and Contents of Portfolio

B. Historical Perspective

1. APB 11

a. Basic Example of Deferred Method

b. Shortcomings of Deferred Method

2. FAS 96

3. FAS 109

C. Conceptual Underpinnings of FAS 109

1. Asset/Liability Approach

a. Basic Example of Asset/Liability Method

b. Utility of the Asset/Liability Approach

2. Key Objectives and Principles

a. Objectives

b. Principles

c. Linkage Between Objectives and Principles

d. Exclusions From Scope of FAS 109

II. Temporary Differences

Introductory Material

A. Definition of Temporary Difference

1. Types of Temporary Differences

2. Taxable v. Deductible Amounts

B. Examples of Taxable and Deductible Temporary Differences

1. Taxable Temporary Differences

a. Revenues Recognized in Book Income Before Taxable Income

(i) Installment Sales Transactions

(ii) Certain Undistributed Earnings of Foreign Subsidiaries

(iii) Certain Debt Cancellations

(iv) Book Income Related to an Overfunded Pension Fund

b. Expenses Recognized in Taxable Income Before Book Income

(i) Accelerated Tax Depreciation Over Book Depreciation

(ii) Tax Basis Goodwill Amortization

(iii) Computer Software Costs Deducted Currently for Tax

c. Differences Created by Business Combinations

d. Other Taxable Temporary Differences

(i) Transactions With No Balance Sheet Basis

(ii) Tax Basis Reductions From Tax Credits

2. Deductible Temporary Differences

a. Revenues Recognized in Taxable Income Before Book Income

(i) Prepaid Service Fees

(ii) Gains on Sale-Leaseback Transactions

b. Expenses Recognized in Taxable Income After Book Income

(i) Uniform Capitalization of Inventory Rules

(ii) Book Impairments and Reserves

(iii) Book Reserves That Are Not Fixed and Determinable Under I.R.C. § 461(h)

(iv) Accrued Interest on Certain High-Yield Discount Obligations

(v) Deferred Compensation Costs Under I.R.C. § 409A

c. Differences Created by Business Combinations

d. Other Deductible Temporary Differences

3. Recap of Temporary Differences

a. ITC Accounted for by the Deferred Method

b. An Increase in Tax Basis Due to Inflation Indexing

C. Non-Taxable Revenue and Non-Deductible Costs

1. Examples

2. Recap and Illustration

D. Uncertain Outcomes for Basis Differences

III. Recognition and Measurement

Introductory Material

A. Annual Computation

1. Identify the Temporary Differences (and Any NOLs/Tax Credit Carryforwards)

2. Determine the Deferred Tax Liabilities

3. Determine the Deferred Tax Assets

4. Determine Deferred Tax Assets Attributable to Tax Credit Carryforwards

5. Establish a Valuation Allowance for Deferred Tax Assets Unlikely to Be Realized

B. Basic Illustrative Example

C. Applicable Tax Rate

1. Graduated Rates Issue

2. Special Rates

3. Phased-In Rate Changes

4. Alternative Minimum Tax

D. Valuation Allowance

1. Establishing a Valuation Allowance

2. Changes in Valuation Allowance

a. Change in Valuation Used in Prior Business Combination

b. Change in Valuation for Specified Equity Transactions

E. Tax Planning Strategies

F. Changes in Tax Laws/Rates/Tax Status

IV. Financial Statement Presentation and Disclosure

A. FAS 109 Disclosure Rules

1. Balance Sheet Presentation and Disclosure

a. Balance Sheet Presentation

b. Balance Sheet Disclosure

2. Income Statement Presentation and Disclosure

3. Reconciliation

4. Comprehensive Illustration

5. Special Situations and Considerations

a. MD& A Disclosure of Uncertainty

b. Separately Issued Financials for a Member of Group Filing a Consolidated Return

