FASB issued ASU 2019-12 (“ASU”) providing guidance to reduce complexity in certain areas of accounting for income taxes. The new guidance is effective fiscal years beginning after December 15, 2020 for public entities and December 15, 2021 for all other entities. The changes included in the ASU are summarized below:
Intraperiod Tax Allocation
US GAAP generally requires an “with-and-without” approach in allocating tax expense or benefit to continuing operation. This approach sometimes result in a unexpected outcome in certain situations. Under the current approach, a loss-making entity with no total tax expense may report an income tax benefit from continuing operation and an offsetting income tax expense from the other components (including discontinued operations and equity). The new guidance provides that a loss-making entity, with no total tax expense generally will report no income tax benefit from continuing operations and no offsetting income tax expense from the other components. In other words, in certain situations, the complex with-and-without allocation calculation may be omitted.
Converting Consolidation to Equity Method
Under current GAAP, when an entity transitions from consolidation to the equity method of accounting for a foreign investment, it does not recognize a deferred tax liability related to the transition-date outside-basis difference if it had been asserting indefinite reversal to its investment in the former subsidiary. However, the new guidance removes this exception to the general principle of recognizing deferred tax liability on outside-basis difference in foreign investment and requires immediate recognition of deferred tax liability if it is no longer eligible to assert indefinite reversal.
Converting Equity Method to Consolidation
Under current GAAP, when an entity transitions from the equity method to consolidation for a foreign investment, it retains the deferred tax liability previously recognized event if it asserts indefinite reversal when the investment becomes a subsidiary. However, under the new guidance, an entity will follow the general principle of GAAP when transition from the equity method to consolidation and derecognize the previously recognized deferred tax liability upon conversion if it no longer meets the indefinite reversal criteria.
Interim Period Tax Accounting
US GAAP generally requires an entity to estimate its annual effective tax rate and use the rate to calculate its income taxes on a year-to-date basis for interim reports. An exception is provided under the current GAAP when the entity generates loss for an interim period in excess the anticipate loss for the current year. In that situation, the year-to-date income tax benefit is limited to the amount that would is anticipated for the entire year. The new guidance removes this exception and requires an entity to compute interim period tax benefit based on the estimated effective annual tax rate and the year-to-date loss.
Franchise Taxes
Non-income-based state franchise tax is reported above the line, not as tax expense, outside of the scope of income tax guidance. However, taxes tax require payment equal to the higher of the non-income-based tax and the income-based tax are in the scope of income tax guidance, but only for the portion in excess of the non-income-based tax. This requires an entity to first account for the none-income-based portion of the tax in pretax income and then apply current GAAP income tax guidance to the incremental income-based portion, if any. However, under the new guidance, an entity is required to first account for these taxes as income taxes and then account for the non-income-based portion, if any, in pretax income.
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https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176173929469&acceptedDisclaimer=true