A Roadmap to Accounting for Income Taxes...3.51B Deferred Income Taxes Related to a Foreign Branch: Accounting for Changes in a Parent’s Deferred Taxes Due to Changes in Exchange

A Roadmap to Accounting for Income Taxes2018

The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission.

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Other Publications in Deloitte’s Roadmap Series

Roadmaps are available on these topics:

Asset Acquisitions

Business Combinations — SEC Reporting Considerations

Carve-Out Transactions

Common-Control Transactions

Consolidation — Identifying a Controlling Financial Interest

Contracts on an Entity’s Own Equity

Discontinued Operations

Distinguishing Liabilities From Equity

Earnings per Share

Environmental Obligations and Asset Retirement Obligations

Equity Method Investments and Joint Ventures

Equity Method Investees — SEC Reporting Considerations

Foreign Currency Transactions and Translations

Initial Public Offerings

Leases

Noncontrolling Interests

Non-GAAP Financial Measures

Pushdown Accounting

Revenue Recognition

SEC Comment Letter Considerations, Including Industry Insights

Segment Reporting

Statement of Cash Flows

Roadmaps on these topics will be available soon:

Business Combinations

Convertible Debt

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Matt Himmelman and Steve Barta supervised the overall preparation of the 2018 edition of this Roadmap and extend their deepest appreciation to all professionals who helped in its development, but in particular the other core members of the working group, which included Jeff Jenkins, Patrice Mano, and Paul Vitola. The 2018 edition would not have been possible without the numerous contributions of the following professionals in the Accounting Services group of Deloitte & Touche LLP’s National Office and the Washington National Tax group of Deloitte Tax LLP who were instrumental in developing the updated guidance contained herein:

Special thanks to our Production group who worked tirelessly to make this Roadmap a reality.

Chris AhlChris BartonDavid BrownRyan CaldwellChris Chiriatti

Peggy CullenJeff FitzgeraldKrystle KortAlice LooNikki Nikizad

Teri AsaritoLynne CampbellSandy CluzetAmy DavidsonGeri DriscollDavid FrangioneMichael LorenzoPeter McLaughlinJeanine PagliaroJoseph Renouf Lora Spickler-Alot

Acknowledgments

iv

Preface xix

Contacts xx

Executive Summary xxi

Chapter 1 — Overview 11.01 Overview of ASC 740 4

1.02 Objectives of ASC 740 5

Chapter 2 — Scope 62.01 Taxes Within the Scope of ASC 740 7

2.02 Hybrid Taxes 8

2.03 Accounting for Taxes Assessed on the Payor of a Dividend 9

2.03A Accounting for Taxes Withheld on Certain Payments (e.g., Dividend, Interest, Royalty, or License) 10

2.04 Refundable Tax Credits 11

2.05 IncomeTaxIndemnificationsUponSaleofaSubsidiaryThatPreviouslyFileda Separate Tax Return 12

Chapter 3 — Recognition and Derecognition 14General Recognition Approach 14

3.01 Exceptions to Recognition of Deferred Taxes 19

3.02 DefinitionofSubsidiaryandCorporateJointVenture 19

3.03 DefinitionofForeignandDomesticInvestments 20

3.04 Definitionof“Inside”and“Outside”BasisDifferences 21

3.05 RecognitionofDeferredTaxesforInsideBasisDifferences 22

3.06 DeferredTaxConsiderationsRelatedtoWithholdingTaxesImposedonDistributionsFromDisregardedEntitiesandForeignSubsidiaries 22

3.07 RecognitionofDeferredTaxesforTemporaryDifferencesRelatedtotheCTA 24

3.08 HedgeofaNetInvestmentinaForeignSubsidiary 25

3.09 Deferred Taxes Recorded Through the Currency Translation Adjustment 26

3.10 WhetheraChangeinManagement’sPlansforReinvestmentorRepatriationofForeign Earnings Is a Recognized or Nonrecognized Subsequent Event 26

3.11 Tax Consequences of a Change in Intent Regarding Remittance of Pre-1993 UndistributedEarnings 27

3.12 TaxConsequencesofBad-DebtReservesofThriftInstitutions 28

Contents

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3.13 TaxConsequencesofaReductionoftheTaxBase-YearBad-DebtReserveinanAnnualPeriod 30

3.14 TaxConsequencesofaReductionoftheTaxBase-YearBad-DebtReserveinanInterimPeriod 30

3.15 RealizationofaDTAofaSavingsandLoanAssociation:ReversalofaThrift’sBase-YearTax Bad-DebtReserve 31

3.15A Regulated Entities Subject to ASC 980 31

3.15B ConstructioninProgressandPlantinServiceRecordedNet-of-Tax 32

3.16 Intra-EntityTransactionsBetweenDifferentTax-PayingComponents 32

3.17 Subsequent Changes in Tax Rates Involving Intra-Entity Transactions 33

3.18 IndexingoftheTaxBasisofAssetsandLiabilities 34

Tax Positions 34

3.19 ConsiderationofTaxPositionsUnderASC740 37

3.20 Considerations of Tax Positions by Tax-Exempt or Pass-Through Entities 38

3.20A UnrecognizedTaxBenefitsandSpin-OffTransactions 38

3.21 AccountingfortheTaxEffectsofTaxPositionsExpectedtoBeTakeninanAmended TaxReturnorRefundClaimortoBeSelf-ReportedUponExamination 40

3.22 RecognitionandMeasurement—AssumptionstoBeUsed 41

3.23 DecisionTreeforRecognizingBenefitsofaTaxPosition 42

3.24 Legal Tax Opinions Not Required to Support a Tax Position 43

3.25 Meaning of the Court of Last Resort and Its Impact on Recognition 43

3.26 ImpactoftheLikelihoodoftheU.S.SupremeCourt’sHearingtheCase 44

3.27 ConsiderationofWidelyUnderstoodAdministrativePracticesandPrecedents 44

3.28 Applying ASC 740 to Questions About Economic Nexus 45

3.29 LookbackPeriodforAccruingaStateIncomeTaxLiabilityforUTBs 45

3.30 DeterminingtheUnitofAccount 46

3.31 WhetherDeterminationoftheUnitofAccountIsanAccountingPolicyChoice 47

3.32 ApplyingtheUnitofAccount 47

3.33 Decision Tree for the Subsequent Recognition, Derecognition, and Measurement of BenefitsofaTaxPosition 48

3.34 EvaluatingtheRecognitionThresholdAfterExaminationofaTaxYear 49

3.35 EffectivelySettledTaxPositions 49

3.36 FinalityorCertaintyofOutcomeinSubsequentRecognition,Derecognition,or Measurement of a Tax Position 50

3.37 NewInformationObtainedAftertheBalanceSheetDateConcerningUncertainTaxPositions 51

3.38 InterimAccountingforaChangeinJudgment 52

3.39 ChangesinJudgmentRegardingaTaxPositionTakenintheCurrentYear 52

3.40 ChangesinJudgmentRegardingaTaxPositionTakeninthePriorYear 53

3.41 DistinguishingaChangeinEstimateFromaCorrectionofanError 54

3.42 DeferredTaxConsequencesofUTBs 56

Temporary Differences 57

3.43 TaxBasesUsedintheComputationofTemporaryDifferences 61

3.44 TemporaryDifferences 61

3.45 IncomeTaxConsequencesofIssuingDebtWithaConversionFeatureAccountedfor Separately as a Derivative 62

3.46 IncomeTaxEffectsonMedicarePartDSubsidyReceipts 64

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Deloitte | A Roadmap to Accounting for Income Taxes (2018)

3.47 RecognizingDeferredTaxesforIndefinite-LivedAssets 65

3.48 DeferredTaxConsiderationsWhenGoodwillBecomesaFinite-LivedAsset 66

3.49 Deferred Tax Consequences of Synthetic Leases 66

3.50 Considering the Impact of Tax Method Changes 67

3.51 When to Recognize the Impact of Tax Method Changes 70

3.51A AccountingforForeignBranchOperations 71

3.51B DeferredIncomeTaxesRelatedtoaForeignBranch:AccountingforChangesina Parent’s Deferred Taxes Due to Changes in Exchange Rates 75

Basis Differences That Are Not Temporary Differences 77

3.52 PermanentDifferences 78

3.53 ExamplesofBasisDifferencesThatAreNotTemporaryDifferences 80

Change in Tax Status 81

3.54 Change in Tax Status of an Entity 81

3.54A TaxEffectsofa“Check-the-Box”Election 83

3.55 Recognition Date for Conversion to a REIT 84

3.56 Loss of Nontaxable Status as a Result of Acquisition 85

3.57 Successor Entity’s Accounting for the Recognition of Income Taxes When the Predecessor Entity Is Nontaxable 86

3.58 Accounting for the Elimination of Income Taxes Allocated to a Predecessor Entity When the Successor Entity Is Nontaxable 88

3.59 VoluntaryChangeinTaxStatusofanAcquiredEntity 89

3.60 Change in Tax Status as a Result of a Common-Control Merger 89

3.61 ChangeinTaxStatustoTaxable:AccountingforanIncreaseinTaxBasis 89

3.62 Built-inGain:RecognitionandMeasurement 90

Tax Holidays 92

3.63 Tax Consequences of Tax Holidays 92

3.63A AccountingforTemporaryDifferencesRelatedtoInvestmentTaxCredits 92

Effect of Anticipated Future Special Deductions, Losses, and Tax Credits 97

Alternative Minimum Tax 98

Investment Tax Credits 99

Changes in Laws or Rates 99

3.64 RetroactiveChangesinTaxLawsorRatesandExpiringProvisionsThatMayBeReenacted 99

3.65 EnactedChangesinTaxLawsorRatesThatAffectItemsRecognizedinOCI 99

3.66 ReportingTaxEffectsofaChangeinTaxLawinDiscontinuedOperations 101

Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations 102

Interest and Penalties 103

3.67 Recognition and Measurement of Interest and Penalties 104

3.68 InterestIncomeonUTBs 105

3.69 Capitalization of Interest Expense 106

3.70 Recognition of the Accrual for Penalties 106

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Contents

Chapter 4 — Measurement 107General Measurement Approach 107

4.01 MeasuringDeferredTaxesinConsolidatedFinancialStatementsWhenaForeign SubsidiaryUsesaLocalStatutoryBasisofAccountingtoPrepareItsFinancialStatements 109

