Projects

Project Updates

Income Tax Project

Last Updated: October 6, 2008 (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 FASB Statement No. 109, Accounting for Income Taxes, and IAS 12, Income Taxes. Although Statement 109 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

View the FASB Action Alert for a summary of decisions reached at the December 5, 2007 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 Statement 109:

Foreign subsidiaries and undistributed earnings (Statement 109, paragraphs 9 and 31–34)
Intercompany transfers (Statement 109, paragraph 9)
Foreign currency translation (Statement 109, paragraph 9).

Uncertainty in Income Taxes

In June 2006, the Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which is an interpretation of Statement 109. The objective of that Interpretation is to clarify accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement 109. FIN 48 applies a recognition threshold to tax uncertainties and requires that deductions that meet the recognition threshold be measured at a single point best estimate. View Interpretation 48. The IASB has tentatively decided to amend IAS 12 to clarify accounting for uncertainty in income taxes. The IASB’s tentative decision will 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:

The following scope exceptions to Statement 109:
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.
The following differences between Statement 109 and IAS 12:
1. Leveraged leases (Statement 109, paragraphs 9 and 256–258)
2. Share-based payments (FASB Statement No. 123 (revised 2004), Share-Based Payment).
These items will be considered in a current or future agenda project that is more closely associated with these differences
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 (Statement 109, paragraphs 9 and 31–34)
2. Policyholders' surplus (Statement 109, paragraphs 9 and 31–34)
3. Steamship enterprise exception (Statement 109, paragraphs 9 and 32)

Recognition

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

Opinion 23: 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 will retain the exceptions in IAS 12 and Statement 109 for the recognition of deferred tax liabilities for certain investments in foreign subsidiaries (or foreign corporate joint ventures). The IASB will amend the language in IAS 12 to make it similar to that in Statement 109 and Opinion 23 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.

Intercompany Transfers and Foreign Currency Translation

The Board will eliminate the following two exceptions to the comprehensive recognition of deferred taxes in paragraph 9 of Statement 109:

The exception in paragraph 9(e) related to intercompany transfers—Entities will be required to recognize deferred tax assets or liabilities for temporary differences created by intercompany transfers of nonmonetary assets between tax jurisdictions.
The exception in paragraph 9(f) related to foreign currency—Entities will 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 intercompany transfers and foreign currency exceptions.

Acquired Temporary Differences in Asset Acquisitions (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:

The asset should be recognized and measured at fair value.
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.
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 a purchase discount allowance on the deferred tax.

Business Combinations

The Board decided to retain the guidance in Statement 109 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 28 of Statement 109 to explicitly include the current tax consequences of an entity’s change in tax status. This change will 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 if 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. This decision revises a previous tentative decision that would have required an entity to use the undistributed rate, unless an obligation to distribute existed.

Change in Tax Law or Rate

For operations within U.S. taxing jurisdictions, the Board will retain the Statement 109 guidance 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 will amend Statement 109 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 FASB Statement No. 109, Accounting for Income Taxes. The definition will be based on the tentative definition that the IASB adopted, with some modification. The IASB is expected to revisit the proposed change to the definition in IAS 12, Income Taxes, at a future date. The definition is not intended to change current practice.

Realizability of Deferred Taxes

The Board decided to retain terminology currently contained in Statement 109 about the realizability of deferred tax assets. The IASB tentatively decided to amend IAS 12 to converge to Statement 109’s valuation allowance approach but plans to use different terms to describe that approach than those in Statement 109. The FASB decided not to amend the terminology in Statement 109 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 Statement 109 will both use the same approach to assess the realizability of deferred tax assets.

Presentation and Disclosure

Intraperiod Tax Allocation

The Boards decided the following:

To retain the intraperiod tax allocation requirements in paragraphs 35–38 and 273–276 of Statement 109.
To amend IAS 12 to adopt the intraperiod tax allocation requirements of Statement 109. 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 paragraphs 35–38 and 273–276 of Statement 109.
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 Statement 109 and IAS 12 and decided to amend the disclosure requirements in Statement 109 as follows:

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 45 of Statement 109.
Add to and expand upon the disclosure requirements in Statement 109 for the tax effects of intercompany asset transfers. The Board will consider alternative disclosure requirements at a future meeting.
Include the guidance in paragraphs 82A and 87A–87C of IAS 12 on disclosure of the potential income tax consequences of dividend payments.
Add to Statement 109 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:

To require entities to adopt the standard 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 will apply prospectively to transactions entered into after the effective date.
To require adoption of the proposed Statement for years beginning after December 15, 2009. Early adoption will not be allowed.

*Next Steps

The IASB plans to publish a proposed standard on income taxes that would improve IAS 12, Income Taxes, and eliminate certain differences between IFRSs and U.S. GAAP. In the second half of 2008, the FASB will review its strategy for short-term convergence projects in light of the possibility that some or all U.S. public companies might be permitted or required to adopt IFRS at some future date. As part of that review, the FASB will solicit input from U.S. constituents by issuing an Invitation to Comment containing the IASB’s proposed replacement of IAS 12. At the conclusion of that review, the FASB will decide whether to undertake a project that would eliminate differences in the accounting for taxes by adopting IAS 12. The FASB has suspended current deliberations on the Tax project, pending the results of that review.

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 Statement, Interpretation, FSP, or Statement 133 Implementation Issue.

Below is a list of the FASB Board meetings for the past 12 months. Minutes for meetings generally are posted within two weeks following the meeting. Refer to the IASB website for IASB Board meetings.

December 5, 2007	Board Meeting—Sweep Issues, Distributed vs. Undistributed Tax Rates, Transition and Effective Date
January 31, 2007	Board Meeting—Assets acquired with temporary differences and non-deductible goodwill
October 24, 2005	Board Meeting—Distributed vs. Undistributed Tax Rates
June 15, 2005	Board Meeting—Disclosures
April 21, 2005	Joint Board Meeting—Intraperiod Tax Allocation
March 23, 2005	Board Meeting—Recognition and Measurement of Deferred Taxes
January 19, 2005	Board Meeting—Recognition and Measurement of Deferred Taxes
December 15, 2004	Board Meeting—Intercompany Transfers and Foreign Currency Exceptions
October 20, 2004	Joint Board Meeting—Foreign Unremitted Earnings Exceptions
September 23, 2004	FASAC Meeting Handout
July 27, 2004	Board Meeting—Opinion 23 and Steamship Enterprise Exceptions
April 22, 2004	Joint Board Meeting—Discussion of Acquired Temporary Differences in Asset Acquisitions (Issue 98-11)
March 16, 2004	Board Meeting—Discussion of Scope and Initial Project Activities