A Roadmap to Accounting for Income Taxes

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  • A Roadmap to Accounting for Income Taxes2016

  • 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.

    iGAAP material in Appendix G copyright 2016 Deloitte Touche Tohmatsu Limited.

    This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

    Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

    As used in this document, Deloitte means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

    December 2016

    Copyright 2016 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited.


  • iii


    Preface xiv

    Acknowledgments xv

    Contacts xvi

    Executive Summary xvii

    Chapter 1 Overview 1

    1.01 Overview of ASC 740 3

    1.02 Objectives of ASC 740 4

    Chapter 2 Scope 5

    2.01 Taxes Within the Scope of ASC 740 6

    2.02 Hybrid Taxes 6

    2.03 Accounting for Taxes Assessed on the Payor of a Dividend* 7

    2.04 Refundable Tax Credits 8

    2.05 Income Tax Indemnifications Upon Sale of a Subsidiary That Previously Filed a Separate Tax Return 8

    Chapter 3 Recognition and Derecognition 10

    General Recognition Approach 10

    3.01 Exceptions to Recognition of Deferred Taxes 13

    3.02 Definition of Subsidiary and Corporate Joint Venture 13

    3.03 Definition of Foreign and Domestic Investments 13

    3.04 Definition of Inside and Outside Basis Differences 14

    3.05 Recognition of Deferred Taxes for Inside Basis Differences 15

    3.06 Deferred Tax Considerations Related to Withholding Taxes Imposed on Distributions From Disregarded Entities and Foreign Subsidiaries 15

    3.07 Recognition of Deferred Taxes for Temporary Differences Related to the CTA 17

    3.08 Hedge of a Net Investment in a Foreign Subsidiary 17

    3.09 Deferred Taxes Recorded Through the Currency Translation Adjustment 18

    3.10 Whether a Change in Managements Plans for Reinvestment or Repatriation of Foreign Earnings Is a Recognized or Nonrecognized Subsequent Event 18

    3.11 Tax Consequences of a Change in Intent Regarding Remittance of Pre-1993 Undistributed Earnings 18

    3.12 Tax Consequences of Bad-Debt Reserves of Thrift Institutions 19

    3.13 Tax Consequences of a Reduction of the Tax Base-Year Bad-Debt Reserve in an Annual Period 21

    3.14 Tax Consequences of a Reduction of the Tax Base-Year Bad-Debt Reserve in an Interim Period 21

    3.15 Realization of a DTA of a Savings and Loan Association: Reversal of a Thrifts Base-Year Tax Bad-Debt Reserve 22

    3.16 Intra-Entity Transactions Between Different Tax-Paying Components 22

  • iv

    Contents A Roadmap to Accounting for Income Taxes

    3.17 Subsequent Changes in Tax Rates Involving Intra-Entity Transactions 23

    3.18 Indexing of the Tax Basis of Assets and Liabilities 23

    Tax Positions 24

    3.19 Consideration of Tax Positions Under ASC 740 26

    3.20 Considerations of Tax Positions by Tax-Exempt or Pass-Through Entities* 27

    3.20A Unrecognized Tax Benefits and Spin-Off Transactions* 27

    3.21 Accounting for the Tax Effects of Tax Positions Expected to Be Taken in an Amended Tax Return or Refund Claim or to Be Self-Reported Upon Examination 28

