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Accounting for Income Taxes — FASB ASC 740 (Portfolio 5000)

BNA Accounting Policy & Practice Portfolio 5000, Accounting for Income Taxes—FASB ASC 740, was completely revised in October 2011.

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DESCRIPTION

BNA Accounting Policy & Practice Portfolio 5000, Accounting for Income Taxes—FASB ASC 740, was completely revised in October 2011.
This Portfolio is designed to summarize the accounting literature related to accounting for income taxes.
Accounting Standards Codification Topic 740 (ASC 740) includes financial accounting and reporting guidance for the effects of income taxes that result from an entity's activities during the current and preceding years. It codified the guidance that was previously included in FASB Statement 109, APB 23, and other FASB statements and EITF consensuses.
This Portfolio has been updated for Ernst & Young interpretative guidance through October 2011. It has been updated and the guidance has been expanded to cover a variety of topics including valuation allowances, the tax effects related to spin-off transactions, and accounting for government assistance. Updated and expanded sections are indicated in the respective heading as well as in Worksheet 7. Excerpts from and references to the Accounting Standards Codification are contained within this Portfolio. Guidance that may still be applicable but is based on non-authoritative standards not included in the FASB's Accounting Standards Codification is included in the Working Papers.
Ernst & Young professionals are prepared to help you identify and understand the issues related to income taxes. In addition, our audit and tax professionals would be pleased to discuss with you any other issues related to your tax and financial reporting needs.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5000-5th, Ernst & Young LLP, Accounting for Income Taxes—FASB ASC 740. Within the Accounting Portfolio Series references to the Portfolios include only the Portfolio numbers and titles.


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AUTHORS

ERNST & YOUNG LLP

TABLE OF CONTENTS

Detailed Analysis

I. Introduction (¶ 3)

II. Scope (¶ 4-5)

Introductory Material

A. General

B. State Income Taxes

C. Partnerships and Other Flow-Through Entities

D. Excise Taxes-Not-for-Profit Foundations

E. Scope Exceptions (FAS 109, ¶ 5)

1. Investment Tax Credits

2. Discounting

3. Interim Accounting

III. Objectives and Basic Principles (¶ 6-9)

Introductory Material

A. Basic Approach

B. Exceptions to Comprehensive Accounting for Deferred Taxes (FAS 109, ¶ 9)

1. Leveraged Leases

a. Leveraged Lease Tax Credits as Source of Taxable Income

b. Impact of Change in Effective Tax Rate

c. Impact of AMT on Leveraged Lease Accounting

d. Leveraged Leases Acquired in Business Combinations

2. Intercompany Transactions

a. Measurement of Prepaid Tax on Intercompany Transactions

b. Classification of Prepaid Tax on Intercompany Transactions

c. Impact of Subsequent Changes in Tax Rates on Prepaid (Accrued) Taxes Attributable to Intercompany Transactions

d. Changes in Realizability of Prepaid (Accrued) Taxes Attributable to Intercompany Transactions

