Summary of Statement No. 96
Accounting for Income Taxes (Issued 12/87)
Summary
This Statement establishes financial accounting and reporting
standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It
requires an asset and liability approach for financial accounting
and reporting for income taxes. This Statement supersedes APB
Opinion No. 11, Accounting for Income Taxes. It also amends
or supersedes other accounting pronouncements listed in Appendix
D.
Objective of Accounting for Income Taxes
The objective in accounting for income taxes on an
accrual basis is to recognize the amount of current and deferred
taxes payable or refundable at the date of the financial statements
(a) as a result of all events that have been recognized in the
financial statements and (b) as measured by the provisions of
enacted tax laws. Other events not yet recognized in the financial
statements may affect the eventual tax consequences of some events
that have been recognized in the financial statements. But that
change in tax consequences would be a result of those other later
events, and the Board decided that the tax consequences of an event
should not be recognized until that event is recognized in the
financial statements.
The Basic Principles of Accounting for Income
Taxes
To implement that objective, all of the following
basic principles are applied in accounting for income taxes at the
date of the financial statements:
- A current or deferred tax liability or asset is recognized for
the current or deferred tax consequences of all events that have
been recognized in the financial statements;
- The current or deferred tax consequences of an event are
measured by applying the provisions of enacted tax laws to
determine the amount of taxes payable or refundable currently or in
future years; and
- The tax consequences of earning income or incurring losses or
expenses in future years or the future enactment of a change in tax
laws or rates are not anticipated for purposes of recognition and
measurement of a deferred tax liability or asset.
The only exceptions in applying those basic
principles are that this Statement (a) does not amend the
requirements for recognition of deferred taxes for the areas
identified in APB Opinion No. 23, Accounting for Income
Taxes-Special Areas, (b) does not address recognition of
deferred taxes for deposits in statutory reserve funds by U.S.
steamship enterprises, (c) does not amend accounting for leveraged
leases as required by FASB Statement No. 13, Accounting for
Leases, and FASB Interpretation No. 21, Accounting for
Leases in a Business Combination, and (d) prohibits recognition
of a deferred tax liability or asset related to goodwill.
Temporary Differences
The tax consequences of most events recognized in the
financial statements for a year are included in determining income
taxes currently payable. However, tax laws often differ from the
recognition and measurement requirements of financial accounting
standards, and differences can arise between:
a. The amount of taxable and pretax financial income
for a year
b. The tax bases of assets or liabilities and their
reported amounts in financial statements.
Opinion 11 used the term timing differences
for differences between the years in which transactions affect
taxable income and the years in which they enter into the
determination of pretax financial income. Timing differences create
differences (sometimes accumulating over more than one year)
between the tax basis of an asset or liability and its reported
amount in financial statements. Other events such as business
combinations may also create differences between the tax basis of
an asset or liability and its reported amount in financial
statements. All such differences collectively are referred to as
temporary differences in this Statement.
The Deferred Tax Consequences of Temporary
Differences
Temporary differences ordinarily become taxable or
deductible when the related asset is recovered or the related
liability is settled. In the Board's view, an assumption inherent
in an enterprise's statement of financial position prepared in
accordance with generally accepted accounting principles is that
the reported amounts of assets and liabilities will be recovered
and settled, respectively. The Board believes that assumption
creates a requirement under accrual accounting to recognize the
deferred tax consequences of temporary differences. A deferred tax
liability or asset represents the amount of taxes payable or
refundable in future years as a result of temporary differences at
the end of the current year.
Deferred Tax Liabilities
A deferred tax liability is recognized for temporary
differences that will result in net taxable amounts in
future years. For example, a temporary difference is created
between the reported amount and the tax basis of an installment
sale receivable if, for tax purposes, some or all of the gain on
the installment sale will be included in the determination of
taxable income in future years. Future recovery of that receivable
is inherently assumed in the statement of financial position for
the current year. Because amounts received upon recovery of that
receivable will be taxable, a deferred tax liability is recognized
in the current year for the related taxes payable in future
years.
The deferred tax liability meets the definition of a
liability in FASB Concepts Statement No. 6, Elements of
Financial Statements. The liability results from a past
event-the installment sale at a profit. It is a present obligation
of the enterprise-the amount is not yet payable to the government,
but based on governmental rules and regulations, taxes will be
payable when the receivable is recovered in future years. The
deferred tax liability represents a probable future
sacrifice-taxable amounts in future years will result from events
whose occurrence is already assumed in an enterprise's statement of
financial position for the current year, namely, recovery of the
reported amount of the receivable. No other future events need
occur.
Losses or expenses that might be incurred and
recognized in financial statements in future years could offset net
taxable amounts that result from temporary differences at the end
of the current year. However, that change in tax consequences would
be a result of events (a) that have not been recognized in the
financial statements and (b) that are not inherently assumed in
financial statements for the current year. The Board believes that
the tax consequences of an event should not be recognized until
that event is recognized in the financial statements.