Applicable Tax Rate Used to Measure Deferred Taxes 110

4.02 TaxRateUsedinMeasuringOperatingLossesandTaxCredits 112

4.03 Determining the Applicable Tax Rate on a Loss Carryback 112

4.04 MeasuringDeferredTaxesforIndefinite-LivedIntangibleAssetsWhenDifferentTax Rates May Apply 113

4.05 UseofaBlendedRatetoMeasureDeferredTaxes 113

4.06 EffectofTaxHolidaysontheApplicableTaxRate 114

4.07 ConsiderationofCertainStateMatters,IncludingOptionalFutureTaxElections,inthe Measurement of DTAs and DTLs 114

4.08 SituationsinWhichDeterminingtheApplicableTaxRateMayBeComplex 116

4.09 Graduated Tax Rates 118

4.10 MeasurementWhenGraduatedTaxRatesAreaSignificantFactor 119

4.11 MeasurementWhenFutureTaxLossesAreExpectedinaGraduatedTaxRateStructure 120

4.12 Measurement When Phased-In Changes in Tax Rates Are Enacted 121

4.13 Measurement When Contingent Phased-In Changes in Tax Rates Are Enacted 122

4.14 ConsiderationofU.S.AMTCreditCarryforwards 123

4.15 AMT Rate Not Applicable for Measuring DTLs 123

4.16 ExampleIllustratingtheApplicationofASC740totheAMTSystemintheU.S. FederalJurisdiction 124

4.17 ConsiderationofSpecialDeductionsThatArePermittedUndertheTaxLaw 125

4.18 MeasurementofBasisDifferencesinanAdjustedGrossReceiptsTaxRegime 128

4.19 Deferred Tax Treatment of Hybrid Taxes 129

4.20 ApplicabilityofPushdownAccountingtoIncomeTaxesandForeignCurrencyTranslationAdjustments 133

Establishment of a Valuation Allowance for Deferred Tax Assets 135

4.21 ConsiderationofFutureEvents 137

4.22 Sources of Taxable Income 138

4.23 Examples Illustrating Sources of Taxable Income 138

4.24 EvaluatingaDTA(forRealization)ofaDebtSecurityAttributedtoanUnrealizedLoss Recognized in OCI 139

4.25 DeterminingthePatternofReversalsofTemporaryDifferences 142

4.26 ExamplesIllustratingtheDeterminationofthePatternofReversalsofTemporaryDifferences 143

4.27 UsingtheReversalofaDTLforanIndefinite-LivedAssetasaSourceofTaxableIncome 150

4.28 AMTValuationAllowances 151

4.28A Assessing Realization of a DTA for Regular Tax NOL Carryforwards When an Entity Anticipates Paying AMT Perpetually 152

4.29 DefinitionofaTax-PlanningStrategy 154

4.30 Examples of Qualifying Tax-Planning Strategies 156

4.31 Examples of Nonqualifying Tax-Planning Strategies 157

4.32 Recognition and Measurement of a Tax-Planning Strategy 159

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4.33 The“More-Likely-Than-Not”Standard 160

4.34 ExamplesIllustratingtheMeasurementofValuationAllowancesWhenTax-Planning Strategies Are Involved 160

4.35 DeterminationoftheNeedforaValuationAllowanceRelatedtoFTCs 164

4.36 Definitionof“CumulativeLossesinRecentYears” 166

4.37 ConsiderationofNegativeEvidenceintheDeterminationofWhetheraValuationAllowanceIsRequired 167

4.38 CumulativeLosses:AnObjectivelyVerifiableFormofNegativeEvidence 168

4.39 Going-Concern Opinion as Negative Evidence 169

4.40 EstimatesofFutureIncome 169

4.41 EffectofNonrecurringItemsonEstimatesofFutureIncome 170

4.42 ExampleIllustratingtheEstimationofFutureTaxableIncomeWhenNegativeEvidencein theFormofCumulativeLossesExists 171

4.43 PositiveEvidenceConsideredintheDeterminationofWhetheraValuationAllowance Is Required 173

4.44 AdditionalExamplesofObjectivelyVerifiablePositiveEvidence 174

4.45 ExampleIllustratingtheDeterminationofaValuationAllowanceWhenItIsMoreLikely ThanNotThataPortionofExistingTaxBenefitsWillNotBeRealized 175

4.46 ReductionofaValuationAllowanceWhenNegativeEvidenceIsNoLongerPresent 177

4.47 ValuationAllowances:TimeFrameforAssessingFutureTaxableIncome 179

Tax Rates Applicable to Items Not Included in Income From Continuing Operations 179

Allocation of Consolidated Tax Expense to Separate Financial Statements of Members 180

4.48 SubsidiaryFinancialStatements[Deleted] 180

4.49 AcceptableMethodsofAllocatingTaxtoSeparateFinancialStatements 180

4.50 Preferable Allocation Method for Public Entities 184

4.51 Change in Application of Tax Allocation Methods 184

4.52 ValuationAllowanceintheSeparateFinancialStatementsofaConsolidatedGroupMember 184

4.52A AccountingforIncomeTaxesintheBalanceSheetofSeparateFinancialStatements: DTAs Related to Tax Attributes 185

4.53 TaxConsequencesofTax-SharingAgreementsThatAreNotAcceptableforFinancial Reporting Purposes 187

4.54 ReportingAcquisitionDebtinSeparateFinancialStatements 188

4.55 TaxBenefitoftheDeductibleInterestintheSeparateFinancialStatements 189

4.56 ApplicationoftheSeparateReturnMethodinCombinedorCarve-OutFinancialStatements ofMultipleLegalEntities,MultipleDivisions,orBoth 189

4.57 AllocatingIncomeTaxestoNonmembersinCarve-OutFinancialStatements 190

4.57A AccountingforTaxableTemporaryDifferencesResultingFromInvestmentsinForeign SubsidiariesandForeignCorporateJointVenturesinSeparateFinancialStatements PreparedbyUsingtheSeparateReturnMethod 191

4.57B AccountingforIncomeTaxesintheBalanceSheetofSeparateFinancialStatements: UnrecognizedTaxBenefitsandCurrentTaxesPayableorReceivable 193

4.58 DisclosureRequirementsWhenanUnincorporatedDivision’sStatementofRevenues andExpensesIsPresentedinaPublicFiling[Deleted] 194

4.59 Single Member LLC Tax Allocation 194

4.60 ChangeFromSingleMemberLLCtoMultipleMemberLLC(orViceVersa) 195

4.61 Publicly Held Single Member LLC 195

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Interest and Penalties on Unrecognized Tax Benefits 195

Information Affecting Measurement of Tax Positions 196

4.62 UseofAggregationandOffsettinginMeasuringaTaxPosition 196

4.63 Measurement: Weighing of Information 196

4.64 Measuring a Tax Position — Assigning Probabilities in a Cumulative-Probability Assessment 196

4.65 Cumulative-Probability Table 197

4.66 Cumulative-ProbabilityApproachVersusBestEstimate 197

4.67 ExampleIllustratingtheMeasurementoftheBenefitofanUncertainTaxPosition 198

4.68 MeasurementofTaxPositionsThatAreConsideredBinary 198

4.69 UncertaintyinDeductionTiming 199

4.70 MeasurementofUncertainTaxPositionsinTransferPricingArrangements 201

Changes in Tax Laws or Rates 204

4.71 Change in Tax Law That Allows an Entity to Monetize an Existing DTA or Tax Credit in LieuofClaimingtheBenefitintheFuture 205

Deferred Credit Arising From Asset Acquisitions That Are Not Business Combinations 205

Chapter 5 — Presentation 206Statement of Financial Position Classification of Income Tax Accounts 206

5.01 Current/NoncurrentClassificationofDTLsandDTAs 209

5.02 PresentationofDeferredFederalIncomeTaxesAssociatedWithDeferredStateIncomeTaxes 210

5.03 RecognitionofChangesinIndemnificationAssetsUnderaTaxIndemnificationArrangement 211

5.04 ValuationAllowance:ClassificationinaClassifiedBalanceSheet 212

5.05 AccountingfortheTaxEffectsofaChangeinTaxAccountingMethod 214

5.06 BalanceSheetClassificationoftheLiabilityforUTBs 215

5.07 FinancialStatementDisplayofFutureObligationstoTaxAuthoritiesUnder Regulation S-X, Rule 5-02 216

5.08 InteractionofUTBsandTaxAttributes 216

5.09 BalanceSheetPresentationofUTBsResultingFromTransferPricingArrangements 217

5.10 PresentationofProfessionalFees 218

Income Statement Presentation of Certain Measurement Changes to Income Tax Accounts 219

Income Statement Classification of Interest and Penalties 220

5.11 ClassificationofInterestandPenaltiesintheFinancialStatements 220

Investment Tax Credits Under the Deferral Method 221

Chapter 6 — Disclosure 222Statement of Financial Position-Related Disclosures 222

6.01 Required Level of Detail 223

6.02 Definitionof“Significant”WithRespecttoDisclosingtheTaxEffectofEachTypeof TemporaryDifferenceandCarryforwardThatGivesRisetoDTAsandDTLs 223

6.03 DisclosureofWorthlessTaxBenefits 223

6.04 ChangeinTaxStatustoTaxable:FinancialReportingConsiderations 224

Income-Statement-Related Disclosures 225

6.05 Disclosure of the Components of Deferred Tax Expense 225

6.06 DisclosureoftheTaxEffectofaChangeinTaxLaw,Rate,orTaxStatus 226

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Income Tax Expense Compared to Statutory Expectations 226

6.07 EvaluatingSignificanceofReconcilingItemsintheRateReconciliation 227

6.07A AppropriateFederalStatutoryRateforUseintheRateReconciliationofaForeign Reporting Entity 228

