How the New Revenue Standard May Affect a Company's Income Tax Accounting

Published on July 24, 2017

As companies prepare to adopt the new revenue recognition standard, they must consider the potential income tax accounting implications. Adoption of the standard may create new temporary differences or require the remeasurement of existing ones. It also may create process and system challenges if multiple “accounting bases” need to be maintained. Tax professionals should be actively involved in implementation discussions to make sure all implications are considered, regardless of whether the company has reached a conclusion on the pretax effects of adoption on financial reporting. 

The new revenue recognition standard issued by the Financial Accounting Standards Board (FASB) will supersede virtually all US GAAP guidance on this topic, including industry and interpretive guidance. The standard, which was largely codified in Accounting Standards Codification (ASC) 606, provides guidance for all revenue arising from contracts to provide goods or services to customers (unless the arrangements are in the scope of other guidance, such as the guidance on leases). As part of the project, the FASB also issued new guidance to account for any gains or losses resulting from the sale of nonfinancial assets or in substance nonfinancial assets that are not outputs of an entity’s ordinary activities and are not businesses. This includes the sale of property, plant and equipment (including real estate) and intangible assets. This guidance is codified in ASC 610-20.2 No. 2017-23 13 July 2017 Technical Line H 

Adopting ASC 606 and related amendments likely will affect the accounting for income taxes because the timing of revenue recognition and gains from sales of nonfinancial assets for financial reporting purposes may no longer align with or may further diverge from their tax treatment. As part of their processes to implement the new standard, companies should determine whether existing temporary differences require remeasurement or whether new temporary differences will arise when the new guidance is applied.

(Source: EY AccountingLink - This Week in Review - Technical Line - July 13, 2017)