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Income Tax Project

Last Updated:  November 6, 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
*Decisions Reached at the Last Meeting
Summary of Decisions Reached
*Next Steps
*Board Meeting and Public Meeting Dates
Related FASB Articles
Background Information
Contact Information

Project Objective

The objective of the Income Tax project is to improve the accounting for income taxes, while reducing the existing differences between the Accounting Standards Codification Topic 740 on income taxes (FASB Statement No. 109, Accounting for Income Taxes ), and IAS 12, Income Taxes. Although Topic 740 and IAS 12 are based on similar principles, there are certain differences in the application of those similar principles that result in noncomparability of financial information reported internationally. The FASB and the IASB (Boards) are jointly deliberating the issues in this project.

*Decisions Reached at the Last Meeting (October 28, 2009)

The IASB staff presented an analysis of the comment letters received on its Exposure Draft, Income Tax. The Boards indicated that they would consider undertaking a fundamental review of accounting for income taxes at some time in the future. In the meantime, the IASB staff plans to present options on how the IASB should proceed with the proposals in the Exposure Draft at the November IASB meeting.

Summary of Decisions Reached

Scope and Scope Exceptions

The income tax project will consider the following exceptions to the comprehensive deferred tax asset and liability recognition principle of Topic 740:

1. Foreign subsidiaries and undistributed earnings (Subtopic 740-30 on considerations for income taxes; Statement 109, paragraphs 9 and 31–34)
2. Intra-entity transfers (paragraph 740-10-25-3(e); Statement 109, paragraph 9(e))
3. Foreign currency remeasurement (paragraph 740-10-25-3(f); Statement 109, paragraph 9(f)).

Uncertainty in Income Taxes

In June 2006, the Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (codified primarily as paragraphs 740-10-25-6 through 25-17 and 740-10-30-7). The objective of that Interpretation is to clarify accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Topic 740. Paragraphs 740-10-25-6 through 25-17 apply a recognition threshold to tax uncertainties, and paragraph 740-10-30-7 requires that deductions that meet the recognition threshold be measured at a single point best estimate. The IASB has tentatively decided to amend IAS 12 to clarify accounting for uncertainty in income taxes. The IASB’s tentative decision would require entities to measure the current and deferred tax consequences of uncertainties related to tax positions based on the expected outcome (the probability weighted average of the possible outcomes).

The income tax project will not consider the following:

1. The following aspects of accounting for income taxes:
   1. The basic methods of accounting for the U.S. federal investment tax credit and for foreign, state, and local investment tax credits or grants
   2. Discounting of deferred taxes
   3. Accounting for income taxes in interim periods.
2. The following differences between U.S. GAAP and IFRS:
   1. Leveraged leases (paragraphs 740-10-25-3(c), 740-10-30-18, 840-30-45-6 through 45-7, and 840-30-55-39 through 55-46; Statement 109, paragraphs 9 and 256–258)
   2. Share-based payments (Subtopic 718-740 on income taxes related to stock compensation; FASB Statement No. 123 (revised 2004), Share-Based Payment).

These items may be considered in a current or future agenda project that is more closely associated with these differences

3. The Board initially considered the following items during this project but ultimately decided to exclude them from the scope:
   1. Certain bad debt reserves of savings and loan associations (paragraph 740-10-25-3(a)(3) and Subtopic 94 2-740 on income taxes for depository and lending entities; Statement 109, paragraphs 9(a) and 31–34)
   2. Policyholders' surplus (paragraph 740-10-25-3(a)(4) and Subtopic 944-740 on income taxes for insurance entities; Statement 109, paragraphs 9(a) and 31–34)
   3. Steamship entities’ exception (paragraph 740-10-25-3(b) and Subtopic 995-740 on income taxes for U.S. steamship entities; Statement 109, paragraphs 9(b) and 32).

Recognition

The Board addressed the following topics regarding the recognition of deferred tax assets and liabilities:

Unremitted Earnings of Foreign Subsidiaries and Corporate Joint Ventures.

Due to the practical complexities of calculating the amount of deferred taxes for the unremitted earnings of foreign subsidiaries and joint ventures, the Boards decided to retain the exceptions in Topic 740 and IAS 12 for the recognition of deferred tax liabilities for certain investments in foreign subsidiaries (or foreign corporate joint ventures). The IASB tentatively decided to amend the language in IAS 12 to make it similar to that in Topic 740 with respect to unremitted foreign earnings. The Boards also requested that the staff evaluate whether improvements could be made to the disclosure requirements for unremitted earnings of foreign subsidiaries and joint ventures.