6.07B Computingthe“ForeignRateDifferential”intheRateReconciliation 228

Unrecognized Tax Benefits-Related Disclosures 229

6.08 PeriodicDisclosuresofUTBs 230

6.09 Disclosure of Expiration of Statute of Limitations 230

6.10 DisclosureRequirementsforEffectivelySettledTaxPositions 230

6.11 DisclosureofUTBsThatCouldSignificantlyChangeWithin12MonthsoftheReportingDate 231

6.12 InterimDisclosureConsiderationsRelatedtoUTBsThatWillSignificantlyChangeWithin 12 Months 232

6.13 AmountsIncludedintheTabularReconciliationofUTBs 232

6.14 Separate Disclosure of Interest Income, Interest Expense, and Penalties 232

6.15 DisclosureofInterestandPenaltiesRecordedintheTabularReconciliationofUTBs 233

6.16 PresentationofChangesRelatedtoExchangeRateFluctuationsintheTabularReconciliation 233

6.17 DisclosureofFullyReservedDTAsintheReconciliationofUTBs 233

6.18 ItemsIncludedintheTabularDisclosureofUTBsFromUncertainTaxPositionsMayAlso BeIncludedinOtherDisclosures 234

6.19 DisclosureoftheSettlementofaTaxPositionWhentheSettlementAmountDiffers FromtheUTB 234

6.20 ConsiderationofTabularDisclosureofUTBsinanInterimPeriod 235

6.21 PresentationintheTabularReconciliationofaFederalBenefitAssociatedWithUnrecognized State and Local Income Tax Positions 235

6.22 DisclosureofUTBsThat,IfRecognized,WouldAffecttheETR 235

6.23 ExampleofUTBsThat,IfRecognized,WouldNotAffecttheETR 235

6.24 DisclosureofLiabilitiesforUTBsintheContractualObligationsTable 236

Public Entities Not Subject to Income Taxes 236

6.25 TaxBasesinAssets 236

Entities With Separately Issued Financial Statements That Are Members of a Consolidated Tax Return 237

6.26 DisclosuresRequiredintheSeparateFinancialStatementsofaMemberofaConsolidated Tax Return 237

6.26A DisclosureRequirementsWhenAbbreviatedFinancialStatementsArePresentedina PublicFiling 238

Policy-Related Disclosures 238

Other Disclosures 239

6.27 DisclosingtheEffectsofIncomeTaxUncertaintiesinaLeveragedLease 239

SEC Staff Disclosure Guidance 240

6.27A DisclosureoftheComponentsofIncome(orLoss)BeforeIncomeTaxExpense (orBenefit)asEitherForeignorDomestic—BranchesandIntra-EntityTransactions 243

Non-GAAP Measures — Treatment of Tax Adjustments 245

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Chapter 7 — Intraperiod Tax Allocation 248Allocation of Income Tax Expense or Benefit for the Year 248

7.01 Intraperiod Tax Allocation: General Rule 249

7.02 Intraperiod Tax Allocation: Application Level 250

Allocation to Continuing Operations 250

7.03 IntraperiodTaxAllocation:Applicationofthe“With”and“Without”Rules 251

7.04 IntraperiodTaxAllocationofChangesinValuationAllowances 252

7.05 ChangesinValuationAllowancesResultingFromItemsOtherThanContinuingOperations 254

7.06 IntraperiodTaxAllocationWhenThereIsaLossFromContinuingOperationsinthe Current Period 255

7.06A Application of ASC 740-20-45-7 to Amounts Credited Directly to APIC 257

7.06B ApplicationofASC740-20-45-7toForeignCurrencyExchangeGains 258

7.07 ConsiderationofCreditEntriesforReclassificationAdjustmentsThatAreRecordedinOCI During the Reporting Period When the General Intraperiod Tax Allocation Rule Is Applied 259

7.08 Implications of the Character of Income (or Loss) When the Exception to the General Intraperiod Tax Allocation Rule Is Applied 260

7.09 Intraperiod Tax Allocation: Treatment of Certain Out-of-Period Adjustments 261

7.10 IntraperiodTaxAllocation:TaxBenefitFromaWorthlessStockDeduction 262

7.11 IntraperiodAllocationof“Out-of-Period”TaxEffectsofUTBsThatOriginatedin Discontinued Operations 263

7.12 TaxBenefitsforDividendsPaidtoShareholders:Recognition 265

7.13 Income Tax Accounting Considerations Related to When a Subsidiary Is Deconsolidated 265

7.14 Fresh-StartAccounting:SubsequentIncreaseorDecreaseinaValuationAllowance 267

7.15 SubsequentChangesinValuationAllowancesforPre-Quasi-ReorganizationTaxBenefits 267

7.16 SubsequentRecognitionofTaxBenefitsFromaQuasi-Reorganization 268

Allocations to Items Other Than Continuing Operations 268

7.17 TaxConsequencesofSecuritiesClassifiedasHeldtoMaturity,Trading,andAvailableforSale 273

7.18 AFSSecurities:MethodsofAccountingforDeferredTaxes 275

7.19 AFSSecurities:ValuationAllowanceforUnrealizedLosses 276

7.20 AFSSecurities:ValuationAllowanceChangesNotRecordedDirectlyinShareholders’Equity 276

7.21 AssessingRealizationofTaxBenefitsFromUnrealizedLossesonAFSSecurities 277

7.21A Application of ASC 740-20-45-7 to Recoveries of Losses in Accumulated OCI 278

7.22 HoldingGainsandLossesRecognizedforBothFinancialReportingandTaxPurposes 280

7.23 TreatmentofTaxBenefitforDividendsPaidonSharesHeldbyanESOP 282

7.24 Tax Consequences of Transactions Among (and With) Shareholders 283

7.25 AccountingfortheTaxEffectsofContributionstoPass-ThroughEntitiesin Control-to-Control Transactions* 284

* Items that are new or have been significantly amended since the previous edition.

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Chapter 8 — Other Considerations or Special Areas 289Background and Scope 289

Undistributed Earnings of Subsidiaries and Corporate Joint Ventures 290

8.01 DefinitionofForeignandDomesticInvestments 291

8.02 AccountingforTemporaryDifferencesRelatedtoanInvestmentinaCorporation 292

8.03 UnremittedEarningsofaForeignSubsidiaryWhenThereIsanOverallDeductible OutsideBasisDifference 294

8.03A OutsideBasisDifferenceinaForeignSubsidiary—SubpartFIncome 295

8.03B OutsideBasisDifferenceinaForeignSubsidiary—“Deferred”SubpartFIncome 296

8.04 “Unborn”ForeignTaxCredits 297

8.05 ConsiderationoftheVIEModelinASC810-10intheEvaluationofWhethertoRecognizeaDTL 299

8.06 TaxConsequencesofInvestmentsinPass-ThroughorFlow-ThroughEntities 300

8.07 Parent’s Deferred Tax Considerations When Intra-Entity Loans That Are of a Long-Term- InvestmentNatureAreNotDenominatedintheFunctionalCurrency 302

Equity Method Investee Considerations 303

8.08 TaxEffectsofInvestorBasisDifferencesRelatedtoEquityMethodInvestments 303

8.09 Deferred Tax Consequences of an Investment in an Equity Method Investment (a 50-Percent-or-Less-Owned Investee) 304

8.10 TaxConsequencesFromSalesofStockbyEquityMethodInvestees[Deleted] 305

8.11 PresentationofTaxEffectsofEquityinEarningsofanEquityMethodInvestee 305

8.12 NoncontrollingInterestsinPass-ThroughEntities:IncomeTaxFinancialReporting Considerations 305

8.13 AccountingfortheTaxEffectsofTransactionsWithNoncontrollingShareholders 306

8.13A AccountingforanInvestmentTaxCreditReceivedFromanInvestmentinaPartnership AccountedforUndertheEquityMethod 308

Other Considerations Related to Foreign and Domestic Subsidiaries 310

8.14 Deferred Tax Consequences of an Investment in a More-Than-50-Percent-Owned Subsidiary 311

8.15 Tax-FreeLiquidationorMergerofaSubsidiary 312

8.16 Exception to Deferred Taxes for an Investment in a More-Than-50-Percent-Owned Domestic Subsidiary[Deleted] 313

8.17 TaxConsequencesofBusinessCombinationsAchievedinStages:OtherTaxConsiderations 313

8.18 StateTaxConsiderationsinConnectionWiththeAssessmentofOutsideBasisDifferences UnderASC740-30-25-7 314

8.19 Realization of a DTA Related to an Investment in a Subsidiary: Deferred Income Tax Exceptions Not a Source of Income 315

8.20 RecognitionofaDTARelatedtoaSubsidiaryClassifiedasaDiscontinuedOperation 316

8.21 ChangeinInvestmentFromaSubsidiarytoanEquityMethodInvestee 317

Exceptions to Comprehensive Recognition of Deferred Income Taxes for Outside Basis Differences 318

8.22 EvidenceNeededtoSupporttheIndefiniteReinvestmentAssertion 319

8.23 DTLforaPortionofanOutsideBasisDifference 319

8.24 AbilitytoOvercomethePresumptioninASC740-30-25-3intheFutureAfteraChangeinManagement’sPlansforReinvestmentorRepatriationofForeignEarnings 320

8.25 WhetheraChangeinManagement’sPlansforReinvestmentorRepatriationofForeign Earnings Is a Recognized or Nonrecognized Subsequent Event 321

Presentation and Disclosure Considerations 322

8.26 DisclosureofOutsideBasisDifferences 323

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Chapter 9 — Interim Reporting 324Background and Scope 324

Recognition 325

9.01 Estimating the AETR for Interim Reporting of Income Taxes 327

9.02 Tax-Exempt Interest in the Calculation of the Estimated AETR 330

9.03 ImpactofChangesinanIndefiniteReinvestmentAssertionforInterim-PeriodTaxPurposes 330

9.04 BalanceSheetEffectsoftheInterimProvisionforIncomeTaxes 331

9.05 Interim Implications of Intraperiod Tax Allocation for Discontinued Operations When ThereIsaLossFromContinuingOperations 332