3. FAS 52 Differences

a. Nonmonetary Temporary Differences

b. Monetary Temporary Differences

(1) Taxation of Unrealized Gains and Losses

(2) Taxation of Realized Gains and Losses

c. Tax Indexation of Nonmonetary Assets

C. Remeasurement in Highly-Inflationary Economies

1. Highly Inflationary Economy-Change in Functional Currency

2. General Price-Level Changes-Restatement of Financial Statements

IV. Temporary Differences (¶ 10-15)

Introductory Material

A. Temporary vs. Permanent Differences

B. Identifying Cumulative Temporary Differences

1. Temporary Differences Related to LIFO Inventory

2. Temporary Differences-Change in Tax Method of Accounting

3. Tax-to-Tax Differences

4. Temporary Differences Related to State Income Taxes

5. Different Tax and Fiscal Year Ends

a. Payments to the IRS to Retain Fiscal Year

6. Impact on Deferred Taxes of Ability to Delay Payment

7. Tax-Planning Strategies

8. Temporary Differences-Examples

9. Temporary Differences-Financial Services Industry

C. Scheduling the Reversal of Temporary Differences

1. Determining Reversal Dates

2. Examples of Temporary Difference Reversal Patterns

3. Change in Method Used to Determine Reversal Pattern

D. Basis Differences Without Future Tax Consequences-Permanent Differences (FAS 109, ¶ ¶ 14 and 15)

E. Temporary Differences Without Financial Reporting Asset or Liability

V. Recognition and Measurement (¶ 16-19)

Introductory Material

A. Applicable Tax Rates

1. Average Graduated Tax Rates

B. Enacted Tax Rate

C. Dividends Received Deductions

1. Shareholders' Tax Credits for Dividends Paid

2. Corporate Tax Credits for Dividends Paid

3. Recognition of Subsidiary Dividends Paid Tax Credits

D. Tax Holidays

1. Applicable Tax Rate in a Tax Holiday Period

E. Alternative Minimum Tax (FAS 109, ¶ 19)

1. Overview of the U.S. Corporate AMT System

2. Effect of the AMT on Deferred Tax Calculations

3. Examples of AMT Calculations and Related Tax Provisions

F. State and Local Income Taxes

1. State Applied vs. Enacted Tax Rates

2. Estimating Deferred State Income Taxes

3. Income Apportionment

4. State Taxes Based on the Greater of Franchise Tax or Income Tax

a. Revised Texas Franchise Tax

b. Franchise Tax Effect on Deferred State Income Taxes

5. State Taxes Based on Items Other Than Income

G. Special Deductions

1. Domestic Production Activities Deduction

VI. Valuation Allowance (¶ 20-25)

Introductory Material

A. General

1. Future Tax Benefits Deemed Worthless

B. Evaluating the Need for a Valuation Allowance

1. Appropriate Character of Taxable Income

2. Offsetting Taxable and Deductible Amounts

C. Future Reversal of Existing Temporary Differences

D. Future Taxable Income

1. Consistency of Assumptions and Projections

E. Operating Loss and Tax Credit Carrybacks

F. Tax-Planning Strategies (¶ 22)

1. Tax-Planning Strategies-Optionality

2. Tax-Planning Strategies-Examples

3. Tax-Planning Strategies-Other Considerations

a. Consideration of Significant Expenses

b. Classification of Expenses to Implement Tax-Planning Strategies

4. Tax Elections

G. Positive and Negative Evidence (¶ 23-25)

1. Operating Loss and Tax Credit Carryforwards

2. Going Concern Opinion

3. Emergence From Bankruptcy

4. Unusual, Nonrecurring and Noncash Charges

H. Other Negative Evidence

