Complexity Still an Issue for Income Tax Accounting Standard

The Financial Accounting Standards Board (FASB) said on December 3 it will continue to analyze the Financial Accounting Foundation (FAF) post-implementation review (PIR) of FASB Statement No. 109, Accounting for Income Taxes. The FAF had concluded that, while generally achieving its purpose, Statement 109 may still be too complex.
 
The standard requires organizations that prepare financial statements under US Generally Accepted Accounting Principles (GAAP) to recognize the amount of (1) taxes payable or refundable for the current year, and (2) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the organization's financial statements or tax returns.
 
While the PIR team determined in its report that Statement 109 "adequately resolved the issues underlying its stated need," the panel found the standard may not have reduced the complexity of accounting for income taxes. It was unclear to the PIR team whether that complexity was a result of the standard's requirements, factors occurring after Statement 109 was issued (e.g., significant changes in the business environment and tax laws), or both.
 
In his written response to the PIR team's findings, FASB Chairman Russell Golden noted that some preparers and practitioners find certain aspects of Statement 109 "operationally challenging, including intraperiod tax allocation, intercompany transfer of assets, and situations in which a deferred tax liability is not recognized for temporary differences related to earnings determined to be indefinitely reinvested in foreign subsidiaries." 
 
"The PIR report states that information resulting from the application of Statement 109 provides investors with decision-useful information; however, the information may not be detailed enough for users to analyze the cash flows associated with income taxes and to analyze earnings determined to be indefinitely reinvested in foreign subsidiaries," Golden wrote. 
 
US GAAP on accounting for earnings indefinitely reinvested in foreign subsidiaries was initially issued in 1972 by the Accounting Principles Board  a standard-setting predecessor to the FASB. "Although the accounting guidance has not changed significantly since that time, the FASB has reevaluated the guidance several times as a result of our ongoing dialogue with stakeholders," Golden wrote. "We considered the guidance in 1987 when the board issued FASB Statement No. 96, Accounting for Income Taxes, in 1992 when the board issued Statement 109, and in 2004 when the FASB evaluated accounting for income taxes in connection with a convergence project with the International Accounting Standards Board. Since that time, the FASB has continued to monitor tax law changes, including when we issued guidance in 2004 to assist preparers and practitioners with addressing the accounting implications of the American Jobs Creation Act of 2004."
 
The FASB said it will continue to analyze the findings in the PIR report, including performing outreach with financial statement users, preparers, auditors, and other stakeholders.
 
"The objective of the outreach is to understand stakeholders' specific concerns and whether there are any cost-effective solutions to address the concerns," Golden wrote. "The FASB also plans to understand stakeholders' views about the priority of addressing those concerns relative to the other projects the board could undertake to enhance US GAAP." 
 
Related article:
 

You may like these other stories...

Treasury prepares options to address tax inversionsDamian Paletta of the Wall Street Journal reported on Monday that US Treasury Department officials are assembling a list of administrative options for Treasury Secretary...
Read more from Larry Perry here and in the Today's World of Audits archive.In my previous article, I discussed auditing standards and the impact of the assessed level of risk of material misstatement (RMM) on the design...
While audits of broker-dealers showed some improvement last year compared to previous years, 71 of 90 broker-dealer audits inspected by the Public Company Accounting Oversight Board (PCAOB) in 2013 were still found to have...

Already a member? log in here.

Upcoming CPE Webinars

Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.
Aug 26
This webcast will include discussions of recently issued, commonly-applicable Accounting Standards Updates for non-public, non-governmental entities.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.
Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.