The Boards received three unsolicited comment letters on the exceptions for foreign unremitted earnings of foreign subsidiaries and foreign corporate joint ventures.

Intra-Entity Transfers and Foreign Currency Translation

The Board decided to eliminate the following two exceptions to the comprehensive recognition of deferred taxes in paragraph 740-10-25-3 (paragraph 9 of Statement 109):

1. The exception in paragraph 740-10-25-3(e) related to intra-entity transfers—Entities would be required to recognize deferred tax assets or liabilities for temporary differences created by intra-entity transfers of nonmonetary assets between tax jurisdictions.
2. The exception in paragraph 740-10-25-3(f) related to foreign currency—Entities would be required to recognize deferred tax assets or liabilities for differences that (1) are related to foreign nonmonetary assets and liabilities that are remeasured from the local currency into the functional currency (where the functional currency also is the reporting currency) and (2) result from changes in exchange rates or indexing for tax purposes.

The Boards received one unsolicited comment letter concerning intra-entity transfers and foreign currency exceptions.

Acquired Temporary Differences in Asset Acquisitions (paragraphs 740-10-25-50 through 25-55; EITF Issue No. 98-11, "Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations")

The Board decided that acquired temporary differences in asset acquisitions other than a business combination should be accounted for as follows:

1. The asset should be recognized and measured at fair value.
2. The corresponding deferred tax asset or liability should be recognized and measured as the difference between the asset’s fair value and its tax basis multiplied by the tax rate.
3. Any difference between (1) the total consideration paid and (2) the sum of the asset’s fair value and the recognized deferred tax amount should be recognized as an allowance or premium on the deferred tax.

Business Combinations

The Board decided to retain the guidance in Subtopic 805-740 on income taxes for business combinations by continuing to prohibit the recognition of a deferred tax liability for the portion of goodwill for which amortization is not deductible for tax purposes.

Change in Tax Status

The Board decided to amend paragraph 740-10-45-19 (paragraph 28 of Statement 109) to explicitly include the current tax consequences of an entity’s change in tax status. This change would be consistent with guidance provided in SIC Interpretation 25, Income Taxes—Changes in the Tax Status of an Entity or its Shareholders. The proposed change is not intended to change current practice.

Initial and Subsequent Measurement

The Board addressed the following topics regarding the measurement of deferred tax assets and liabilities:

Different Rate Depending on Whether an Entity Distributes Earnings to Owners

In certain jurisdictions, an entity’s taxable income is taxed at different rates, depending on whether income is distributed to owners or retained by the entity. In other jurisdictions, an entity is provided a deduction from taxable income for dividends paid to owners. In these situations, the Board decided to require an entity to use the distributed rate to measure tax assets or liabilities i f the entity expects to distribute income to owners and has the ability to do so. In all other cases, entities are required to use the undistributed rate. The existing guidance on this subject is in paragraphs 740-10-25-39 through 25-41 and 740-10-30-14 through 30-15 (EITF Issues No. 95-10, “Accounting for Tax Credits Related to Dividend Payments in Accordance with FASB Statements No. 109” and No. 95-20, “Measurement in the Consolidated Financial Statements of a Parent of the Tax Effects Related to the Operations of a Foreign Subsidiary That Receives Tax Credits Related to Dividend Payments”).

Change in Tax Law or Rate

For operations within U.S. taxing jurisdictions, the Board decided to retain the guidance in Topic 740 that requires entities to recognize the effect of the change in tax laws or rates in the period of enactment. For operations other than U.S. taxing jurisdictions, the Board decided to amend Topic 740 to require the use of an approach that is consistent with International Financial Reporting Standards (IFRS). The IFRS approach requires that deferred tax assets and liabilities be measured based on tax rates (and tax laws) that have been enacted (or substantively enacted) by the balance sheet date.

Definition of Tax Basis

The Board decided to include a definition of the term tax basis in the master glossary. The definition would be based on the tentative definition that the IASB adopted, with some modification. The definition is not intended to change current practice.

Realizability of Deferred Taxes

The Board decided to retain terminology currently contained in Topic 740 about the realizability of deferred tax assets. The IASB tentatively decided to amend IAS 12 to converge to the valuation allowance approach within Topic 740 but plans to use different terms to describe that approach than those in Topic 740. The FASB decided not to amend the terminology in Topic 740 to converge with the proposed changes to IAS 12. The Board reiterated that, with the proposed changes to IAS 12, the revised IAS 12 and Topic 740 would both use the same approach to assess the realizability of deferred tax assets.