9.06 CalculatinganInterimTaxProvisionWhenaPortionofOrdinaryIncomeCannotBe Reliably Estimated 335

9.06A Calculating an Interim Tax Provision When the AETR Is Highly Sensitive to Changes in Estimates of Ordinary Income or Loss 336

9.07 Interim-Period Treatment of a Nonrecognized Subsequent Event With Respect to the Estimated AETR 336

9.08 Adjustments of Intraperiod Tax Allocation Made in a Prior Interim Period 336

9.09 ChangesintheValuationAllowanceinanInterimPeriod 337

9.10 Changes in Tax Laws and Rates Occurring in Interim Periods 340

9.11 InterimIncomeTaxAccountingforSignificantUnusualorInfrequentlyOccurringItems 344

Measurement 346

9.12 RecognitionoftheTaxBenefitofaLossinanInterimPeriod 352

9.13 Intraperiod Tax Allocation in Interim Periods 352

9.14 RecognizingInterestExpenseforInterim-PeriodReportingWhenInterestIsClassified as Income Tax Expense 353

9.15 ComputinganInterimTaxProvisionforanEntitySubjecttoTaxinMultipleJurisdictions 354

9.16 ImpactofZero-Tax-RateJurisdictionsandNontaxableEntitiesonanEntity’sAETR 356


Chapter 10 — Share-Based Compensation 359Background and Scope 360

Recognition 360

10.01 TaxEffectsofShare-BasedCompensation 363

10.02 Incentive Stock Options 363

10.03 NonqualifiedStockOptions 364

10.04 Change in Tax Status of an Award 364

10.05 “RechargePayments”MadebyForeignSubsidiaries 365

10.06 Impact of Research and Development Cost-Sharing Arrangements 366

10.07 TheEffectofUTBLiabilitiesonRealizationofExcessTaxBenefits 367

10.08 PermanentDifferencesRelatedtoanExchangeofAwards 368

10.09 AccountingforExcessTaxBenefitsIncludedinanNOLCarryforwardAcquiredina BusinessCombination 368

10.10 AccountingforIncomeTaxesRelatedtoCapitalizedShare-BasedPayment Compensation Cost 369

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Measurement 372

10.11 Measuring DTAs in Reference to the Current Stock Price 375

10.12 BasicIncomeTaxEffectsofShare-BasedPaymentAwards 376

10.13 TaxEffectsofAwardsWithGradedVesting 377

10.14 RecognizingIncomeTaxEffectsonanAward-by-AwardBasis 378

10.15 IncomeTaxEffectsof“EarlyExercise”ofRestrictedStockAwards 381

10.16 MeasuringtheExcessTaxBenefitAssociatedWithShare-BasedCompensation: TaxCreditsandOtherItemsThatAffecttheETR 381

10.17 Change in Tax Rates 382

10.18 AmountsIncludedintheExcessTaxBenefitsAvailableforOffset(“APICPool”) 383

10.19 RealizationofExcessTaxBenefits 383

10.20 TaxEffectsofExpirationofaVestedAward 385

10.21 Combining Employee and Nonemployee APIC Pools 386

10.22 EffectofAcquisitions,Sales,Spin-Offs,andInvestmentsinEquityMethodInvestees on the APIC Pool — Parent-Company Awards 386

10.23 ComputingtheAPICPoolinInterimFinancialStatements 387

10.24 InterimFinancialStatements—AnticipatingtheTaxEffectsofShare-Based Payment Awards 388

10.25 RecordingTaxBenefitsofAwardsGrantedBeforetheAdoptionofStatement123(R) 389

10.26 EffectontheAPICPoolWhentheFullCorrespondingDTADoesNotExistUponExercise 390

10.27 ValuationAllowancesonExcessTaxBenefitsEstablishedBeforetheAdoptionof Statement 123(R) 393

10.28 Application of the Prospective Application Method to Nonpublic Entities’ APIC Pool 393

10.29 CalculatingtheAPICPoolWhenaCompanyBecomesPublicAfterAdoptingStatement123 394

Presentation Considerations 396

10.30 BalanceSheetClassificationofDTAsRelatedtoNonqualifiedStockOptions 399

10.31 ESOP: Income Tax Accounting Example 400

10.32 TaxBenefitofESOPDividends 401

Earnings per Share Considerations 402

10.33 Inclusionof“Out-of-the-Money”Share-BasedPaymentAwardsWithaDilutiveEffect UndertheTreasuryStockMethodBecauseofTaxBenefitDeficiencies 402

10.34 TaxBenefitComponentofAssumedProceeds 403

10.35 RealizationofExcessTaxBenefitsintheCalculationoftheTaxBenefitComponentof Assumed Proceeds 404

10.36 EstimatingExpectedDisqualifyingDispositionsintheCalculationoftheTaxBenefit Component of Assumed Proceeds 405

10.37 Earnings-per-ShareTreatmentoftheTaxBenefitsofDividendsonUnallocatedStock 406

Statement of Cash Flows 406

10.38 PresentationintheStatementofCashFlowsoftheIncomeTaxEffectsofShare-Based Payment Awards 406

10.39 TaxBenefitDeficienciesofShare-BasedPaymentAwards 407

ASU 2016-09 FAQs 408

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Contents

Chapter 11 — Business Combinations 412Background and Scope 412

Recognition 412

11.01 TaxConsequencesofBusinessCombinations 415

11.01ADeterminingWhetherIncomeTaxElections,TaxPlanning,orSubsequentBusiness IntegrationStepsShouldBeIncludedintheApplicationoftheAcquisitionMethodof AccountingtoaBusinessCombination 416

11.02 RecognitionofanAcquiringEntity’sTaxBenefitsNotConsideredinAcquisitionAccounting 417

11.02A Considering Whether Acquired Deferred Tax Liabilities Support the Realization of Acquired or Acquirer Deferred Tax Assets 417

11.03 RecognitionofanAcquiringEntity’sTaxBenefitsAftertheAcquisitionDate 419

11.04 AccountingforUncertaintyinIncomeTaxesinBusinessCombinations 420

11.05 Deferred Taxes Associated With Acquired Intangible Assets 420

11.06 RecordingDeferredTaxesinaBusinessCombinationon“Inside”and“Outside” BasisDifferences 420

11.07 Accounting for the Settlement of a Preexisting Relationship 423

11.08 Reacquired Rights 425

11.09 IncomeTaxAccountingforTransactionCostsinaBusinessCombination 427

11.10 IncomeTaxAccountingforAcquisition-RelatedCostsIncurredinaPeriodBefore ConsummationofaBusinessCombination 428

11.11 IncomeTaxAccountingforAcquisition-RelatedCostsIncurredinaBusinessCombination 429

11.12 TaxConsequencesofBusinessCombinationsAchievedinStages:Remeasurementofthe Original Investment 431

11.13 TaxConsequencesofBusinessCombinationsAchievedinStages:OtherTaxConsiderations 433

11.14 AccountingforIncomeTaxesinaBusinessCombinationThatResultedinaBargainPurchase 435

11.15 AccountingfortheTaxEffectsofContingentEnvironmentalLiabilitiesAssumedina BusinessCombination 437

11.16 ResearchandDevelopmentAssetsAcquiredinaBusinessCombination 439

11.17 ObtainingTaxBasisStep-UpofAcquiredNetAssetsThroughPaymenttoaTaxAuthority 440

11.18 IncomeTaxAccountingforAssetsAcquiredinaBusinessCombinationThatWereSubject to an Intra-Entity Sale 440

11.19 TaxConsiderationsRelatedtoLeveragedLeasesAcquiredinaBusinessCombination 440

11.19AIncomeTaxBenefitsFromAmortizationofIntangibleAssetsinFairValueMeasurements 441

11.20 Deferred Taxes Associated With Goodwill 442

11.21 Allocation of Tax Amortization of Goodwill 445

11.22 Deferred Taxes Associated With Goodwill in Pre-Statement 141(R) Acquisitions 446

11.23 TaxBenefitsofTax-DeductibleShare-BasedPaymentAwardsExchangedina BusinessCombination 449

11.23ASettlementofShare-BasedPaymentAwardsHeldbytheAcquiree’sEmployees 457

11.24 TaxBenefitsReceivedFromtheDisqualifyingDispositionofIncentiveStockOptions ExchangedinaBusinessCombination 458

11.25 RevisionstoAccountingforaBusinessCombinationAftertheMeasurementPeriod 461

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Measurement 463

11.26 Initial Measurement of the Income Tax Consequences of Contingent Consideration in a BusinessCombination 464

11.27 Subsequent Measurement of the Income Tax Consequences of Contingent Consideration in a BusinessCombination 465

11.28 ApplicableTaxRates:BusinessCombinationAccounting 468

11.29 InitialMeasurementoftheTaxEffectsofContingenciesAssumedinaBusinessCombination 469

11.30 SubsequentMeasurementoftheTaxEffectsofContingenciesAssumedina BusinessCombination 470

11.31 ImpactofIndefinite-LivedIntangibleAssetsonAccountingforIncomeTaxes[Deleted] 474

11.32 Goodwill Impairment Test — Tax Considerations* 474

11.33 DeterminingtheDeferredTaxEffectsofaGoodwillImpairment* 477

11.34 TaxEffectsofGoodwillRemaininginaReportingUnitUponDisposalofaSubsidiaryThat WasPreviouslyIntegratedIntotheReportingUnit* 480

11.35 AccountingforChangesinForfeitureEstimatesAffectingShare-BasedPaymentAwards ExchangedinaBusinessCombination 482


11.36 AccountingforChangesintheAcquirer’sandAcquiree’sValuationAllowancesasofand After the Consummation or Acquisition Date 487

11.37 ChangesinUncertainIncomeTaxPositionsAcquiredinaBusinessCombination 488

11.38 UncertaintyinIncomeTaxesinaBusinessCombination—MeasurementPeriod 489

Chapter 12 — Foreign Currency Matters 49012.01 Price-Level-AdjustedFinancialStatements 493