I. Available Evidence

J. Foreign Tax Credit Carryforwards

K. Recovery of Investments in Subsidiaries

L. Effect of Alternative Minimum Tax (AMT) on Deferred Tax Assets

M. Availability of Tax Credits

N. Tax Benefit Substitution Versus Realization

O. Valuation Allowances in a Business Combination

P. Valuation Allowances for Opinion 23 Temporary Differences

Q. Intraperiod Tax Allocations

1. Valuation Allowances for Certain Debt and Equity Securities

2. Valuation Allowances for Minimum Pension Liabilities

VII. A Change in the Valuation Allowance (¶ 26)

Introductory Material

A. General

B. Changes in Valuation Allowances-Business Combinations

C. Valuation Allowances for Opinion 23 Temporary Differences

D. Intraperiod Tax Allocations

1. Valuation Allowances for Certain Debt and Equity Securities

2. Valuation Allowances for Minimum Pension Liabilities

VIII. An Enacted Change in Tax Laws or Rates (¶ 27)

Introductory Material

A. Changes in Tax Laws and Rates

1. Regulatory Changes Akin to Legislative Changes

B. Enactment Date

1. Enactment Date (United States)

2. Enactment Date (Australia)

3. Provisional Measures

C. Effects of Rate Changes on Deferred Tax Assets

D. Retroactive Change in Enacted Tax Rates

E. Changes in Tax Rates Following Adoption of New Accounting Standards

F. Change in Tax Law or Rates Related to Items Not Recognized in Continuing Operations

G. Changes in Tax Accounting Methods

1. Discretionary Change in Tax Accounting Methods

2. Nondiscretionary Change in Tax Accounting Methods

3. Change in Tax Accounting Methods Due To Change in Tax Law

H. Other Discussions of the Impact of Changes in Tax Rates

IX. Change in the Tax Status of an Enterprise (¶ 28)

Introductory Material

A. General

1. Change in Tax Status-Subsequent Event

B. Built-in Gains

C. Upon Consummation of Initial Public Offering

D. Loss of Nontaxable Status

X. Regulated Enterprises (¶ 29)

Introductory Material

A. General

B. Regulatory-Assisted Acquisitions of Financial Institutions

C. Business Combinations

D. Impact of Regulatory Requirements

XI. Business Combinations (¶ 30)

Introductory Material

A. General

B. Tax Effects of Basis Differences

C. Identifiable Intangible Assets and Goodwill

1. Non-Deductible Goodwill

2. Non-Deductible Identified Intangible Assets

3. Purchase Price Allocation Differences

4. Tax-Deductible Goodwill

5. Immediate Recognition of Tax Benefits in a Business Combination

6. Negative Goodwill

7. Deposit-Based Intangibles

8. Acquired Research and Development Deferred Tax Liabilities

D. Impairment of Identifiable Intangible Assets and Goodwill

1. Impairment of Tax Deductible Goodwill

2. Impairment of Non-Deductible Goodwill

a. Allocation of Subsequent Impairments to Deductible and Non-Deductible Goodwill

3. Foreign Currency Temporary Differences From "Push-Down" Adjustments

E. Effects of Change in Tax Laws or Rates Subsequent to a Business Combination

F. Valuation Allowance in a Business Combination

1. Acquired Company Tax Benefits

a. Subsequent Recognition of Acquired Company Deductible Temporary Differences and Carryforwards

2. Acquiring Company Valuation Allowance Reduced in a Business Combination

a. Subsequent Recognition of Acquiring Company Deductible Temporary Differences and Tax Carryforwards

