The Internal Revenue Service is starting to taking stock of how the new revenue recognition accounting standards will affect tax reporting, and it’s expecting to find increased differences between financial accounting and tax accounting rules.
Companies follow accounting rules to recognize income in financial statements, but tax accounting rules to recognize income in tax filings. Differences between accounting and tax rules lead to timing differences in terms of when companies can recognize income and tax benefits for each reporting purpose. The new revenue recognition standards adopted by the Financial Accounting Standards Board and the International Accounting Standards Board provide a new method for companies to determine when and in what amounts to recognize revenue in financial statements.
In a notice asking for input and comments, the IRS notes “the new standards raise a number of substantive and procedural issues for the IRS, including whether the new standards are permissible methods of accounting for federal income tax purposes.” Tax rules require companies to secure permission from the IRS if they are making accounting method changes for federal income tax purposes, so the IRS is now growing concerned over the types of accounting method change requests it might face as companies adopt the new accounting standards.
The IRS notes the new accounting standard may affect the timing of income for tax accounting purposes, especially for entities using the percentage of completion method, deriving income by providing services, using bill-and-hold transactions for the sale of goods, accounting for sales and returns of goods, and earning income from warranties. The potential implications has led the IRS to consider whether it should issue new guidance, especially on requesting permission for accounting method changes.
To help determine the need for guidance, the IRS is posing a number of questions for public comment. To what extent do the new standards deviate from tax code requirements around the recognition of revenue for tax purposes? How might they affect the deferral of income? What industry-specific or transaction-specific issues are companies finding that might require IRS guidance? What kinds of changes in methods of accounting are taxpayers anticipating? Should the IRS consider changes in the procedures for requesting permission for accounting method changes?
The IRS is asking for written comments by Sept. 16. Among the many issues that have been addressed by the accounting boards through their Transition Resource Group, differences in accounting and tax rules have not arisen as an area of concern with respect to implementing the accounting standard.