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:

  1. 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;
  2. 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
  3. 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.