3. Acquiring Company Valuation Allowance Increased in a Business Combination

G. Post Combination Net Operating Losses

H. Ordering Pre and Post Acquisition Tax Benefits

I. Tax Benefits of Nonqualified Options Issued in a Purchase Business Combination-Pre-Adoption of FAS 123(R)

J. APB 23 in a Business Combination

K. Asset Acquisitions

1. Asset Acquired With Tax Basis Greater Than Book Basis

2. Asset Purchased for More Than Tax Basis

3. Deferred Credit From Tangible Asset Acquisition

4. Deferred Credit from the Acquisition of Assets Recorded at Fair Value

5. Valuation Allowance Reduced Due to Acquired Intangible Asset

6. Purchase of Future Tax Benefits

7. Transaction Directly with a Governmental Taxing Authority

XII. Opinion 23 and U.S. Steamship Enterprise Temporary Differences (¶ 31-34)

Introductory Material

A. General

B. Investments in Foreign Subsidiaries

1. Foreign Versus Domestic Subsidiaries

2. Investments That Are Essentially Permanent in Duration

a. Inside Basis Differences of Foreign Subsidiaries

b. Changes in Indefinite Reinvestment Assertions

(1) The American Jobs Creation Act-Limited Relief

3. Partial Reinvestment

4. Other Situations Involving "Indefinite Reversal"

a. Change in Status of Foreign Investees

5. Foreign Equity Method Investees and Corporate Joint Ventures

6. APB 23 and U.S. Possessions

7. Foreign Operational Structures

a. Branch Offices

b. Partnerships

c. Hybrid Structures

8. Deferred Taxes Allocated to Translation Adjustments

a. Original Investment Not Indefinitely Reinvested

b. Hedge of a Net Investment

9. Applicability of APB 23 Exception to Consolidated Variable Interest Entities

10. APB 23 and Purchase Accounting

11. Advance Corporate Tax Payments and Refunds (UK)

a. Frequently Asked Questions

C. Undistributed Domestic Earnings Before 1992

D. Bad-Debt Reserves of Savings and Loan Associations

E. Investments in Domestic Subsidiaries

1. Basis Differences With Tax Consequences

a. Outside-Basis Differences in Joint Ventures

b. Outside-Basis Differences in Equity Method Investees-Applicable Rate

2. Dividends Received Deduction

3. Basis Differences Without Tax Consequences

F. Statutory Reserve Funds of U.S. Steamship Companies (¶ 33)

G. Investments in Domestic Subsidiaries (¶ 33)

1. Basis Differences Without Tax Consequences

a. Expected Manner of Recovery of Investment

b. Change in Expected Manner of Recovery of Investment

H. Limitations on Deferred Tax Assets (¶ 34)

1. Reversals of Deductible Temporary Differences

XIII. Intraperiod Tax Allocation (¶ 35-38)

Introductory Material

A. Income Tax Expense (Benefit) Allocated to Continuing Operations-the Incremental Approach

1. Tax Effect of Pretax Income From Continuing Operations

a. Exception to General Principle of Allocation to Continuing Operations

2. Changes in Tax Laws, Rates or Tax Status

3. Changes in the Valuation Allowance

4. Tax Benefit of Dividends on Shares Held by ESOP

a. Tax Benefit of Dividends on Allocated ESOP Shares

b. Tax Benefit of Dividends on Unallocated ESOP Shares

(1) Unallocated Shares Accounted for Under SOP 93-6

(2) Unallocated Shares Accounted for Under SOP 76-3

B. Items Charged or Credited Directly to Shareholders' Equity (¶ 36)

1. Income Taxes for Debt and Equity Securities Classified as Available-for-Sale

a. Initial Recognition of Unrealized Loss

b. Valuation Allowances

(1) Holding Debt Securities to Maturity as a Tax Planning Strategy

(2) Subsequent to Initial Recordation

(a) Changes Due to Changes in Portfolio Value

(b) Reductions Resulting From a Change in Judgment

(c) Increases Resulting From a Change in Judgment

c. Income Tax Rate Changes

d. Backward-Tracing of Tax Effects

2. Cumulative Translation Adjustment

a. Foreign Currency Hedges

3. Cash Flow Hedges

4. Deferred Taxes for Minimum Pension Liabilities

a. Initial Recognition of Minimum Pension Liabilities

b. Valuation Allowances

(1) Subsequent Recognition of Valuation Allowance

(2) Valuation Allowance Changes Due to Minimum Pension Liability

(3) Change in Judgment Resulting in Decreased Valuation Allowance

(4) Change in Judgment Resulting in Increased Valuation Allowance

c. Reversal of the Minimum Pension Liability

d. Income Tax Rate Changes

5. Income Tax Consequences of Issuing Convertible Debt With a Beneficial Conversion Feature, EITF 05-8

6. Order of Tax Deductions for Excess Stock Compensation-Pre-Adoption of FAS 123R

