FAF: Accounting for Income Tax Standard Achieves Purpose

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By Jason Bramwell

The post-implementation review (PIR) team of the Financial Accounting Foundation (FAF) concluded on November 19 that, while complex, a 1992 accounting standard addressing accounting for income taxes generally achieves its purpose.

The standard – Financial Accounting Standards Board (FASB) Statement No. 109, Accounting for Income Taxes – requires public and private companies to recognize the estimated amount of taxes payable or refundable for the current year. Companies are also required to recognize deferred tax liabilities and assets for future tax consequences of events that have been recognized in a company's financial statements or tax returns.

"The PIR report on Statement 109 identified many positive aspects of the income tax standard, including its decision-usefulness to users and understandability for preparers", FASB Chairman Russell Golden said in a written statement. "Stakeholders have indicated that income tax accounting remains complex, and we are eager to consider the PIR team's findings. We anticipate providing our initial response in the coming weeks."

Several stakeholders, including investors, financial statement users, preparers, auditors, and academics, provided the independent PIR team with input on the standard. Based on its research, the PIR team concluded the following:

1. Statement 109 adequately resolved the issues underlying its stated need but may not have reduced the complexity of accounting for income taxes. It is not clear whether the complexity is a result of the standard's requirements, factors occurring after the issuance of Statement 109 (such as significant changes in the business environment and tax laws, along with increased foreign operations by US companies), or both.

2. Information resulting from the application of Statement 109 provides investors with decision-useful information, although certain income tax information may not be sufficiently aligned with investor needs. For example, income tax information may not be detailed enough for users to (a) analyze the cash effects associated with income taxes, particularly current period taxes paid by jurisdiction (United States and foreign), and estimate future tax payments, and (b) analyze earnings determined to be indefinitely reinvested in foreign subsidiaries.

3. Most of Statement 109's requirements are understandable, can be applied as intended, and enable income tax information to be reported reliably. The following aspects of income tax accounting are the most challenging for stakeholders: intraperiod tax allocations, accounting for intercompany transfers of assets, and accounting for earnings determined to be indefinitely reinvested in foreign subsidiaries (and the related disclosures).

4. Statement 109 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant unanticipated consequences.

5. Stakeholders incur significant ongoing costs to comply with Statement 109. Some of the costs relate to factors arising after Statement 109 was issued, including the introduction of the Sarbanes-Oxley Act of 2002 and an increase in complexity of business transactions, US and foreign tax laws, and business conducted in foreign jurisdictions by US companies.

"On behalf of the FAF and the FASB, I'd like to thank the stakeholders who helped the PIR team assess the application, usefulness, and effectiveness of the income tax standard for public and private companies", FAF President and CEO Teresa Polley said in a written statement.

The PIR team had no significant standard-setting process recommendations as a result of its review.

Future PIR Team Activities

The PIR team is in the early review process of FASB Statement No. 123(R), Share-Based Payment, and it will begin a review of FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, after completing its review of FASB Statement No. 157, Fair Value Measurements, in early 2014.

The PIR team also has its sights set on reviewing several standards of the Governmental Accounting Standards Board (GASB). It will initiate a review of GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and related GASB Statement No. 36, Recipient Reporting for Certain Shared Nonexchange Reviews, after finishing its review of GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, next year.

Stakeholders who would like the opportunity to participate in upcoming PIR surveys, which are conducted by an independent survey firm on behalf of the FAF, should register online.

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