FASB Simplifies Income Tax Accounting in 6 Critical Areas with ASU 2019-12– February 05, 2020

In December 2019, the Financial Accounting Standards Board (FASB) issued a new accounting standard that simplifies income tax accounting requirements in six unrelated areas that are costly and complex.

The FASB issued the changes to remove specific technical exceptions to general principles found in Accounting Standards Codification (ASC) Topic 740, Income Taxes. These items often produce information that investors have a hard time understanding. The changes were issued as Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.

The guidance will curb accounting costs in the following ways.

1. Removing the need to analyze whether the following apply in a given period:

  • The exception to the incremental approach for intraperiod tax allocation,
  • Exceptions to accounting for basis differences when there are ownership changes in foreign investments, and
  • The exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

2. Recognizing a franchise tax (or similar tax) that’s partially based on income as an income-based tax and accounting for any incremental amount incurred as a non-income-based tax.

3. Evaluating when a step-up in the tax basis of goodwill should be considered a separate transaction or part of the business combination in which the goodwill was originally recognized on the entity’s balance sheet.

4. Reflecting 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.

5. Making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

6. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that’s not subject to tax in its separate financial statements.

However, under the updated guidance, an entity may elect to allocate the consolidated amount of current and deferred tax expense (on an entity-by-entity basis) for a legal entity that’s both not subject to tax and disregarded by the taxing authority.

The FASB proposed the changes in May 2019 as part of its simplification initiative. In comment letters, most respondents were supportive of the changes. They told the FASB that most of the changes would simplify the accounting for income taxes in a meaningful way without sacrificing the usefulness of information provided to investors and other users of financial statements.

For public companies, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, it’s effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.

Contact Beth Reho at breho@cohencpa.com, Cliff Holmyard at cholmyard@cohencpa.com or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.