The September 1986 Exposure Draft, Accounting for
Income Taxes, proposed a requirement to recognize a deferred
tax liability for the areas identified in Opinion 23 and for
deposits to statutory reserve funds by U.S. steamship enterprises.
The Board views that proposal as consistent with the decision to
reject the partial tax allocation approach to recognition of
deferred taxes. The Board continues to believe that there is a
recognizable liability for the deferred tax consequences of those
temporary differences. However, the Board decided that, at this
time, it would continue the exception to comprehensive recognition
of deferred taxes for those temporary differences. Recognition of a
deferred tax liability for analogous types of temporary differences
is required.
Deferred Tax Assets
The tax benefit of temporary differences that will
result in deductible amounts in future years is recognized in the
following circumstances:
a. A deferred tax liability is reduced to the extent
that those deductible amounts offset taxable amounts from other
temporary differences in future years.
b. A deferred tax asset is recognized to the extent
that net deductible amounts in future years would be
recoverable by a carryback refund of taxes paid in the current or
prior years.
A deferred tax asset is not recognized for any
additional amount of temporary differences that will result in net
deductible amounts in future years. That additional amount is, in
substance, the same as a tax loss carryforward.
The results of applying the requirements of this
Statement are sometimes described as asymmetrical because a
deferred tax liability is always recognized for temporary
differences that will result in net taxable amounts and a tax
benefit is only recognized for temporary differences that will
result in deductible amounts that reduce taxes otherwise paid or
payable. That asymmetry, however, is an accurate reflection of U.S.
tax law. The U.S. tax law is not evenhanded. Net taxable amounts
always result in current tax payments. Deductible amounts,
on the other hand, only result in a current tax benefit if
they offset taxable amounts, either in the same year or in a prior
year that is subject to a claim for carryback refund. Under U.S.
tax law, deductible amounts that do not reduce taxes otherwise paid
or payable are a loss carryforward. Absent earning taxable income
in the future, the tax benefit of a loss carryforward, as
determined by the tax law, is zero. The Board believes that the
requirements of this Statement are consistent with the tax law and
that the results of applying this Statement are
representationally faithful, a quality called for in FASB
Concepts Statement No. 2, Qualitative Characteristics of
Accounting Information.
Income earned and recognized in financial statements
in future years might permit realization of a tax benefit for net
deductible amounts that result from temporary differences at the
end of the current year. However, that change in tax consequences
would be a result of events (a) that have not been recognized in
the financial statements and (b) that are not inherently assumed in
financial statements for the current year. The Board believes that
the tax consequences of an event should not be recognized until
that event is recognized in the financial statements, regardless of
the probability that the event will occur in future years.
Tax-Planning Strategies
This Statement requires that recognition and
measurement of a deferred tax liability or asset take into account
tax-planning strategies (provided that they meet certain criteria)
that would change the particular future years in which temporary
differences result in taxable or deductible amounts. Tax-planning
strategies either (a) reduce the recognized amount of taxes payable
for temporary differences that will result in net taxable amounts
in future years or (b) increase the recognized amount of tax
benefits for temporary differences that will result in net
deductible amounts in future years. Most strategies involve
transactions that would accelerate the recovery of assets or
settlement of liabilities to increase the recognizable tax benefit
of deductions and tax credits. However, management would not need
to actually apply the strategy in the future if income earned in a
following year permits realization of the entire tax benefit of a
loss or tax credit carryforward from the current year.
Measurement of a Deferred Tax Liability or Asset
A deferred tax liability or asset is determined at
each financial statement date by applying the provisions of enacted
tax laws to measure the deferred tax consequences of temporary
differences that will result in net taxable or deductible amounts
in each future year. In concept, the amount of deferred taxes
payable or refundable in future years is determined as if a tax
return were prepared for each future year. In practice, less
detailed or aggregate calculations may be possible.
A tax law may require that more than one
comprehensive method or system be used to determine an enterprise's
tax liability. If alternative systems exist, they should be used to
measure an enterprise's deferred tax liability or asset in a manner
consistent with the tax law.
Changes in Tax Laws or Rates
This Statement requires that a deferred tax liability
or asset be adjusted in the period of enactment for the effect of
an enacted change in tax laws or rates. A change in tax laws or
rates is an event that has economic consequences for an enterprise.
An enterprise's financial condition improves if it owes a smaller
amount of taxes or if it would receive a larger refund. Its
financial condition weakens if the enterprise owes more taxes or
would receive a smaller refund.
Effective Date
This Statement is effective for fiscal years
beginning after December 15, 1988, although earlier application is
encouraged.
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