Coming Soon: Changes to Income Tax Reporting

The updated guidance will help lower accounting costs by:

1.    Removing the need to analyze whether the following applies in a given period:

• • The exception to the incremental approach for intra-period tax allocation,
  • Exceptions to accounting for basis differences when there are ownership changes in foreign investments, and
  • The exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

2.    Recognizing a franchise tax (or similar tax) that’s partially based on income as an income-based tax and accounting for any incremental amount incurred as a non-income-based tax.

3.    Evaluating when a step-up in the tax basis of goodwill should be considered a separate transaction or part of the business combination in which the goodwill was originally recognized on the entity’s balance sheet.

4.    Reflecting the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

5.    Making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

6.    Specifying that an entity isn’t required to allocate the consolidated amount of current and deferred tax expense to a legal entity that’s not subject to tax in its separate financial statements.

Furthermore, under the updated guidance, an entity may elect to allocate the consolidated amount of current and deferred tax expense (on an entity-by-entity basis) for a legal entity that’s both not subject to tax and disregarded by the taxing authority.

More Changes in the Works

In addition to the changes under ASU 2019-12, the FASB has been evaluating the disclosure requirements for income taxes for possible modifications. In 2016 and 2019, the FASB issued controversial proposals that would have required businesses to disclose more details about domestic and foreign tax payments.

After receiving negative feedback on both proposals, the income tax disclosure project is back in the redeliberation phase. FASB staff is currently performing research and outreach on potential alternatives to disclose certain disaggregated income tax information and other proposed amendments.

Implementation Deadlines

For public companies, the ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, it’s effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

However, most companies welcome the upcoming changes to the complex income tax accounting rules so many are expected to take advantage of the option to adopt the simplification measures early. Contact DLA with questions about implementing the new guidance and the latest developments on the disclosure requirements.