A Roadmap to Accounting for Income Taxes2017

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Other Publications in Deloittes Roadmap Series

Roadmaps are available on these topics:

Asset Acquisitions (2017)

Common-Control Transactions (2016)

Consolidation Identifying a Controlling Financial Interest (2017)

Contracts on an Entitys Own Equity (2017)

Discontinued Operations (2017)

Distinguishing Liabilities From Equity (2017)

Foreign Currency Transactions and Translations (2017)

Non-GAAP Financial Measures (2017)

Noncontrolling Interests (2017)

The Preparation of the Statement of Cash Flows (2017)

Pushdown Accounting (2016)

Revenue Recognition (2017)

Segment Reporting (2017)

Share-Based Payment Awards (2017)

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Contents

Preface xvi

Acknowledgments xvii

Contacts xvi

Executive Summary xviii

Chapter 1 Overview 11.01 Overview of ASC 740 3

1.02 Objectives of ASC 740 4

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 17

3.02 DefinitionofSubsidiaryandCorporateJointVenture* 18

3.03 DefinitionofForeignandDomesticInvestments 18

3.04 DefinitionofInsideandOutsideBasisDifferences 20

3.05 RecognitionofDeferredTaxesforInsideBasisDifferences 21

3.06 DeferredTaxConsiderationsRelatedtoWithholdingTaxesImposedonDistributionsFromDisregardedEntitiesandForeignSubsidiaries 21

3.07 RecognitionofDeferredTaxesforTemporaryDifferencesRelatedtotheCTA 23

3.08 HedgeofaNetInvestmentinaForeignSubsidiary 24

3.09 Deferred Taxes Recorded Through the Currency Translation Adjustment 24

3.10 WhetheraChangeinManagementsPlansforReinvestmentorRepatriationofForeign Earnings Is a Recognized or Nonrecognized Subsequent Event 25

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

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3.11 Tax Consequences of a Change in Intent Regarding Remittance of Pre-1993 UndistributedEarnings 26

3.12 TaxConsequencesofBad-DebtReservesofThriftInstitutions 26

3.13 TaxConsequencesofaReductionoftheTaxBase-YearBad-DebtReserveinanAnnualPeriod 29

3.14 TaxConsequencesofaReductionoftheTaxBase-YearBad-DebtReserveinanInterimPeriod 30

3.15 RealizationofaDTAofaSavingsandLoanAssociation:ReversalofaThriftsBase-YearTax Bad-DebtReserve 30

3.15A Regulated Entities Subject to ASC 980* 31

3.15B ConstructioninProgressandPlantinServiceRecordedNet-of-Tax* 31

3.16 Intra-EntityTransactionsBetweenDifferentTax-PayingComponents 31

3.17 Subsequent Changes in Tax Rates Involving Intra-Entity Transactions 32

3.18 IndexingoftheTaxBasisofAssetsandLiabilities 33

Tax Positions 34

3.19 ConsiderationofTaxPositionsUnderASC740 36

3.20 Considerations of Tax Positions by Tax-Exempt or Pass-Through Entities 37

3.20A UnrecognizedTaxBenefitsandSpin-OffTransactions 37

3.21 AccountingfortheTaxEffectsofTaxPositionsExpectedtoBeTakeninanAmended TaxReturnorRefundClaimortoBeSelf-ReportedUponExamination 39

