TCA 2021 Small Business Forum
Originally published in The Cooperative Accountant, Fall 2021 Issue
FASB Simplification Initiative Related to Income Taxes
In recent years the Financial Accounting Standards Board (FASB) launched the Simplification Initiative to reduce unnecessary complexity in the various areas of accounting. The Simplification Initiative has resulted in several narrow scope changes to the accounting guidance while maintaining the decision usefulness of the financial information. The FASB has issued the following Accounting Standards Updates (ASU) in an effort to simplify the guidance in Accounting Standards Codification (ASC) Topic 740, entitled Income Taxes:
- ASU 2019-12, entitled Simplifying the Accounting for Income Taxes.
- ASU 2016-16, entitled Intra-Entity transfers of Assets Other Than Inventory.
- ASU 2015-17, entitled Balance Sheet Classification of Deferred Taxes.
This guidance reflects changes to the accounting standards that are a direct result of the Simplification Initiative. In general, the objective of the FASB with this new guidance is to reduce the cost and complexity associated with the accounting requirements related to income taxes while maintaining the decision usefulness of the financial information.
Eliminated Exceptions to the Provisions of ASC Topic 740 (ASU 2019-12)
The FASB issued ASU 2019-12 to reduce the complexity of the accounting guidance by eliminating the following exceptions to the provisions of ASC Topic 740.
Incremental approach for intraperiod tax allocation. ASC 740-20-45-7 indicates that the tax effect of pretax income or loss from continuing operations should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. For example, assume that a reporting entity has a $1,000 ordinary loss from continuing operations and an $1,800 gain from discontinued operations that is a capital gain for tax purposes. Also, assume the reported entity determined that a deferred tax asset (with no allowance) would have been recognized for the loss if the capital gain did not exist. Assuming the tax rates are 21% on ordinary income and 21% on capital gains, the income tax expense is allocated between continuing operations and discontinued operations as follows:
$168 Total Tax Expense ($1,800 capital gain less $1,000 ordinary loss = $800 x 21%)
(210) Tax benefit allocated to the loss from operations ($1,000 ordinary loss x 21%)
$378 Increment tax expense allocated to gain on discontinued operations
Prior to ASU 2019-12, the exception to this incremental approach was that all items (e.g., discontinued operations) be considered in determining the amount of tax benefit that is allocated to continuing operations. Using the pre-2019-12 guidance, the tax benefit allocated to the loss from operations would assume that the $1,000 ordinary loss was used to offset a portion of the $1,800 capital gain that otherwise would have been taxed at 21%. Thus, $210 ($1,000 x 21%) of the tax benefit would have been allocated to continuing operations.