FASB preps proposal to simplify income tax accounting

FASB has been researching ways it could simplify tax accounting as part of its broader simplification initiative, looking for changes that would make it easier for preparers to apply Generally Accepted Accounting Principles without making the information any less useful. Tax accounting is a common cause for restatement, FASB staff told the board, although sometimes the complexity is driven more by tax law, jurisdictional differences, and the complicated nature of business than by accounting standards.

In outreach with Big Four firms in early 2017, FASB staff identified a number of areas in GAAP where the board could consider changes that would cut unnecessary complexity. The Tax Cuts and Jobs Act, enacted in late 2017, took some of the luster off of those potential improvements, but they are still worth pursuing, FASB staff told the board.

The board determined it will propose a handful of specific changes to Accounting Standards Codification Topic 740 on income taxes, and it tasked its staff with drafting the proposed rule revisions for the board’s consideration. Those are separate from a recent FASB proposal to revise disclosures related to income taxes. The intended changes to accounting rules focus largely on eliminating exceptions that have been difficult to apply. 

The board decided, for example, to eliminate an 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. The proposal will also target the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment. Additional exceptions to be removed involve deferred tax liabilities for foreign subsidiaries and certain interim year calculating methods.

With the elimination of four problematic exceptions, the board also plans to make four additional changes to ASC 740. One change would require companies to 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. FASB staff told the board Big Four firms asked for the change because the current guidance can be confusing, which has led to inconsistent application.

The board also determined it will make additional changes focused on franchise tax, the tax basis of goodwill, allocation of certain consolidated tax expenses to legal entities, taxes related to employee stock ownership plans, and investments in certain qualified affordable housing projects. 

FASB staff also acknowledged two other changes Big Four firms suggested that will not be addressed in the planned amendments. One focuses on backward tracing, which GAAP currently prohibits. FASB has an ongoing research project to review backward tracing in the context of tax reporting to determine if changes to rules are warranted. Another area for consideration is the accounting for uncertain tax positions, but FASB staff told the board that area could not be regarded as “narrow scope changes” to the standard.