Project Update

Deferred Tax Assets and Liabilities on Available-for-Sale Debt Securities that Are Expected to Be Held to Recovery

Last Updated: October 15, 2009 (Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
*Next Steps
Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

The objective of this project is to consider the accounting for deferred tax assets and liabilities on available-for-sale debt securities that are expected to be held to recovery.   In particular, the Board will consider whether the assessment of a valuation allowance for a deferred tax asset related to an available-for-sale debt security that an entity expects to hold to recovery, which may be maturity, should be evaluated (a) discretely from the entity’s other deferred tax assets or (b) in combination with its other assets.

*Next Steps

On October 14, 2009, this project project was removed from the Board’s agenda because the issues will be addressed within the Board’s project on accounting for financial instruments.

Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

February 18, 2009 Agenda Decision

Background Information

FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (Topic 320 of the FASB Accounting Standards Codification), establishes standards of financial accounting and reporting for (a) investments in equity securities that have readily determinable fair values and (b) all investments in debt securities. Paragraph 13 of Statement 115 (paragraph 320-10-35-1 of the Codification) requires that:

        Unrealized holding gains and losses for available-for-sale securities (including those classified as current assets) shall be excluded from earnings and reported in other comprehensive income . . .

Paragraph 36(b) of FASB Statement No. 109, Accounting for Income Taxes (paragraph 740-20-45-11 of Topic 740), requires that the tax effects for gains and losses included in comprehensive income but excluded from net income occurring during the year (for example, translation adjustments under FASB Statement No. 52, Foreign Currency Translation (Topic 830), and changes in the unrealized holding gains and losses of securities classified as available-for-sale under Statement 115 (Topic 320)) be “charged or credited directly to other comprehensive income or to related components of shareholders' equity.” Furthermore, paragraph 25 of FASB Statement No. 130, Reporting Comprehensive Income (paragraph 220-10-45-12 of Topic 220), requires an entity to “disclose the amount of income tax expense or benefit allocated to each component of other comprehensive income.”

Statement 109 (Topic 740) also requires that deferred tax assets be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax taxes will not be realized. Statement 109 (Topic 740) notes that future realization of the tax benefit of an existing deductible temporary difference depends on the existence of sufficient taxable income of the appropriate character within the carryback, or carryforward period available under the tax law. Recently, the Board has received questions from constituents about whether the assessment of a valuation allowance for a deferred tax asset related to an available-for-sale debt security that an entity expects to hold to recovery, which may be maturity, should be evaluated (a) discretely from the entity’s other deferred tax assets or (b) in combination with its other assets. It is the FASB staff’s understanding that there is diversity in practice in this area.

To provide clarification on this issue and address diversity in practice, the Board added a project to its agenda on February 18, 2009, to consider the accounting for deferred tax assets and liabilities on available-for-sale debt securities that are expected to be held to recovery.

Contact Information

Diane Inzano
Practice Fellow
dcinzano@fasb.org