c. Interest and Penalties on Tax Deficiencies

d. Professional Fees

e. Unrecognized Tax Benefits Associated With Uncertain Tax Positions

B. SEC Disclosure Rules

1. General

2. Tax Holidays

3. "Carve-Out" Financial Statements

4. Separate Financial Statements of a Consolidated Tax Return Group

5. Other SEC-Related Issues

V. Uncertain Tax Positions

Introductory Material

A. Definition of "Uncertain Tax Position"

B. FIN 48

1. Recognition-Step 1

2. Measurement-Step 2

3. Tax Planning Strategies

4. FIN 48 Issues Subsequent to Initial Recognition

5. Other Items

a. Classification and Disclosure

b. Interest and Penalties

VI. Special Topics

A. Business Combinations

1. General

2. Goodwill

3. Negative Goodwill

4. Separately Identified Intangible Assets

5. Acquired In-Process Research and Development

6. Income Tax Uncertainties Arising in or Acquired in a Business Combination

7. Valuation Allowances

B. State Tax Issues

1. General

2. Tax-Paying Components

3. Calculating State Taxable Income

4. Franchise Taxes, Commercial Activity Taxes, and Margin Taxes

C. Employee Compensation and Benefits

1. Deferred Compensation

2. Pensions

3. OPEB

4. Stock Compensation (FAS 123(R))

D. International Operations (Including Permanent Reinvestments)

1. Outside Basis Differences

2. Inside Basis Differences

3. Unique International Issues

E. Intraperiod Tax Allocation

1. General

2. Continuing Operations

a. Changes in Valuation Allowance

b. Changes in Tax Laws, Rates, or Tax Status

c. Dividends on Shares Held by an ESOP

(i) Allocated Shares

(ii) Unallocated Shares

3. Items Charged or Credited Directly to Shareholders' Equity

a. Examples of Items Charged or Credited Directly to Shareholders' Equity

b. Quasi Reorganizations

4. Method of Allocation

a. Example of Allocating Tax to One Item Other Than Continuing Operations

b. Example of Allocating Tax to Multiple Items Other Than Continuing Operations

F. Interim Reporting

1. General

2. Effective Tax Rate Calculation

3. Changes in Tax Law or Rates

4. Operating Losses in Interim Periods

5. NOL Carryforwards and Other Deductible Temporary Differences/Credits From Prior Periods

6. Items Not Included in Estimated Annual Effective Tax Rate

7. Publicly Traded Company Interim Reporting Disclosures

G. International Accounting Standards

1. General Background

2. Pertinent Provisions of IAS 12

a. Definitions

b. Current Taxes

c. Deferred Tax Liabilities and Assets

d. The Provision for Taxes

e. Balance Sheet Presentation

f. Disclosures

3. Recap of Key Differences Between IAS 12 and FAS 109

4. Global Convergence

H. Other Topics

1. Regulated Enterprises

2. LIFO Inventory

3. Partnerships, Flow-Through Entities, and Not-for-Profit Foundations

4. Leveraged Leases

5. Business Combination Accounting

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Glossary

Worksheet 2 Form 1120 (Including Schedule M-1)

Worksheet 3 Form 1120 Schedule M-3

Worksheet 4 Illustrations: Reconciliation of Book to Tax Income and Current Taxes, Analysis of Temporary Differences, Schedule of Temporary Differences and Deferred Taxes, Provision for Income Taxes, and Rate Reconciliation

Worksheet 5 General Accounting Process Related to the Total Income Tax Provision-Checklist

Worksheet 6 FAS 109 Considerations for the Auditor-Checklist

Worksheet 7 Sample Disclosure Concerning Undistributed Earnings of Foreign Subsidiaries

Worksheet 8 Sample Disclosure Concerning Reduction in Goodwill From Deferred Tax Asset Valuation Allowance

Bibliography

Official Authorities

U.S. Constitution

Statutes

Legislative Materials

Court Cases

U.S. Department of Treasury Materials

Internal Revenue Code

Treasury Regulations

IRS Forms

U.S. Securities and Exchange Commission Materials

SEC Regulations

SEC Staff Bulletins

SEC Materials

FASB

FASB Statements of Financial Accounting Standards

FASB Interpretations

FASB Statements of Financial Accounting Concepts

FASB Staff Positions

FASB Materials

Accounting Principles Board Opinions

Accounting Research Bulletins

EITF

EITF Issues

EITF Topic D

AICPA

AICPA Statements of Position

AICPA Materials

IASB

IASB Standards

IASB Materials

Unofficial

Journal Articles

BNA Tax and Accounting Portfolios