IRS Adjusting Revenue-Recognition Guidance After New Tax Law

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By Allyson Versprille

Companies that adopted a new revenue recognition accounting standard last year—earlier than they had to—will get targeted guidance from the IRS that conforms to the new tax law, an official said.

“There’s an urgent need to get that out,” said Scott Dinwiddie, associate chief counsel (Income Tax and Accounting). Longer-term guidance on the tax law changes will follow, he said.

The Internal Revenue Service was already drafting a revenue procedure to help businesses with the Financial Accounting Standards Board’s revenue recognition standard. The standard—ASC 606, Revenue from Contracts with Customers—took effect for public companies in 2018 and for private companies in 2019. Companies could adopt it beginning Jan. 1, 2017, if they wanted to.

The 2017 tax act ( Pub. L. No. 115-97) made changes that “we need to fully digest” to finish drafting the guidance so that it makes sense for businesses that early-adopted the standard before the changes were enacted, Dinwiddie said Feb. 9 at the American Bar Association Section of Taxation meeting in San Diego.

The guidance, which will address accounting method change issues and procedures stemming from the FASB standard, needs to be modified “so that it’s not inaccurate or misleading or otherwise too broad,” he said.

The tax law revised the rules associated with the recognition of income by amending tax code Section 451. It requires a taxpayer that uses the accrual method of accounting to recognize income no later than the taxable year in which the income is taken into account as revenue on an audited financial statement or another applicable financial statement. The law provides an exception for long-term-contract income.

Questions Remain

The law also codified a 2004 revenue procedure that allows taxpayers to defer inclusion of income associated with certain advance payments to the end of the tax year following the year it is received, provided that the income is deferred for financial statement purposes.

Some of what the IRS was hoping to clarify in its revenue procedure on ASC 606 was answered by the changes in the tax law, Dinwiddie said. But the answers are only provided on a prospective basis, because the tax law provisions are effective for years after 2017, he said.

Early adopters still have questions about their accounting method changes to comply with ASC 606, Dinwiddie said. For example, they may have made allocations for book purposes, and they will want to know “whether those will be respected for tax purposes under the change procedures,” he told Bloomberg Tax after a panel discussion.

Once the early-adopter project is complete, the agency will turn its attention to longer-term guidance on the tax law’s changes to Section 451, he said.

To contact the reporter on this story: Allyson Versprille in San Diego at aversprille@bloombergtax.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bloombergtax.com

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