United States

FASB issues standard to simplify the accounting for income taxes

FINANCIAL REPORTING INSIGHTS  | 

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes the following exceptions to the general principles in Topic 740:

  • 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 (e.g., discontinued operations or other comprehensive income)
  • Exceptions to the accounting for basis differences when there are ownership changes in foreign subsidiaries and foreign equity-method investments
  • Exception to the interim period income tax accounting when a year-to-date loss exceeds the anticipated loss for the year 

The ASU also simplifies the accounting for income taxes by, among other specifications:

  • 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 
  • 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 originally was recognized and when it should be considered a separate transaction 
  • 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 

For public business entities, ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for (a) public business entities for periods for which financial statements have not yet been issued and (b) all other entities for periods for which financial statements have not yet been made available for issuance.

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