United States

FASB proposes to simplify the accounting for income taxes

FINANCIAL REPORTING INSIGHTS  | 

The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. If finalized, the proposed ASU would remove 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 (such as discontinued operations or other comprehensive income)
  • Exception to the requirement to recognize a deferred tax liability for equity-method investments when a foreign subsidiary becomes an equity-method investment
  • Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity-method investment becomes a subsidiary
  • Exception in the interim-period income tax accounting when a year-to-date loss exceeds the anticipated loss for the year

The proposed ASU also would simplify the accounting for income taxes by:

  • Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income in accordance with Topic 740 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
  • Specifying that an entity is not required to allocate in its separate financial statements the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax, but that an entity may elect to do so for a legal entity that is disregarded by the taxing authority
  • 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
  • Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method

The proposed ASU is available for comment until June 28, 2019.