FASB finalizes simplification of income tax standard

The update makes a handful of changes to Topic 740 on income taxes in Generally Accepted Accounting Principles (GAAP). The changes were initially proposed for public comment in May and received “largely supportive” response, according to FASB.

Tax issues are among the most common causes for restatement, along with debt, revenue recognition, and cash flow errors.

“The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740,” FASB stated. “The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.”

The simplification included the elimination of the following exceptions:

• Exception to the incremental approach for intraperiod tax collection where there’s a loss from continuing operations and income or a gain from other items, like 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 to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

Additional changes to Topic 740 include the following:

• Requiring an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.
• Requiring 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 was originally recognized and when it should be considered a separate transaction.
• Specifying an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. An entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.
• Requiring 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.
• Minor improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

For public business entities, the amendments above are effective for fiscal years and interim periods within those fiscal years beginning Dec. 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption is permitted.

The simplification changes to Topic 740 are separate from another FASB proposal to revise disclosures related to income taxes. Those changes, reissued for proposal in March, have been met with criticism from both investors and companies alike: Investors say the new requirements to break out tax obligations by state, federal, and global jurisdiction don’t go far enough, while preparers say the disclosures are burdensome enough as proposed.

The board has yet to proceed further since the comment period on the exposure draft ended May 31.