United States

Limited accounting method changes now available for ASC 606 adoption

TAX ALERT  | 

Revenue Procedure 2018-29 provides new procedures for taxpayers adopting ASC 606 to make corresponding changes to their methods of accounting for the recognition of income for federal income tax purposes, provided the new methods are otherwise permissible under the Code.

Background

Financial Accounting

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued new financial accounting standards related to revenue recognition (ASC 606 and IFRS 15). The new financial accounting standards generally apply to annual reporting periods beginning after Dec. 15, 2017 for publicly traded entities and annual reporting periods after Dec. 15, 2018 for non-public entities.

Federal Income Tax

For taxable years beginning after Dec. 31, 2017, amendments to section 451 (general rule for taxable year of inclusion) apply pursuant to H.R. 1, often referred to as the Tax Cuts and Jobs Act (TCJA). As amended, section 451(b) provides generally that for an accrual method taxpayer, income cannot be deferred beyond book income. The new provision could reduce instances when recognition for federal income tax is later than on the financial statements.

The New Automatic Method Change

In the taxable year a taxpayer adopts the new financial accounting standards, a new automatic method change (DCN 231) applies for changes to otherwise permissible methods of revenue recognition that use the new financial accounting standards for (1) identifying performance obligations, (2) allocating transaction price to performance obligations, and/or (3) considering performance obligations satisfied. 

The Rev. Proc. provides certain restrictions on the use of the new automatic method change. In order to use the Rev. Proc., the taxpayer must be using a method that complies with section 451. As the amended section 451 does not apply to tax years that begin before Jan. 1, 2018, complying with the limitation is somewhat straight forward. For tax years beginning Jan. 1, 2018, it may be difficult to meet this limitation as the IRS has not published how the Service will implement the amended section 451. Additionally, the granting of consent to file a method change under the Rev. Proc. is not a determination that the taxpayer’s new methods or allocations are permissible.

Although the automatic method change only allows changes for the year that that taxpayer implements the new financial accounting standards, the Rev. Proc. is effective for a taxpayer’s first, second, or third taxable year ending on or after May 10, 2018.

Takeaways

The IRS has provided bare consent guidance for taxpayers to use the automatic consent procedures to implement certain changes under the new financial accounting standards for tax years beginning before Jan. 1, 2018. While the guidance is available for taxpayer’s first, second, or third taxable year ending on or after May 10, 2018, taxpayers may have to wait until after the IRS publishes the guidance on section 451 to use the guidance beyond the 2017 tax year.

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