12.02 Accounting for Deferred Taxes Related to Nonmonetary Assets and Liabilities When the FunctionalCurrencyIsNottheLocalCurrency 493

12.03 ChangeintheFunctionalCurrencyWhenanEconomyCeasestoBeConsidered HighlyInflationary 495

12.04 DeferredIncomeTaxEffectsWhentheFunctionalCurrencyChangesFromtheLocal Currency to the Reporting Currency 496

12.05 Accounting for Deferred Taxes Related to Monetary Assets When the Reporting Currency IstheFunctionalCurrency 500

12.06 DeferredTaxConsiderationsRelatedtoaForeignSubsidiaryWhenIntra-EntityLoans That Are of a Long-Term-Investment Nature Are Denominated in the Parent’s Currency 503

Chapter 13 — Qualified Affordable Housing Project Investments 50613.01 TaxBenefitsResultingFromInvestmentsinAffordableHousingProjects(Beforethe

AdoptionofASU2014-01[Deleted] 506

13.02 TaxBenefitsResultingFromInvestmentsinAffordableHousingProjects 511

13.02ADeterminingWhetheranInvestorHastheAbilitytoExerciseSignificantInfluenceOver anEntityThatInvestsinQualifiedAffordableHousingProjects 513

13.03 ApplicabilityoftheProportionalAmortizationMethodtoaQualifiedAffordableHousingProjectInvestmentThatGeneratesOtherTaxCreditsinAdditiontoAffordableHousingCredits 514

13.04 RecognizingDeferredTaxesWhentheProportionalAmortizationMethodIsUsedto AccountforanInvestmentinaQualifiedAffordableHousingProject 515

xvii

Appendix A — Implementation Guidance and Illustrations 519

Appendix B — Frequently Asked Questions About Tax Reform* 592B.1 Introduction 592

B.2 SAB118 592

B.3 FASBASUandStaffQ&As 593

B.4 ChangeinCorporateTaxRate 593

B.5 ModificationofCarryforwardsandCertainDeductions 596

B.6 DeemedRepatriationTransitionTax(IRCSection965) 597

B.7 GlobalIntangibleLow-TaxedIncome 602

B.8 Foreign-DerivedIntangibleIncome 608

B.9 BaseErosionAnti-AbuseTax 609

B.10 CorporateAMT 610

B.11 Non–ASC740TopicsAffectedbyTaxReform 611

B.12 Separate-CompanyFinancialStatements 620

B.13 DisclosureConsiderations 620

B.14 IFRSConsiderations 625

B.15 InterimReportingConsiderations 625

B.16 ASU2018-02 631

Appendix C — Glossary of Terms in the ASC 740 Topic and Subtopics 638

Appendix D — Sample Disclosures of Income Taxes 648

Appendix E — Sample SEC Comments: Income Taxes 671

Appendix F — Differences Between U.S. GAAP and IFRS Standards* 695

Appendix G — Titles of Standards and Other Literature 707

Appendix H — Abbreviations 714

xviii


PrefaceTo our friends and clients:

We’re pleased to present the 2018 edition of A Roadmap to Accounting for Income Taxes. This Roadmap provides Deloitte’s insights into and interpretations of the income tax accounting guidance in ASC 7401 and the differences between that standard and IFRS® Standards (inAppendixF). The income tax accounting framework has been in place for many years; however, views on the application of that framework to current transactions continue to evolve because structures and tax laws are continually changing. Therefore, use of this Roadmap, though it is intended as a helpful resource, is not a substitute for consultation with Deloitte professionals on complex income tax accounting questions or transactions.

The body of this Roadmap combines the income tax accounting rules from ASC 740 with Deloitte’s interpretations and examples in a comprehensive, reader-friendly format. The Roadmap’s organization mirrors the order of ASC 740 and reflects ASUs issued through September 30, 2018. Each chapter of this publication typically starts with a brief introduction and includes excerpts from ASC 740, Deloitte’s interpretations of those excerpts, and examples to illustrate the relevant guidance. The Roadmap includes pending content from recently issued ASUs, some of which may already apply to some entities or for which early adoption may be permitted. Readers should refer to the transition guidance in the ASC or in the relevant ASU to determine the effective date(s) of the pending guidance.

Throughout the Roadmap, new guidance has been added and minor edits have been made to existing guidance to improve its clarity. The numbering of items within each chapter is unchanged from the numbering used in the 2017 edition of the Roadmap; items that are new to the Roadmap have been inserted in a logical sequence in the appropriate chapter and assigned an item number with a letter suffix. An asterisk in the section title in the table of contents denotes items that are new or have been significantly amended since the previous edition of the Roadmap. Items without asterisks are unchanged from the previous edition. In addition, AppendixB has been added and contains responses to frequently asked questions (FAQs) about how an entity should account for the tax effects of the Tax Cuts and Jobs Act (the “Act”), signed into law by the president in December 2017, in accordance with ASC 740. However, the content in Chapters 1 through 13 has not been updated to address the impact of the legislation’s provisions on the accounting for income taxes under ASC 740. The updated content will be included in a subsequent edition.

Where applicable, we also include cross-references linking to other Roadmap paragraphs (links are in blue; as a reminder, use [alt] and [left arrow] to return to the paragraph you were originally reading).

Subscribers to the Deloitte Accounting Research Tool (DART) may access any interim updates to this publication by selecting the document from the “Roadmaps” tab on DART’s home page. If a “Summary of Changes Since Issuance” displays, subscribers can view those changes by clicking the related links or by opening the “active” version of the Roadmap.

We hope that you find this Roadmap a useful tool when considering the income tax accounting guidance.

Sincerely,

Deloitte & Touche LLP

1 For the full titles of standards, topics, and regulations, see Appendix G. For the full forms of abbreviations, see Appendix H.

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https://dart.deloitte.com/

Contacts

If you have questions about the information in this publication, please contact any of the following Deloitte professionals:

Matt Himmelman Partner Deloitte & Touche LLP +1.714.436.7277 [email protected]

Steve Barta Partner Deloitte & Touche LLP +1.415.783.6392 [email protected]

Paul Vitola Partner Deloitte Tax LLP +1.602.234.5143 [email protected]

Patrice Mano Partner Deloitte Tax LLP +1.415.783.6079 [email protected]

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mailto:mhimmelman%40deloitte.com?subject=mailto:mhimmelman%40deloitte.com?subject=mailto:sbarta%40deloitte.com?subject=mailto:pvitola%40deloitte.com?subject=mailto:pmano%40deloitte.com?subject=

The following is a brief summary of the Roadmap’s 13 chapters and 8 appendixes, which includes guidance that has been amended or added to this edition. Further, this edition includes FAQs and interpretive guidance related to the Act in AppendixB. The content in Chapters 1 through 13 has not been updated to address the impact of the legislation’s provisions on the accounting for income taxes under ASC 740. The updated content will be included in a subsequent edition.

• Chapter1,“Overview” — Includes excerpts from the overview and objectives subsection of ASC 740 as well as a brief summary of the evolution of the income tax accounting guidance.

• Chapter2,“Scope” — Discusses the differences between taxes that are within the scope of ASC 740 (i.e., income taxes) and taxes that are not considered income taxes and therefore are accounted for under other U.S. GAAP.

• Chapter3,“RecognitionandDerecognition” — Contains comprehensive recognition guidance on all transactions that are within the scope of ASC 740 as well as on the exceptions to the recognition criteria. Specific topics covered include when a tax position taken or expected to be taken on a tax return meets the ASC 740 recognition criteria; determining the unit of account to use in applying those criteria; when recognition or derecognition is warranted after the original assessment of the criteria; examples of temporary differences; and other special circumstances in which recognition consideration is warranted, such as changes in tax laws, rates, or tax status.

• Chapter4,“Measurement” — Expands on many of the topics that are introduced in Chapter 3, “Recognition and Derecognition.” This chapter provides guidance on the amount at which an entity should measure a tax asset or liability in its financial statements when the recognition criteria for that asset or liability have been met (as discussed in Chapter 3). Specifically, this chapter focuses on (1) the appropriate tax rate to be used, (2) how uncertainty should be considered, and (3) how to evaluate DTAs for realizability and when a valuation allowance would be appropriate.

• Chapter5,“Presentation,” and Chapter6,“Disclosure” — Provide general guidance on presentation and disclosure matters related to the statement of financial position, income statement, and footnotes for income taxes. See also Appendix D, which contains comprehensive disclosure examples (discussed below).

• Chapter7,“IntraperiodTaxAllocation” — ASC 740 prescribes an accounting model, known as “intraperiod tax allocation,” for allocating an entity’s total annual income tax provision among continuing operations and the other components of an entity’s financial statements (e.g., discontinued operations, OCI, and shareholders’ equity). Although it may appear simple, this model is one of the more challenging aspects of income tax accounting. This chapter provides insights (including illustrations) into some of the complexities associated with intraperiod tax allocation. Updates to this chapter include the following added guidance:

o 7.25 — Accounting for the Tax Effects of Contributions to Pass-Through Entities in Control-to-Control Transactions.

Executive Summary

xxi

• Chapter8,“OtherConsiderationsorSpecialAreas” — Provides accounting and disclosure guidance on specific matters related to investments in subsidiaries and corporate joint ventures, including guidance on applying ASC 740 to the (1) tax consequences of undistributed earnings of subsidiaries, (2) change in ownership basis of subsidiaries, and (3) recognition of certain DTAs and DTLs. This chapter also covers presentation and disclosure issues not discussed in other chapters of this Roadmap.

• Chapter9,“InterimReporting” — The core principle of ASC 740-270 is that the interim period is integral to the entire financial reporting year. This chapter describes the general process for allocating an entity’s annual tax provision to its interim financial statements. This chapter also discusses estimating an entity’s annual effective tax rate (AETR), which is determined and updated in each interim reporting period.