    3.22 Recognition and Measurement Assumptions to Be Used 29

    3.23 Decision Tree for Recognizing Benefits of a Tax Position 30

    3.24 Legal Tax Opinions Not Required to Support a Tax Position 31

    3.25 Meaning of the Court of Last Resort and Its Impact on Recognition 31

    3.26 Impact of the Likelihood of the U.S. Supreme Courts Hearing the Case 31

    3.27 Consideration of Widely Understood Administrative Practices and Precedents 32

    3.28 Applying ASC 740 to Questions About Economic Nexus 32

    3.29 Lookback Period for Accruing a State Income Tax Liability for UTBs 33

    3.30 Determining the Unit of Account 34

    3.31 Whether Determination of the Unit of Account Is an Accounting Policy Choice 34

    3.32 Applying the Unit of Account 34

    3.33 Decision Tree for the Subsequent Recognition, Derecognition, and Measurement of Benefits of a Tax Position 35

    3.34 Evaluating the Recognition Threshold After Examination of a Tax Year 36

    3.35 Effectively Settled Tax Positions 36

    3.36 Finality or Certainty of Outcome in Subsequent Recognition, Derecognition, or Measurement of a Tax Position 37

    3.37 New Information Obtained After the Balance Sheet Date Concerning Uncertain Tax Positions 38

    3.38 Interim Accounting for a Change in Judgment 38

    3.39 Changes in Judgment Regarding a Tax Position Taken in the Current Year 39

    3.40 Changes in Judgment Regarding a Tax Position Taken in the Prior Year 40

    3.41 Distinguishing a Change in Estimate From a Correction of an Error 40

    3.42 Deferred Tax Consequences of UTBs 42

    Temporary Differences 43

    3.43 Tax Bases Used in the Computation of Temporary Differences 46

    3.44 Temporary Differences 46

    3.45 Income Tax Consequences of Issuing Debt With a Conversion Feature Accounted for Separately as a Derivative 47

    3.46 Income Tax Effects on Medicare Part D Subsidy Receipts 49

    3.47 Recognizing Deferred Taxes for Indefinite-Lived Assets 49

    3.48 Deferred Tax Considerations When Goodwill Becomes a Finite-Lived Asset 50

    3.49 Deferred Tax Consequences of Synthetic Leases 50

    3.50 Considering the Impact of Tax Method Changes 51

    3.51 When to Recognize the Impact of Tax Method Changes 53

    3.51A Accounting for Foreign Branch Operations* 54

    3.51B Deferred Income Taxes Related to a Foreign Branch: Accounting for Changes in a Parents Deferred Taxes Due to Changes in Exchange Rates* 57

    Basis Differences That Are Not Temporary Differences 59

    3.52 Permanent Differences 59

    3.53 Examples of Basis Differences That Are Not Temporary Differences 60

    Change in Tax Status 61

    3.54 Change in Tax Status of an Entity 61

    3.54A Tax Effects of a Check-the-Box Election* 62

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

  • v

    Contents A Roadmap to Accounting for Income Taxes

    3.55 Recognition Date for Conversion to a REIT 64

    3.56 Loss of Nontaxable Status as a Result of Acquisition 64

    3.57 Successor Entitys Accounting for the Recognition of Income Taxes When the Predecessor Entity Is Nontaxable 65

    3.58 Accounting for the Elimination of Income Taxes Allocated to a Predecessor Entity When the Successor Entity Is Nontaxable 66

    3.59 Voluntary Change in Tax Status of an Acquired Entity 67

    3.60 Change in Tax Status as a Result of a Common-Control Merger 67

    3.61 Change in Tax Status to Taxable: Accounting for an Increase in Tax Basis 68

    3.62 Built-in Gain: Recognition and Measurement 68

    Tax Holidays 70

    3.63 Tax Consequences of Tax Holidays 70

    Effect of Anticipated Future Special Deductions, Losses, and Tax Credits 70

    Alternative Minimum Tax 71

    Investment Tax Credits 71

    Changes in Laws or Rates 72

    3.64 Retroactive Changes in Tax Laws or Rates and Expiring Provisions That May Be Reenacted 72

    3.65 Enacted Changes in Tax Laws or Rates That Affect Items Recognized in OCI 72

    3.66 Reporting Tax Effects of a Change in Tax Law in Discontinued Operations 73

    Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations 74

    Interest and Penalties 75

    3.67 Recognition and Measurement of Interest and Penalties 75

    3.68 Interest Income on UTBs 76

    3.69 Capitalization of Interest Expense 77

    3.70 Recognition of the Accrual for Penalties 77

    Chapter 4 Measurement 78

    General Measurement Approach 78

    4.01 Measuring Deferred Taxes in Consolidated Financial Statements When a Foreign Subsidiary Uses a Local Statutory Basis of Accounting to Prepare Its Financial Statements 79

    Applicable Tax Rate Used to Measure Deferred Taxes 81

    4.02 Tax Rate Used in Measuring Operating Losses and Tax Credits 82

    4.03 Determining the Applicable Tax Rate on a Loss Carryback 82

    4.04 Measuring Deferred Taxes for Indefinite-Lived Intangible Assets When Different Tax Rates May Apply* 83

    4.05 Use of a Blended Rate to Measure Deferred Taxes 83

    4.06 Effect of Tax Holidays on the Applicable Tax Rate 84

    4.07 Consideration of Certain State Matters, Including Optional Future Tax Elections, in the Measurement of DTAs and DTLs 84

    4.08 Situations in Which Determining the Applicable Tax Rate May Be Complex 85

    4.09 Graduated Tax Rates 87

    4.10 Measurement When Graduated Tax Rates Are a Significant Factor 87

    4.11 Measurement When Future Tax Losses Are Expected in a Graduated Tax Rate Structure 89

    4.12 Measurement When Phased-In Changes in Tax Rates Are Enacted 89

    4.13 Measurement When Contingent Phased-In Changes in Tax Rates Are Enacted 90

    4.14 Consideration of U.S. AMT Credit Carryforwards 91

    4.15 AMT Rate Not Applicable for Measuring DTL