United States

FASB delay of ASC 606 adoption for certain issuers may impact tax

TAX ALERT  | 

On Wednesday May 20, 2020, the FASB voted to allow certain companies to defer the adoption date of the ASC 606 revenue recognition standard (see our financial reporting insights here). Impacted companies are nonpublic entities that have not yet issued their financial statements.

Specifically, ASC 606, Revenue from Contracts with Customers, for which the effective date will be deferred (on an optional basis) for private companies (which includes those entities that are not public business entities [as defined in the Master Glossary of the ASC]) and not-for-profit entities that have not yet issued financial statements reflecting the adoption of ASC 606. For these entities, the FASB will defer the effective date of ASC 606 to annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020. This deferral represents an expansion of the FASB’s proposed effective date deferral for ASC 606, which would have only applied to private franchisors.

While the impact of the deferral is yet to be seen, the FASB vote to allow a deferral could cause tax revenue recognition implications. As part of the 2018 Tax Cuts and Jobs Act, portions of tax revenue recognition are aligned with financial accounting revenue recognition. Specifically the amendments to Internal Revenue Code (the Code) section 451 require a taxpayer that issues an applicable financial statement to recognize income upon the earlier of when that amount is due, earned, received or recognized as revenue in the taxpayer’s applicable financial statements. 

As many taxpayers have discovered, the adoption of ASC 606 and its impact on financial accounting may cause unexpected tax consequences. As the IRS and Treasury have not yet issued final regulations on the amendments to section 451, companies that have not yet issued their financial statements should take a careful look at the potential tax impact of deferring the adoption of ASC 606.

Companies should note the deferrals are effective only upon issuance of a final ASU.

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