• Chapter10,“Share-BasedCompensation” — This chapter provides recognition, measurement, and presentation guidance on the tax effects of share-based payment awards. It also includes guidance on interim reporting of tax effects of share-based payment awards and other related topics.

• Chapter11,“BusinessCombinations” — Addresses the income tax considerations related to business combinations. In particular, the chapter focuses on some of the more challenging aspects of the business combination accounting guidance, such as contingent consideration, bargain purchases, acquisition costs, reacquired rights, preacquisition contingencies, and goodwill. Updates to this chapter include the following amended guidance:

o 11.32 — Goodwill Impairment Test — Tax Considerations.

o 11.33 — Determining the Deferred Tax Effects of a Goodwill Impairment.

o 11.34 — Tax Effects of Goodwill Remaining in a Reporting Unit Upon Disposal of a Subsidiary That Was Previously Integrated Into the Reporting Unit.

• Chapter12,“ForeignCurrencyMatters” — This chapter provides guidance on deferred income tax accounting for changes in tax or financial reporting bases that are the result of (1) changes in an entity’s functional currency, (2) price-level-related changes, and (3) differences between a foreign entity’s functional and local currency.

• Chapter13,“QualifiedAffordableHousingProjectInvestments” — Addresses ASU 2014-01, which provides guidance on accounting for investments in projects that qualify for affordable housing tax credits under U.S. federal tax law. This chapter provides guidance for circumstances in which an entity has adopted ASU 2014-01.

• Appendix A — Contains implementation guidance and illustrations from ASC 740.• AppendixB — Contains responses to FAQs about how an entity should account for the tax

effects of the Act in accordance with ASC 740.

• Appendix C — Contains excerpts from the ASC 740 glossary of terms that are important to the accounting for income taxes.

• Appendix D — Includes comprehensive disclosure examples. • Appendix E — Comprises a sample of recent SEC comments on income tax matters, which may

be particularly useful for SEC registrants.

• AppendixF — A comprehensive discussion of the key differences between U.S. GAAP and IFRS Standards in the accounting for income taxes.

• Appendix G — Glossary containing the full titles of topics, standards, and regulations used in the Roadmap.

• Appendix H — Glossary containing the full forms of abbreviations used throughout the Roadmap. xxii


Chapter 1 — Overview

The accounting for income taxes under ASC 740 is sometimes very specific and can be complex. An entity’s primary objective in accounting for income taxes under ASC 740 is to reflect its after-tax financial position in its balance sheet. To accomplish this objective, an entity employs the balance sheet model for recording current and deferred taxes. This chapter summarizes the core concepts under ASC 740 and gives an overview of the objectives of accounting for income taxes.

ASC 740-10

05-1 The Income Taxes Topic addresses financial accounting and reporting for the effects of income taxes that result from an entity’s activities during the current and preceding years. [FAS 109, paragraph 1] Specifically, this Topic establishes standards of financial accounting and reporting for income taxes that are currently payable and for the tax consequences of all of the following:

a. Revenues, expenses, gains, or losses that are included in taxable income of an earlier or later year than the year in which they are recognized in financial income

b. Other events that create differences between the tax bases of assets and liabilities and their amounts for financial reporting

c. Operating loss or tax credit carrybacks for refunds of taxes paid in prior years and carryforwards to reduce taxes payable in future years. [FAS 109, paragraph 3]

05-2 This Topic includes the following Subtopics:

a. Overall b. Intraperiod Tax Allocation c. Other Considerations or Special Areas d. Interim Reporting.

05-3 The Overall Subtopic provides the majority of the accounting and reporting guidance related to income taxes. The other Subtopics in this Topic provide more detailed guidance on narrower elements of accounting and reporting for income taxes.

1

ASC 740-10 (continued)

05-4 Other Topics, including industry-specific Topics, may also have Income Taxes Subtopics that address the Topic-specific requirements for income taxes. Guidance in those Subtopics is intended to be incremental to the guidance otherwise established in the Income Taxes Topic. Topics with incremental Income Taxes Subtopics are:

a. Investments—Equity Method and Joint Ventures, Subtopic 323-740 b. Compensation—Stock Compensation, Subtopic 718-740 c. Business Combinations, Subtopic 805-740 d. Foreign Currency Matters, Subtopic 830-740 e. Reorganizations, Subtopic 852-740 f. Entertainment—Casinos, Subtopic 924-740g. Extractive Activities—Oil and Gas, Subtopic 932-740 h. Financial Services—Depository and Lending, Subtopic 942-740 i. Financial Services—Insurance, Subtopic 944-740 j. Health Care Entities, Subtopic 954-740 k. Real Estate—Common Interest Realty Associations, Subtopic 972-740 l. Regulated Operations, Subtopic 980-740 m. U.S. Steamship Entities, Subtopic 995-740.

Pending Content (Transition Guidance: ASC 740-10-65-6)

05-4 Other Topics, including industry-specific Topics, may also have Income Taxes Subtopics that address the Topic-specific requirements for income taxes. Guidance in those Subtopics is intended to be incremental to the guidance otherwise established in the Income Taxes Topic. Topics with incremental Income Taxes Subtopics are: [ASU 2017-15, paragraph 2]

a. Investments—Equity Method and Joint Ventures, Subtopic 323-740 b. Compensation—Stock Compensation, Subtopic 718-740 c. Business Combinations, Subtopic 805-740 d. Foreign Currency Matters, Subtopic 830-740 e. Reorganizations, Subtopic 852-740 f. Entertainment—Casinos, Subtopic 924-740 g. Extractive Activities—Oil and Gas, Subtopic 932-740 h. Financial Services—Depository and Lending, Subtopic 942-740 i. Financial Services—Insurance, Subtopic 944-740 j. Health Care Entities, Subtopic 954-740 k. Real Estate—Common Interest Realty Associations, Subtopic 972-740 l. Regulated Operations, Subtopic 980-740 m. Subparagraph superseded by Accounting Standards Update No. 2017-15.

05-5 There are two basic principles related to accounting for income taxes, each of which considers uncertainty through the application of recognition and measurement criteria:

a. To recognize the estimated taxes payable or refundable on tax returns for the current year as a tax liability or asset

b. To recognize a deferred tax liability or asset for the estimated future tax effects attributable to temporary differences and carryforwards. [EITF 91-8, paragraph Status]

2



05-6 This Subtopic provides guidance for recognizing and measuring tax positions taken or expected to be taken in a tax return that directly or indirectly affect amounts reported in financial statements. This Subtopic also provides accounting guidance for the related income tax effects of individual tax positions that do not meet the recognition thresholds required in order for any part of the benefit of that tax position to be recognized in an entity’s financial statements. Under this Subtopic, a tax position is first evaluated for recognition based on its technical merits. Tax positions that meet a recognition criterion are then measured to determine an amount to recognize in the financial statements. That measurement incorporates information about potential settlements with taxing authorities. [FIN 48, paragraphs B9, 2, and B27]

05-7 A temporary difference refers to a difference between the tax basis of an asset or liability, determined based on recognition and measurement requirements for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences and carryforwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money.

05-8 As indicated in paragraph 740-10-25-23, temporary differences that will result in taxable amounts in future years when the related asset or liability is recovered or settled are often referred to as taxable temporary differences. Likewise, temporary differences that will result in deductible amounts in future years are often referred to as deductible temporary differences. Business combinations may give rise to both taxable and deductible temporary differences. [FAS 109, paragraph 13]

05-9 As indicated in paragraph 740-10-25-30, certain basis differences may not result in taxable or deductible amounts in future years when the related asset or liability for financial reporting is recovered or settled and, therefore, may not be temporary differences for which a deferred tax liability or asset is recognized. [FAS 109, paragraph 14]

5-10 As indicated in paragraph 740-10-25-24, some temporary differences are deferred taxable income or tax deductions and have balances only on the income tax balance sheet and therefore cannot be identified with a particular asset or liability for financial reporting. In such instances, there is no related, identifiable asset or liability for financial reporting, but there is a temporary difference that results from an event that has been recognized in the financial statements and, based on provisions in the tax law, the temporary difference will result in taxable or deductible amounts in future years. [FAS 109, paragraph 15]

Objectives10-1 There are two primary objectives related to accounting for income taxes:

a. To recognize the amount of taxes payable or refundable for the current year b. To recognize deferred tax liabilities and assets for the future tax consequences of events that have been

recognized in an entity’s financial statements or tax returns.

As it relates to the second objective, some events do not have tax consequences. Certain revenues are exempt from taxation and certain expenses are not deductible. In some tax jurisdictions, for example, interest earned on certain municipal obligations is not taxable and fines are not deductible. [FAS 109, paragraph 6]

10-2 Ideally, the second objective might be stated more specifically to recognize the expected future tax consequences of events that have been recognized in the financial statements or tax returns. However, that objective is realistically constrained because:

a. The tax payment or refund that results from a particular tax return is a joint result of all the items included in that return.

b. Taxes that will be paid or refunded in future years are the joint result of events of the current or prior years and events of future years.

c. Information available about the future is limited. As a result, attribution of taxes to individual items and events is arbitrary and, except in the simplest situations, requires estimates and approximations. [FAS 109, paragraph 7]

3



10-3 Conceptually, a deferred tax liability or asset represents the increase or decrease in taxes payable or refundable in future years as a result of temporary differences and carryforwards at the end of the current year. That concept is an incremental concept. A literal application of that concept would result in measurement of the incremental tax effect as the difference between the following two measurements:

a. The amount of taxes that will be payable or refundable in future years inclusive of reversing temporary differences and carryforwards

b. The amount of taxes that would be payable or refundable in future years exclusive of reversing temporary differences and carryforwards. [FAS 109, paragraph 87]

However, in light of the constraints identified in the preceding paragraph, in computing the amount of deferred tax liabilities and assets, the objective is to measure a deferred tax liability or asset using the enacted tax rate(s) expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. [FAS 109, paragraph 18]

1.01 Overview of ASC 740As noted in ASC 740-10-10-1, an entity’s overall objectives in accounting for income taxes under ASC 740 are to (1) “recognize the amount of taxes payable or refundable for the current year” and (2) “recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.”

