ASC 740 CURRENT ISSUES Practical Issues Impacting Income Tax Provisions BDO US A, LLP, a Delaware limited liability partnership, is the U.S . member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
With You Today DANIEL NEWTON Tax Partner –AS C 740 Technical Practice Leader National Tax Office 617.239.7026 dnewton@ bdo.com 2 AS C 740 – Practical Issues Impacting Income Tax Provisions
Income Taxes – Increased Risk 3 AS C 740 – Practical Issues Impacting Income Tax Provisions
Increased Scrutiny For Taxes Financial Restatements: Tax Expense/Benefit/Deferral Other ASC 740 Issues Disclosure Y ear 2012 2013 2014 2015 2016 2017 2018 Tax/ Expense Restatements 113 103 114 95 104 84 54 Total Restatements 854 876 857 757 686 573 516 % of All Restatements 13.2% 11.8% 13.3% 12.5% 15.2% 14.7% 10.5% Tax continues to be one of the top accounting issues resulting in restatements. “ Consists of errors or irregularities in approach, understanding or calculation associated with various forms of tax obligations or benefits. Many of these restatements relate to foreign tax, specialty taxes or planning issues. S ome deal with failures to identify appropriate differences between tax and book adj ustments .” Source : 2018 Financial Restatements; An Eighteen Year Comparison published August 2019 by Audit Analytics. 4 AS C 740 – Practical Issues Impacting Income Tax Provisions
Critical Audit Matters 5 AS C 740 – Practical Issues Impacting Income Tax Provisions
Critical Audit Matters (CAMs) • In October 2017 the S EC approved a new PCAOB standard intended to enhance the auditor reporting model • The new model will now require the audit report to disclose in the report matters arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and relates to: accounts or disclosures that are material to the financial statements AND involved especially challenging ,subj ective, or complex auditor j udgement • A CAM will include the following four elements in the audit report: Identification of the CAM Description of how the CAM was addressed in the audit Description of the principal Reference to the financial statements considerations that lead the auditor or disclosures to determine the matter was a CAM 6 AS C 740 – Practical Issues Impacting Income Tax Provisions
CAMs (cont’ d) • Reporting of CAMs are effective for: • Audits for fiscal years ending on or after June 30, 2019 for large accelerated filers • For audits of fiscal years ending on or after December 15, 2020 for all other companies who are required to report CAMs • Reporting CAMs is not required for audits of broker dealers reporting under the S ecurities and Exchange Act of 1934 Rule 17a-5,employee stock purchase, savings or other similar plans and emerging growth companies. 7 AS C 740 – Practical Issues Impacting Income Tax Provisions
CAM – Income Tax Cycle - Any CAM’ s within the income tax cycle should be defined to a specific element within the income tax provision S pecific Element(s) of Risk Assessment / Income Tax Provision Planning Tax & Audit should conduct assessment together CAM guidance re: S ubstantive taxes Procedures 8 AS C 740 – Practical Issues Impacting Income Tax Provisions
CAMs – Income Tax Examples • Income Tax was identified as a CAM during dry runs by 57% of certain large accelerated filers based on a recent Int elligize CAM S urvey report (9/ 10/ 19) • Recent Tax CAMs addressed the following issues: Uncertain Tax Positions – Microsoft Corp. Realizability of the deferred tax assets – Atlassian Corp PLC Assessment of gross unrecognized tax benefits – Ubiquiti Inc. Realizability of deferred tax assets – Quinstreet, Inc. Assessment of disallowance calculations related to executive compensation limitations (IRC §162(m)) – K12 Inc. • As noted earlier, tax-related CAMs should focus on a specific area of the income tax provision process. 9 AS C 740 – Practical Issues Impacting Income Tax Provisions
Proposed AS Us 10 AS C 740 – Practical Issues Impacting Income Tax Provisions
AS C 740 S implification 11 AS C 740 – Practical Issues Impacting Income Tax Provisions
ASC 740 Simplification • At its April 10th Board meeting the FAS B decided to add to its agenda a proj ect regarding simplifications to accounting for income taxes • Proj ect is part of the Board’ s S implification Initiative • The FAS B had noted that accounting for income taxes has been among the top areas of restatement over the last several years (13-15 % of all restatements) • Based on feedback from accounting firms as well as suggestions from preparers and practitioners the Board identified certain requirements that had less relevance given tax reform as well as other requirements which were complex and prone to errors 12 AS C 740 – Practical Issues Impacting Income Tax Provisions
ASC 740 Simplification (cont’ d) The Board decided to remove the following exceptions in Topic 740, Income Taxes: • Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) • Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment • Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary (therefore, an entity would have the ability to assert indefinite reinvestment for the entire basis difference of a subsidiary) • Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. 13 AS C 740 – Practical Issues Impacting Income Tax Provisions
ASC 740 Simplification (cont’ d) The board also decided the following: • An entity should recognize a franchise tax that is partially based on income in accordance with Topic 740 and account for any incremental amount as a non- income-based tax. • An entity should evaluate when a step up in the tax basis of goodwill should be considered part of the initial recognition of book goodwill and when it should be considered a separate transaction. • An entity should be permitted to forgo the allocation of consolidated current and deferred tax expense to legal entities that are not subj ect to tax in their separate financial statements. • An entity should reflect 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. 14 AS C 740 – Practical Issues Impacting Income Tax Provisions
ASC 740 Simplification (cont’ d) • The Board also decided to make Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing proj ects accounted for using the equity method. • The Board decided to exclude from the scope of the proj ect an issue involving the accounting for nondeductible goodwill by private companies. 15 AS C 740 – Practical Issues Impacting Income Tax Provisions
ASC 740 Simplification (cont’ d) The Board affirmed its initial decisions at a meeting on S eptember 4, 2019. In addition, the Board decided that an entity should apply the amendments as follows: • Either retrospectively or modified retrospective for franchise taxes that are partially based on income (changed from initial retrospective recommendation) • Retrospectively for the election to forgo the allocation of consolidated taxes to legal entities that are not subj ect to tax in their separate financial statements • Using a modified retrospective approach for ownership changes to a foreign equity method investment or subsidiary • Prospectively for all other amendments to Topic 740. 16 AS C 740 – Practical Issues Impacting Income Tax Provisions
Disclosure Framework 17 AS C 740 – Practical Issues Impacting Income Tax Provisions
Disclosure Framework On, March 25th, the FAS BI issued a proposed Accounting S tandard Update (AS U), Disclosure Framework-Changes to the Disclosure Requirements for Income Taxes: • This proposed AS U is a revision to an exposure draft which was issued on July 26,2016 • The amendments in the AS U will apply to all entities that are subj ect to income taxes • Certain of the disclosures would only be applicable to public business entities as that term is defined in the Master Glossary of the Codification • Comments were received on May 31, 2019 18 AS C 740 – Practical Issues Impacting Income Tax Provisions
Disclosure Framework (cont’ d) As proposed all entities would need to disclose: • Income (or loss) from continuing operations before income tax expense (or benefit) and before intra-entity eliminations disaggregated between domestic and foreign • Income tax expense (or benefit) from continuing operations disaggregated between federal, state, and foreign • Income taxes paid disaggregated between federal, state, and foreign. 19 AS C 740 – Practical Issues Impacting Income Tax Provisions
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