What Financial Service Firms Need to Know in Applying ASU No. 2019-12
In line with recent simplification efforts in December 2019, the FASB issued ASU 2019-12: Income Tax Simplification. The ASU simplifies the accounting for income taxes through a number of clarifications and changes in the previously existing ASC 740, Income Taxes. The simplification primarily relates to the following:
- Approach for calculating income-based taxes such as franchise taxes
- Evaluating the need for a step-up in tax basis of goodwill
- Minor codifications for income taxes related to employee stock ownership plans and removing various exceptions related to intra-period tax allocation
- Recognition of deferred tax liabilities for foreign equity method investments
- Treatment of calculating income taxes in an interim period
The ASU also specifies changes to the allocation of consolidated current and deferred tax expense to a legal entity not subject to tax on its separate financial statements.
The new ASU has a number of implications for both public and non-public companies. The ASU is affective for public companies with fiscal and interim periods beginning after December 15, 2020 and effective for all other entities beginning after December 15, 2021.
Separate financial statements of legal entities not subject to tax
Under the previous GAAP presentation, consolidated current and deferred taxes were to be allocated among the individual entities that file a consolidated tax return if those entities issue separate financial statements. Under the new ASU 2019-12, the separate entity (or entities) is no longer required to allocate the current and deferred tax expense to a separate legal entity that is (1) not subject to the tax directly and (2) disregarding by taxing authorities (i.e., wholly owned limited liability companies). The election is not required to be made uniformly on the basis of the group consolidated return, thus, can be elected by each entity within the group consolidated tax return. In addition, the election of such allocation or election to not allocate current and deferred tax expenses are to be disclosed in the separately issued financial statements of the subsidiary.
Franchise tax calculation changes
Franchise taxes in certain jurisdictions are calculated as the greater of income or other non-income related figures, such as capital. In applying ASU 2019-12, the FASB has specified that franchise taxes or similar taxes that are also based on income/non-income related figures, requires an entity to first apply the expense related to income to tax expense and the non-income related tax should be recorded as a non-income tax expense, if applicable in excess of the income-related tax.
Step-up in tax basis goodwill
Under the former guidance upon the creation of goodwill due to business combination, an entity recognizes a deferred tax asset when tax basis goodwill exceeds the remaining balance of book goodwill. Under the new ASU, companies are now required to assess if the step-up in goodwill is a result of a business combination which results in a deferred tax asset or if there was a separate transaction or attribute which resulted in the deferred tax asset. The ASU outlines a number of attributes and scenarios which must be considered. Upon determination of the source of the goodwill step-up creation, a deferred tax asset may need to be created to the extent that the tax basis goodwill step-up transaction is unrelated to the business combination.
Intraperiod tax allocation
Intra-period tax allocation is the process of allocating the income tax provision among various financial statement components such as continuing operations, discontinued operations, and other comprehensive income. As was previously provided under GAAP, this allocation of tax provisions was first allocated to the continuing operations and then to other components with the exception that given there is a loss from continued operations which may be offset by income from other components it would be considered for all components. Under the newly released ASU 2019-12, the exception is now eliminated and the tax benefit from the loss from continuing operations should be computed without considering the effects of the gain from another component.
Interim tax recognition
Under the former ASC 740, an entity recognizes tax laws which have impacts on deferred tax assets or liabilities in the period of enactment with the exception that tax laws with delayed effective dates are recognized in which period they become effective. Upon the new ASU 2019-12, the exception is removed and now effects of the tax law and new tax rate are effective in the period of enactment.
When applying the new ASU, adoption of the ASU should take effect as of the beginning of the annual period and all adjustment reflected within the financial statements as of the beginning of the period. When adopting the changes, disclosures within the financial statements should outline the methods and nature of the reason for the changes in accounting principle and the application methods used and impacts to the financial statements. For a full list of the changes, the FASB has outlined those changes here.
The Keiter Financial Services Industry team closely monitors FASB regulation changes to keep you updated and informed. If you have any questions, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000
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