Under the prior superseded guidance, the principal objective was matching. That is, total tax expense was determined without regard to timing differences, and the difference between that amount and the actual taxes payable was recorded as a deferred tax. The deferred tax accounts were residuals, reported as either deferred liabilities or assets. These amounts did not, except by coincidence, represent the amount of taxes that would be paid or refunded in a future reporting period.

Other previously superseded guidance was based on a balance sheet approach. This approach focused on the amount of taxes payable or receivable for the future tax return consequences of reporting-date temporary differences. In addition, under this other previously superseded guidance, recognition and measurement of DTAs and DTLs did not anticipate the tax consequences of earning income in future years. Two events were necessary to recognize a DTA: (1) the existence of a deductible temporary difference or tax credit or loss carryforward and (2) income (from taxable temporary differences or prior tax returns) that permitted the realization of the potential benefit. Because the tax consequences of earning income in future years could not be anticipated, this other previously superseded guidance effectively limited the recognition of net DTAs to the amount of the deductible temporary difference or loss that could be carried back to recover previously paid or accrued income taxes.

Under ASC 740, the balance sheet approach was modified to incorporate a “one event” approach to DTA recognition. In accordance with ASC 740, the critical event for recognition of an asset is the event that gives rise to the deductible temporary difference or tax credit or NOL carryforward. Once that event occurs, those tax benefits should be recognized subject to a realizability assessment. In effect, earning taxable income in future years is treated as a confirmation of realizability and not as a prerequisite to asset recognition. At the same time, management should consider future events to record those tax assets at amounts that are more likely than not to be realized in future tax returns. In the case of DTLs, ASC 740 requires an entity to include in its balance sheet an obligation for the tax consequences of taxable temporary differences even when losses are expected in future years.

4


The following is a brief summary of deferred tax accounting, in general, under ASC 740:

• DTLs are recognized for future taxable amounts.• DTAs are recognized for future deductions and operating loss and tax credit carryforwards.• The marginal tax rate is used to measure DTAs and DTLs.• A valuation allowance is recognized to reduce DTAs to the amounts that are more likely than not

to be realized.

• The amount of the valuation allowance is based on all available positive and negative evidence about the future.

• Deferred tax expense or benefit is computed as the difference between the beginning and ending balance of the net DTA or DTL for the period.

• Before the adoption of ASU 2015-17, DTAs and DTLs are classified as current or noncurrent in accordance with the classification of the related asset or liability for financial reporting purposes.

• The effects of changes in rates or laws are recognized on the date of enactment.

1.02 Objectives of ASC 740The overall objective of accounting for income taxes is to reflect (1) the amount an entity currently owes to tax authorities and (2) an asset or liability for the tax effects of the transactions or events that have occurred but that have not yet been reflected in a tax return or vice versa. An asset will be recorded for items that will result in future tax deductions (sometimes referred to as a benefit), and liabilities are recorded for items that will result in the inclusion of future taxable income in an entity’s tax return. This balance sheet approach is used to calculate temporary differences that, in effect, take into account the total tax that would be payable (or receivable) if all of an entity’s assets and liabilities were realized at their carrying value at a specific time (the reporting date).

In certain situations, an entity may determine that its ability to actually use a deduction for a DTA on a future tax return is uncertain. For example, an entity may have recorded a DTA for accumulated operating losses that it can use to offset future income on future tax returns. However, on the basis of forecasts of future taxable income, the entity determines, using its best estimate, that it most likely will not be able to use all of the accumulated operating losses to offset future taxable income on future tax returns before the attribute expires under tax rules. In this situation, the entity would need to record a valuation allowance to reduce the DTA to the amount it ultimately expects to be able to deduct on its tax return. See Chapter4,“Measurement,” for further discussion of valuation allowances.

The total tax provision for a period includes the amount of expense (or benefit) related to the total tax that is expected to be paid (or refunded) in connection with income, expenses, and other events captured in that period’s financial statements. This provision consists of current tax expense (benefit) (i.e., the amount expected to be reflected on the current-period income tax return(s)) and deferred tax expense (or benefit) (i.e., change in DTAs and DTLs for the period). Generally, an increase in a DTA and a decrease in a DTL decrease deferred tax expense. Similarly, a decrease in a DTA and an increase in a DTL increase deferred tax expense.

Income tax expense (or benefit) is not just one line item in the income statement. A model known as “intraperiod tax allocation” (see Chapter7,“IntraperiodTaxAllocation”) is used to allocate these amounts among other components of an entity’s financial statements through discontinued operations, OCI, and shareholders’ equity. This allocation also applies to the reporting of information in the interim financial statements. Chapter9,“InterimReporting,” discusses the method for allocating income tax expense (or benefit) among the interim periods on the basis of its core principle that the interim period is an integral component of the entire financial reporting year.

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Chapter 2 — Scope

The scope of ASC 740 can be described as including any tax that is based on income, regardless of how the tax is labeled by a jurisdiction. Although this principle may appear simple, entities must use significant judgment in determining whether a tax is within the scope of ASC 740 because the accounting model for income taxes is very different from the accounting model for other types of taxes that are not within ASC 740’s scope. Those non-income taxes are accounted for following the general concepts in U.S. GAAP for the recognition of liabilities or other sections of the Codification, and therefore no deferred taxes are recognized. Uncertainties about whether a non-income tax is required to be paid under the law in particular circumstances generally are accounted for under the contingencies guidance in ASC 450. When a tax is determined to be an income tax, the income tax accounting guidance is required to be applied for each tax-paying component in each tax jurisdiction.

ASC 740-10

15-1 The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Income Taxes Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Income Taxes Topic.

Entities15-2 The principles and requirements of the Income Taxes Topic are applicable to domestic and foreign entities in preparing financial statements in accordance with U.S. generally accepted accounting principles (GAAP), including not-for-profit entities (NFP) with activities that are subject to income taxes. [FAS 109, paragraph 4]

15-2A Paragraph not used.

15-2AA The Sections of this Subtopic relating to accounting for uncertain tax positions are applicable to all entities, including tax-exempt not-for-profit entities, pass-through entities, and entities that are taxed in a manner similar to pass-through entities such as real estate investment trusts and registered investment companies. [ASU 2009–06, paragraph 3]

Transactions15-3 The guidance in the Income Taxes Topic applies to:

a. Domestic federal (national) income taxes (U.S. federal income taxes for U.S. entities) and foreign, state, and local (including franchise) taxes based on income

b. An entity’s domestic and foreign operations that are consolidated, combined, or accounted for by the equity method. [FAS 109, paragraph 4]

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15-4 The guidance in this Topic does not apply to the following transactions and activities:

a. A franchise tax to the extent it is based on capital and there is no additional tax based on income. If there is an additional tax based on income, that excess is considered an income tax and is subject to the guidance in this Topic. See Example 17 (paragraph 740-10-55-139) for an example of the determination of whether a franchise tax is an income tax. [EITF 91-8, paragraph Discussion]

b. A withholding tax for the benefit of the recipients of a dividend. A tax that is assessed on an entity based on dividends distributed is, in effect, a withholding tax for the benefit of recipients of the dividend and is not an income tax if both of the following conditions are met: 1. The tax is payable by the entity if and only if a dividend is distributed to shareholders. The tax does

not reduce future income taxes the entity would otherwise pay. 2. Shareholders receiving the dividend are entitled to a tax credit at least equal to the tax paid by

the entity and that credit is realizable either as a refund or as a reduction of taxes otherwise due, regardless of the tax status of the shareholders. [EITF 95-9, paragraph Discussion]

See the guidance in paragraphs 740-10-55-72 through 55-74 dealing with determining whether a payment made to a taxing authority based on dividends distributed is an income tax.

Related Implementation Guidance and Illustrations• Treatment of Certain Payments to Taxing Authorities [ASC 740-10-55-67]. • Example 17: Determining Whether a Tax Is an Income Tax [ASC 740-10-55-139].

2.01 Taxes Within the Scope of ASC 740ASC 740 clearly indicates that “income taxes” are the only taxes within its scope. ASC 740-10-20 defines income taxes as “[d]omestic and foreign federal (national), state, and local (including franchise) taxes based on income,” and it defines taxable income as the “excess of taxable revenues over tax deductible expenses and exemptions for the year as defined by the governmental taxing authority.”

Although ASC 740 provides no further guidance on this matter, the term “taxes based on income” implies a tax system in which the tax payable is calculated on the basis of the entity’s revenue minus the costs allowed by the jurisdiction being considered. For the tax to be an income tax, the tax computation would not need to include all income statement accounts but should include some determination that would be meaningful to most taxpayers or meaningful in relation to the specific income being taxed. A tax levied on a subset of the income statement, such as a tax on net investment income (i.e., a tax on investment income less investment-related expenses), would also qualify as a tax based on income since it would be computed on the basis of a portion of net income less expenses incurred to generate the income.

As explained above, the scope of ASC 740 is limited to “taxes based on income” when income is determined after revenues and gains are reduced by some amount of expenses and losses allowed by the jurisdiction. Therefore, a tax based solely on revenues (e.g., gross receipts or sales tax) would not be within the scope of ASC 740 because the taxable base amount is not reduced by any expenses. A tax based on gross receipts, revenue, or capital should be accounted for under other applicable literature (e.g., ASC 450). In contrast, a tax whose base takes into account both income and expenses is within the scope of ASC 740.

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Chapter 2 — Scope

For example, not-for-profit foundations that make certain minimum distributions are generally exempt from federal income taxes but may be subject to an excise tax on their net investment income. Such an excise tax meets the definition of a tax based on income and therefore is within the scope of ASC 740. Alternatively, in some jurisdictions, qualifying entities may be subject to an excise tax (e.g., based on a percentage of assets or sales) in lieu of an income tax. Although this tax is levied in lieu of an income tax, it is not based on a measure of income and therefore is not within the scope of ASC 740.

