Income tax accounting continues to be a "leader in the clubhouse" on lists that no one wants to lead, such as the number of restatements and Sarbanes-Oxley material weaknesses. The topic continues to be a troublesome area for companies both large and small.
Why the issues in this area? The reasons are numerous. The rules that must be followed come from multiple sources, including new disclosure requirements proposed by the FASB (see our In brief). A thorough understanding of the financial accounting rules can only go so far; to ensure you "get it right" in this area, the appropriate understanding of tax technical rules must also be obtained. Generally speaking, the expertise in these two areas may not always reside in the same professionals, so the income tax accounting arena also necessitates strong communication amongst multiple professionals due to the sheer complexity of the issues at hand.
Income tax accounting incorporates highly judgmental areas, such as valuation allowance assessments, as well as certain areas which have very prescriptive rules (e.g., intraperiod allocation, valuation allowance balance sheet classification). It requires the use of estimates and assumptions, which can be challenging for professionals to determine, and can result in the need for difficult judgments to be made at various points in time. In addition, there is generally a "timing difference" in terms of when professionals focus on certain aspects of income tax accounting. For example, although the year-end financial reporting function is a critical aspect in the year-end reporting timeframe, the income tax return for that same year is not generally a priority until several months after year-end.
In addition to the "everyday" complexities of income tax accounting, when acquisitions or divestitures occur, additional complexities often materialize in the areas of intraperiod allocation, permanent reinvestment assertions, and valuation allowance assessments. Simply put, no transaction is "complete" without a comprehensive assessment of the income tax accounting guidance.
Impacts to companies:
What companies should do: