FASB proposal to simplify the accounting for income taxes

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In brief , PwC US May 14, 2019

Proposed changes to income tax accounting could reduce complexity for preparers. Take a look at our In brief to learn more.

What happened?

On May 14, the FASB issued a proposed Accounting Standards Update (ASU), Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of ASC 740, Income Taxes, and simplifies income tax accounting in several areas. The proposed ASU is part of the Board’s initiative to reduce complexity in accounting standards.

Removal of certain ASC 740 exceptions

The proposed ASU removes certain exceptions to the general principles of ASC 740 to reduce the cost and complexity of applying ASC 740. The proposed changes would have the following effects:

  • Removes the exception to intraperiod tax allocation when there is a loss in continuing operations and income in other components, such as discontinued operations or other comprehensive income (prospective application proposed)

  • If a foreign subsidiary becomes an equity method investment, the amount of outside basis difference for which deferred taxes were not provided for would no longer be considered “frozen” and a deferred tax liability would be recorded in the period of change (modified retrospective application proposed)

  • If an equity method investment becomes a foreign subsidiary, the deferred tax liability for the amount of the outside basis difference would no longer be frozen and an entity could assert that the undistributed earnings are indefinitely reinvested and eliminate the deferred tax liability (modified retrospective application proposed)
  • If an entity’s year-to-date loss exceeds the anticipated loss for the year, there will no longer be a limitation on the amount of benefit that can be recorded in an interim period (prospective application proposed)

Simplifications

The simplifications proposed by the ASU include:

  • Requiring that the portion of franchise tax based on income be recognized in accordance with ASC 740 and any incremental amount (based on items such as capital or revenue) be accounted for as a non-income-based tax (retrospective application proposed)
  • Requiring an entity to evaluate whether a step up in tax basis of goodwill should be considered part of the initial recognition of book goodwill or a separate transaction (prospective application proposed)
  • For separate company financial statements, specifying that an entity is not required to allocate consolidated income taxes to legal entities not subject to tax (e.g., partnerships, single member LLCs), but may elect to do so (retrospective application proposed)
  • For interim periods, requiring the annual effective tax rate to reflect changes in enacted tax laws or rates, beginning with the period of enactment (prospective application proposed)
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Why is this important?

The proposed ASU is intended to reduce costs and complexity in income tax accounting, while maintaining or improving the usefulness of information provided to financial statement users.

What's next?

Comments on the proposed ASU are due by June 28, 2019. Stakeholders are encouraged to provide comments on the proposal. The effective date and whether early adoption of the proposed amendments will be permitted will be determined after the Board considers stakeholder feedback.

To have a deeper discussion, contact:

Jennifer Spang

Partner, National Professional Services Group, PwC US

Email

Holly Reeves

Director, National Professional Services Group, PwC US

Email

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David Schmid

International Accounting Leader, National Professional Services Group, PwC US

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