7. Tax Effects of Transactions Among or With Shareholders

8. Tax Benefits of Pre-reorganization Temporary Differences and Carryforwards

C. Operating Loss Tax Benefit-Backwards Tracing Prohibited (¶ 37-38)

D. Examples of Intraperiod Allocation

XIV. Certain Quasi Reorganizations (¶ 39)

Introductory Material

A. General

B. Bankruptcies

XV. Separate Financial Statements of a Subsidiary (¶ 40)

Introductory Material

A. General

B. SEC Staff Position

C. Financial Regulatory Position

D. Carve Out Financial Statements

XVI. Financial Statement Presentation (¶ 41-49)

Introductory Material

A. Balance Sheet Presentation

1. Offset of Deferred Tax Assets and Liabilities

B. Disclosures About Balance Sheet Accounts (¶; 43-49)

1. Components of Balance Sheet Deferred Tax Amounts

2. Net Operating Loss and Tax Credit Carryforwards

3. Subsequent Recognition of Tax Benefits

4. APB Opinion No. 23 Indefinite Reversal Exceptions

5. Other Balance Sheet Related Disclosures

C. Disclosures About Income Statement Accounts

1. SEC Staff Position

D. Disclosure of Changes in Tax Laws or Rates

E. Interest and Penalties Due to Taxing Authorities

F. Professional Fees

G. Reconciliation to Statutory Rate

H. Illustrative Financial Statement Note Disclosure

I. Management's Discussion and Analysis-SEC Staff Positions

1. Management's Discussion and Analysis Disclosure Requirements

J. Disclosures Related to Tax Contingencies-Prior to Adoption of FIN 48

XVII. Income Tax Exposures (Contingencies)-Prior to Adoption of FASB's Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48)

Introductory Material

A. Initial Recognition of Tax Benefits-Prior to Adoption of FIN 48

B. Accounting for Income Tax Exposures-Prior to Adoption of FIN 48

C. Recording an Accrual for Income Tax Exposures in the Financial Statements-Prior to Adoption of FIN 48

D. Interest-Prior to Adoption of FIN 48

E. Income Tax Reserves Established in Purchase Business Combinations-Prior to Adoption of FIN 48

1. Tax Allocation Uncertainties in a Business Combination-Prior to Adoption of FIN 48

2. Income Tax Uncertainties in a Business Combination-Prior to Adoption of FIN 48

F. Disclosure-Prior to Adoption of FIN 48

XVIII. Accounting for Uncertainty in Income Taxes-After Adoption of FIN 48

A. Introduction

B. Scope

1. Primary Guidance

2. Taxes Within Scope

3. Entities Within Scope

4. Business Combinations

C. Unit of Account

1. Unit of Account

2. Consistency

D. Recognition

1. More Likely Than Not

2. Examination by the Taxing Authority

3. Evaluating the Technical Merits of Individual Tax Positions

4. Administrative Practices and Precedents

a. Self-Reporting Obligation

b. Indemnification Agreements

5. Disaggregation

6. General Reserves

E. Measurement of Tax Positions

1. Measurement

2. Highly Certain Tax Positions

a. Documentation of Highly Certain Tax Positions

3. Measurement of a Tax Position After an Audit Settlement

4. Differences Related to Timing

F. Tax Planning Strategies

1. Tax Planning Strategies

G. Subsequent Recognition, Derecognition and Measurement

1. Subsequent Recognition

2. Evaluation of Particular Events

a. Audit Milestones

3. Derecognition of a Tax Position

4. New Information vs. New Evaluation

5. Changes in Judgment

6. Intraperiod Tax Allocation

7. Subsequent Events

8. Interim Reporting

H. Interest and Penalties

1. Interest

2. Penalties

I. Classification

1. Classification as Current or Non-Current

2. Accounting Policy Election

3. Interaction with FAS 123R

4. Presentation of a Net Operating Loss and Related FIN 48 Liabilities

J. Disclosures

1. Disclosures Under FIN 48

2. Disclosure Example

3. Interim Reporting

K. Effective Date and Transition

1. SAB 74

2. Implementation

3. SEC Shares Views on FIN 48 Adoption Issues

XIX. Interim Reporting

Introductory Material

A. Estimated Annual Effective Tax Rate

1. Loss Contingencies (Prior to Adoption of FIN 48)

B. Operations Taxable in Multiple Jurisdictions

C. Effect of New Tax Legislation

D. Computation of Interim Period Tax (or Benefit)

E. Reversal of Taxable Temporary Differences

F. Disposal of a Component of an Entity and Extraordinary, Unusual, Infrequently Occurring, and Contingent Items

G. Contingent Items

H. Tax (or Benefit) Applicable to Significant Unusual or Infrequently Occurring Items, Discontinued Operations, or Extraordinary Items

1. Basis of Tax Provision

2. Financial Statement Presentation

3. Recognition of the Tax Benefit of a Loss

4. Discontinued Operations

I. Using a Prior-Year Operating Loss Carryforward

J. Examples

1. Estimated Annual Effective Tax Rate Computation and Effect of New Tax Legislation

a. Calculation of First Quarter Income Tax Expense

b. Calculation of Second Quarter Income Tax Expense When a Change in Tax Rates Occurs

2. Accounting for Income Taxes if an "Ordinary" Loss is Anticipated for the Fiscal Year

a. Realization of the Full Tax Benefit of Losses When Company Has "Ordinary" Losses in All Interim Periods

b. Realization of the Full Tax Benefit of Losses When Company Has "Ordinary" Income and Losses in Interim Periods and for the Year-to-Date Period

c. Partial Realization of the Tax Benefit of Losses When Company Has "Ordinary" Losses in All Interim Periods

d. Partial Realization of the Tax Benefit of Losses When Company Has "Ordinary" Income and Losses in Interim Periods and for the Year-to-Date Period

3. Accounting for Income Taxes Upon the Use of Prior-Year Net Operating Loss Carryforwards

a. Reversal of Valuation Allowance Because of Current-Year Ordinary Income

b. Reversal of Valuation Allowance Because of Estimated "Ordinary" Income in Future Years

XX. Income Taxes Attributable to Stock Based Compensation Arrangements-Prior to Adoption of FAS 123R

Introductory Material

A. General-Prior to Adoption of FAS 123R

1. APB 25 Accounting-Prior to Adoption of FAS 123R

2. FAS 123 Accounting-Prior to Adoption of FAS 123R

3. Taxation of Stock-Based Compensation Arrangements-Prior to Adoption of FAS 123R

B. Deferred Taxes for Stock-Based Compensation-Prior to Adoption of FAS 123R

1. Tax Deduction Exceeds Book Expense-Prior to Adoption of FAS 123R

2. Book Expense Exceeds Tax Deduction-Prior to Adoption of FAS 123R

3. Non-Deductible Awards Expensed for Book-Prior to Adoption of FAS 123R

a. Subsequent Changes to the Tax Status of an Award-Prior to Adoption of FAS 123R

4. Rescissions of Stock Option Exercises-Prior to Adoption of FAS 123R

5. Subsequent Changes in the Fair Market Value of Underlying Stock-Prior to Adoption of FAS 123R

6. Expired Unexercised Options-Prior to Adoption of FAS 123R

C. Valuation Allowance Considerations-Prior to Adoption of FAS 123R

1. Recognition of a Valuation Allowance After Initial Recognition of Deferred Tax Assets Attributable to Excess Tax Deductions-Prior to Adoption of FAS 123R

D. Other Stock Based Compensation Arrangements-Prior to Adoption of FAS 123R

E. Net Operating Losses Utilized Before Current Year Excess Stock Compensation Tax Deductions-Prior to Adoption of FAS 123R

F. Classification in Statement of Cash Flows of the Income Tax Benefit Received for Stock-Based Compensation-Prior to Adoption of FAS 123R

G. Tax Benefits of Nonqualified Options Issued in a Purchase Business Combination-Prior to Adoption of FAS 123R

H. Impact of Stock Compensation Tax Benefits on EPS Computation-Prior to Adoption of FAS 123R

1. Computing the Tax Benefit Component of the Assumed Proceeds-Prior to Adoption of FAS 123R

2. Impact of Valuation Allowance on the Tax Benefit Component of the Assumed Proceeds-Prior to Adoption of FAS 123R


WORKING PAPERS

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Statement of Financial Accounting Standards No. 109

Worksheet 2 FASB Interpretation No. 48

Bibliography

OFFICIAL

FASB Statements of Financial Accounting Standards

FASB Staff Positions

FASB Interpretations

AICPA Opinions

Accounting Principles Board Opinions

AICPA Accounting Research Bulletins

SEC Staff Accounting Bulletins

FASB Technical Bulletins

AICPA Statements of Position

FASB's Emerging Issues Task Force (EITF) Abstracts and Topics Interpretations

FASB Implementation Guides

FASB Statements of Financial Accounting Concepts