Presentation and Disclosure

Intraperiod Tax Allocation

The Boards decided the following:

1. To retain the intraperiod tax allocation requirements in Subtopic 740-20 on intraperiod tax allocation for income taxes (paragraphs 35–38 and 273–276 of Statement 109).
2. To amend IAS 12 to adopt the intraperiod tax allocation requirements of Subtopic 740-20. The requirement to allocate income taxes to items previously credited or charged to equity contained in paragraphs 57, 58, and 61–65 of IAS 12 would be amended and replaced with guidance similar to that in Subtopic 740-20 (paragraphs 35–38 and 273–276 of Statement 109).
3. To reconsider existing intraperiod tax allocation guidance in Segment B of the reporting financial performance project.

Disclosure

The Board considered certain differences between the disclosure requirements in Topic 740 and IAS 12 and decided to amend the disclosure requirements in Topic 740 as follows:

1. Add "any adjustments recognized in the period for current tax of prior periods" to the list of examples of significant components of income tax expense in paragraph 740-10-50-9 (paragraph 45 of Statement 109).
2. Add to and expand upon the disclosure requirements in Topic 740 for the tax effects of intra-entity asset transfers.
3. Include the guidance in paragraphs 82A and 87A–87C of IAS 12 on disclosure of the potential income tax consequences of dividend payments.
4. Add to Topic 740 a required disclosure of the tax effects of dividends, if any, whenever entities voluntary disclose dividends declared subsequent to the balance sheet date in the notes to financial statements.

The Board decided not to require additional disclosures about the nature and amount of undistributed earnings of foreign subsidiaries.

Transition and Effective Date

The Board tentatively decided the following:

1. To require entities to adopt the Accounting Standards Update through a cumulative catch-up of retained earnings as of the beginning of the year in which the final Statement is adopted, except as it relates to the decision affecting the allocation of the purchase price in asset acquisitions with tax basis differences. The new guidance for that decision would apply prospectively to transactions entered into after the effective date.
2. To require adoption of the proposed Statement for years beginning after December 15, 2009. Early adoption would not be allowed.

*Next Steps

*Board Meeting and 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.

Below is a list of the FASB Board meetings over the history of the project. Minutes for meetings generally are posted within two weeks following the meeting. Refer to the IASB website for IASB Board meetings.

Related FASB Articles

"Developing Consistent Application of Similar Principles of Accounting for Income Taxes," The FASB Report, No. 257, June 30, 2004.

Background Information

Topic 740 and IAS 12 are founded on similar principles: both take a balance sheet approach to accounting for income taxes. Both account for (1) taxes currently payable (or receivable) arising from current taxable income and (2) future (deferred) taxes payable (or receivable) due to differences in U.S. generally accepted accounting principles (GAAP) (or IFRS) and tax bases of assets and liabilities.

Differences between U.S. GAAP and IFRS principally arise for the following reasons:

1. Differences in the exceptions to the application of those similar principles
2. Certain differences in the recognition, measurement, and disclosure criteria
3. Differences resulting from some specific application and implementation guidance that was issued after legacy Statement 109.

Both Topic 740 and IAS 12 make certain explicit exceptions to the basic principle, and those exceptions are the primary source of the divergence. Topic 740 has six explicit exceptions to the basic principle and IAS 12 has three explicit exceptions to the basic principle. There is some overlap in these exceptions. Some exceptions involve country-specific issues (for example, the exception related to U.S. steamship entity statutory reserve funds or bad-debt reserves of U.S. savings and loan associations) that do not represent a fundamental difference in the overall approach. Due to the passage of time or issuance of new authoritative literature, some of the historical exceptions may have been obviated.

Additionally, there are subtle but substantive differences between Topic 740 and IAS 12 related to the recognition and measurement of tax assets and liabilities that may create differences in their application. These differences relate to tax rates (for example, distributed versus undistributed, and enacted versus substantively enacted) and deferred tax asset recognition (thresholds for recognition and approach to valuation allowances—for example, impairment versus affirmative judgment).

Finally, as a result of subsequently issued implementation guidance, there are differences between U.S. GAAP and IFRS that are not solely the result of differences between IAS 12 and legacy Statement 109 as it was originally issued (for example, initial recognition of deferred tax effects in certain asset acquisitions in accordance with Issue 98-11).

For these reasons, the FASB identified income taxes as a topic for convergence. The FASB and IASB are sharing staff resources and research and coordinating activities on the project. The Boards deliberate individually and vote on each issue. Details on the IASB’s decisions to date are available on its website at www.iasb.org.

Contact Information

Peter Proestakes
Assistant Technical Director
pcproestakes@fasb.org