2.02 Hybrid TaxesIn a hybrid tax regime, an entity pays the greater of two tax computations, one of which is typically based on taxable profit and the other of which is not (e.g., it is based on gross revenue or capital). The tax rules and regulations of such a regime may state that an entity must always pay income tax but must also calculate taxes on the basis of the non-income-based measure(s). To the extent that the non-income-based measure or measures result in a larger amount, the entity would pay the difference between the income tax and the amount determined by using the non-income-based measure. This distinction may affect how the tax authority in the jurisdiction can use the tax revenue (e.g., income tax revenue may be used for general purposes, but the incremental tax may be earmarked for a specific purpose). The description of the amounts paid in the tax rules and regulations does not affect how a reporting entity determines the component of the hybrid taxes that is considered an income tax for accounting purposes.

When paying taxes in a hybrid tax regime, the basis for determining which taxes qualify as income taxes under ASC 740 may not always be clear, especially when certain taxes appear to have characteristics of both an income tax and a gross-revenue or capital-based tax. ASC 740-10-15-4 and the related implementation guidance beginning in ASC 740-10-55-139 establish a framework that should be applied to all hybrid tax regimes. More specifically, an entity should consider the various tax computations that can apply for the year. The non-income-tax component can be identified on the basis of the amount of tax that would be payable if the entity has no taxable income. In other words, the amount payable in the absence of income would be a non-income tax that is outside the scope of ASC 740. The tax payable for the year in excess of the portion that is considered a non-income tax would be an income tax and within the scope of ASC 740.

For example, an entity in a certain jurisdiction may be subject to tax that is determined on the basis of the greater of taxable income multiplied by an income tax rate or net equity multiplied by a capital tax rate. Alternatively, an entity may be subject to tax in a jurisdiction in which the regular corporate tax is based on the greater of a production-based computation or a profit-based computation (i.e., the production-based computation is a fixed minimum amount per ton of product sold, but the total tax due based on profits may exceed the production-based computation). In either of these jurisdictions, an entity should determine the amount of tax that would be payable in the absence of taxable profit. The amount payable in the absence of taxable income (i.e., the “floor” amount) is based on something other than taxable income and is therefore outside the scope of ASC 740 and should be included in pretax income. The floor amount should be included in pretax income, even if the total amount of taxes payable for the year is actually a tax on taxable profits (the latter being the greater of the two computations). Amounts payable in excess of the floor that result from an income tax computation are considered to be a tax based on income and are therefore within the scope of ASC 740.

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Example 2-1

Assume that the regular corporate tax in Country A is based on the greater of 25 percent of taxable profit or 1 percent of net equity as of the last day of the prior year.

Assume that an entity’s net equity as of the last day of the prior year is $800,000 and that pretax income in the current year is $80,000. The current tax computation is as follows:

Book pretax income $ 80,000

Originating taxable temporary difference 3,000

Taxable income $ 77,000

Current tax payable (based on income) $ 19,250 (77,000 × 25%)

Capital tax (“floor” amount) that is considered to be outside the scope of ASC 740 8,000 (800,000 × 1%)

Current tax within the scope of ASC 740 $ 11,250

2.03 Accounting for Taxes Assessed on the Payor of a Dividend Most taxes on dividends are assessed on the recipient of the dividend but are withheld by the payor. In these instances, the payment of the tax withheld (sometimes referred to as a “withholding tax”) to the tax authority by the dividend payor is accounted for by the payor in its financial statements in equity as a part of the dividend. The “withholding tax” may still, however, be viewed as an income tax from the point of view of the recipient of the dividend since the tax is paid on behalf of the recipient.

However, in some jurisdictions, a tax based on dividends distributed is assessed directly on the dividend payor.

A tax assessed directly on an entity on the basis of dividends it has distributed may, under certain circumstances, be considered a withholding of tax for the benefit of the recipient and therefore accounted for in equity as part of the dividend (rather than as an expense of the payor).

ASC 740-10-15-4(b) states, in part:

A tax that is assessed on an entity based on dividends distributed is, in effect, a withholding tax for the benefit of recipients of the dividend and is not an income tax if both of the following conditions are met:

1. The tax is payable by the entity if and only if a dividend is distributed to shareholders. The tax does not reduce future income taxes the entity would otherwise pay.

2. Shareholders receiving the dividend are entitled to a tax credit at least equal to the tax paid by the entity, and that credit is realizable either as a refund or as a reduction of taxes otherwise due, regardless of the tax status of the shareholders.

If either of these criteria are not met, a tax assessed directly on the dividend payor should not be considered a withholding of tax for the benefit of the recipient. Instead, it should be accounted for by the payor as an income tax within the scope of ASC 740 or as a “non-income based” tax, depending on the substance of the tax.

If the tax is accounted for as an income tax within the scope of ASC 740, any tax benefit to the payor resulting from payment of the withholding tax should be recognized as income from continuing operations.

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Chapter 2 — Scope

2.03A Accounting for Taxes Withheld on Certain Payments (e.g., Dividend, Interest, Royalty, or License)ASC 740 does not provide guidance on determining whether recipients of certain payments (e.g., dividends or royalties) should account for associated statutory withholdings (commonly referred to as withholding taxes) as income taxes within the scope of ASC 740. Generally, the scope of ASC 740 is limited to “taxes based on income,” and income is determined after revenues and gains are reduced by some amount of expenses and losses allowed by the jurisdiction. Therefore, a tax based solely on revenues would not be within the scope of ASC 740 because the taxable base amount is not reduced by any expenses. A tax based on gross receipts, revenue, or capital should be accounted for under other applicable literature (e.g., ASC 450).

ASC 740-10-55-24 states the following regarding taxes withheld from dividends:

Deferred tax liabilities and assets are measured using enacted tax rates applicable to capital gains, ordinary income, and so forth, based on the expected type of taxable or deductible amounts in future years. For example, evidence based on all facts and circumstances should determine whether an investor’s liability for the tax consequences of temporary differences related to its equity in the earnings of an investee should be measured using enacted tax rates applicable to a capital gain or a dividend. Computation of a deferred tax liability for undistributed earnings based on dividends should also reflect any related dividends received deductions or foreign tax credits, and taxes that would be withheld from the dividend. [Emphasis added]

It can be inferred from this guidance that the FASB intended withholding taxes on dividends to be a component of income taxes. However, ASC 946-225-45-3 discusses the presentation of certain items in the statement of operations of an investment company and suggests that withholding taxes might, in fact, be considered as “other taxes.” ASC 946-225-45-3 states, in part:

All of the following expenses are commonly reported separately: . . .

g. Federal and state income taxes (these expenses shall be shown separately after the income category to which they apply, such as investment income and realized or unrealized gains)

h. Other taxes (foreign withholding taxes shall be deducted from the relevant income item and disclosed parenthetically or shown as a separate contra item in the income section).

For a discussion on how to determine whether a withholding tax represents an income tax of the payor, see ASC 740-10-15-4 and 2.03 on accounting for taxes assessed on the payor of a dividend. In circumstances in which the withholding tax is determined not to be an income tax of the payor, questions often arise about whether it should be accounted for by the recipient as an income tax within the scope of ASC 740.

The recipient of a dividend or other payment that is subject to withholding tax should account for the withholding tax on the basis of its facts and circumstances. Relevant questions (not all inclusive or individually determinative) include the following:

• If the recipient had qualifying expenditures in the local jurisdiction or had established a local presence, would the withholding tax be adjusted accordingly (i.e., would it not apply, or would it be reflected as an estimated tax payment on the income tax return)?

The fact that the taxable income would be adjusted if there were qualifying expenditures would be a strong indicator that the withholding tax should be considered an income tax.

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• Is the payment effectively a distribution from the earnings of the paying entity? That is, is it a dividend and not a return of capital or other expense?

If the amount was paid out of earnings of the paying entity, the withholding tax may represent an incremental layer of tax, imposed on the recipient, on the income of the payor. For example, although a dividend itself may seem to be revenue rather than income to the recipient (i.e., the recipient has not been able to directly reduce the dividend by expenses), the withholding tax is assessed on a net income figure (i.e., the paying entity has incurred expenses on its revenues) at the time of distribution. Therefore, the recipient has indirectly been allowed a deduction for the expenses associated with the revenue upon which the dividend is based given that the paying entity has taken these deductions before making the dividend.

• Is the withholding tax creditable on an income tax return filed by the receiving entity or by the receiving entity’s parent?

While the ability to take a credit for the tax on an income tax return would not itself indicate that the tax is an income tax, many of the criteria used to evaluate whether the tax is creditable would most likely be relevant in the determination of whether the tax is an income tax for U.S. GAAP purposes

2.04 Refundable Tax CreditsCredits whose realization ultimately depends on taxable income (e.g., investment tax credits and R&D credits) are generally recognized as a reduction of income tax, regardless of whether they are accounted for under the flow-through method or the deferral method (as described in ASC 740-10-25-45 and 25-46).

Certain tax jurisdictions provide refundable credits (e.g., qualifying R&D credits in certain countries and state jurisdictions and alternative fuel tax credits for U.S. federal income tax) that do not depend on the entity’s ongoing tax status or tax position (e.g., an entity may receive a refund despite being in a taxable loss position).

If realization of the tax credit does not depend on the entity’s generation of future taxable income or the entity’s ongoing tax status or tax position, the credit is not considered an element of income tax accounting under ASC 740. Thus, even if the credit claims are filed in connection with a tax return, the refunds are not considered part of income taxes and therefore are not within the scope of ASC 740. In such cases, an entity would not record the credit as a reduction of income tax expense; rather, the entity should determine the credit’s classification on the basis of its nature.

When determining the classification of these credits, an entity may consider them to be a form of government grant or assistance. An entity may look to paragraphs 24 and 29 of IAS 20 for guidance on government grants. Under paragraph 24 of IAS 20, an entity presents government grants related to

Documents

A Roadmap to Accounting for Income Taxes...3.51B Deferred Income Taxes Related to a Foreign Branch: Accounting for Changes in a Parent’s Deferred Taxes Due to Changes in Exchange