3.22 RecognitionandMeasurementAssumptionstoBeUsed 40

3.23 DecisionTreeforRecognizingBenefitsofaTaxPosition 41

3.24 Legal Tax Opinions Not Required to Support a Tax Position 42

3.25 Meaning of the Court of Last Resort and Its Impact on Recognition 42

3.26 ImpactoftheLikelihoodoftheU.S.SupremeCourtsHearingtheCase 43

3.27 ConsiderationofWidelyUnderstoodAdministrativePracticesandPrecedents 43

3.28 Applying ASC 740 to Questions About Economic Nexus 44

3.29 LookbackPeriodforAccruingaStateIncomeTaxLiabilityforUTBs 44

3.30 DeterminingtheUnitofAccount 45

3.31 WhetherDeterminationoftheUnitofAccountIsanAccountingPolicyChoice 46

3.32 ApplyingtheUnitofAccount 46

3.33 Decision Tree for the Subsequent Recognition, Derecognition, and Measurement of BenefitsofaTaxPosition 47

3.34 EvaluatingtheRecognitionThresholdAfterExaminationofaTaxYear 48

3.35 EffectivelySettledTaxPositions 48

3.36 FinalityorCertaintyofOutcomeinSubsequentRecognition,Derecognition,or Measurement of a Tax Position 49

3.37 NewInformationObtainedAftertheBalanceSheetDateConcerningUncertainTaxPositions 50

3.38 InterimAccountingforaChangeinJudgment 51

3.39 ChangesinJudgmentRegardingaTaxPositionTakenintheCurrentYear 51

3.40 ChangesinJudgmentRegardingaTaxPositionTakeninthePriorYear 52

3.41 DistinguishingaChangeinEstimateFromaCorrectionofanError 53

3.42 DeferredTaxConsequencesofUTBs 55

Temporary Differences 56

3.43 TaxBasesUsedintheComputationofTemporaryDifferences 60

3.44 TemporaryDifferences 60

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3.45 IncomeTaxConsequencesofIssuingDebtWithaConversionFeatureAccounted for Separately as a Derivative 61

3.46 IncomeTaxEffectsonMedicarePartDSubsidyReceipts 64

3.47 RecognizingDeferredTaxesforIndefinite-LivedAssets 64

3.48 DeferredTaxConsiderationsWhenGoodwillBecomesaFinite-LivedAsset 65

3.49 Deferred Tax Consequences of Synthetic Leases 65

3.50 Considering the Impact of Tax Method Changes 66

3.51 When to Recognize the Impact of Tax Method Changes 69

3.51A AccountingforForeignBranchOperations 70

3.51B DeferredIncomeTaxesRelatedtoaForeignBranch:AccountingforChangesin a Parents Deferred Taxes Due to Changes in Exchange Rates 74

Basis Differences That Are Not Temporary Differences 76

3.52 PermanentDifferences 77

3.53 ExamplesofBasisDifferencesThatAreNotTemporaryDifferences 78

Change in Tax Status 80

3.54 Change in Tax Status of an Entity 80

3.54A TaxEffectsofaCheck-the-BoxElection 82

3.55 Recognition Date for Conversion to a REIT 83

3.56 Loss of Nontaxable Status as a Result of Acquisition 84

3.57 Successor Entitys Accounting for the Recognition of Income Taxes When the Predecessor Entity Is Nontaxable 85

3.58 Accounting for the Elimination of Income Taxes Allocated to a Predecessor Entity When the Successor Entity Is Nontaxable 87

3.59 VoluntaryChangeinTaxStatusofanAcquiredEntity 88

3.60 Change in Tax Status as a Result of a Common-Control Merger 88

3.61 ChangeinTaxStatustoTaxable:AccountingforanIncreaseinTaxBasis 88

3.62 Built-inGain:RecognitionandMeasurement 89

Tax Holidays 91

3.63 Tax Consequences of Tax Holidays 91

3.63A AccountingforTemporaryDifferencesRelatedtoInvestmentTaxCredits* 92

Effect of Anticipated Future Special Deductions, Losses, and Tax Credits 96

Alternative Minimum Tax 97

Investment Tax Credits 98

Changes in Laws or Rates 98

3.64 RetroactiveChangesinTaxLawsorRatesandExpiringProvisionsThatMayBeReenacted 98

3.65 EnactedChangesinTaxLawsorRatesThatAffectItemsRecognizedinOCI 98

3.66 ReportingTaxEffectsofaChangeinTaxLawinDiscontinuedOperations 100

Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations 101

Interest and Penalties 102

3.67 Recognition and Measurement of Interest and Penalties 103

3.68 InterestIncomeonUTBs 104

3.69 Capitalization of Interest Expense 105

3.70 Recognition of the Accrual for Penalties 105

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Chapter 4 Measurement 106General Measurement Approach 106

4.01 MeasuringDeferredTaxesinConsolidatedFinancialStatementsWhenaForeignSubsidiary UsesaLocalStatutoryBasisofAccountingtoPrepareItsFinancialStatements 108

Applicable Tax Rate Used to Measure Deferred Taxes 109

4.02 TaxRateUsedinMeasuringOperatingLossesandTaxCredits 111

4.03 DeterminingtheApplicableTaxRateonaLossCarryback 111

4.04 MeasuringDeferredTaxesforIndefinite-LivedIntangibleAssetsWhenDifferentTax Rates May Apply 112

4.05 UseofaBlendedRatetoMeasureDeferredTaxes 112

4.06 EffectofTaxHolidaysontheApplicableTaxRate 113

4.07 ConsiderationofCertainStateMatters,IncludingOptionalFutureTaxElections, in the Measurement of DTAs and DTLs 113

4.08 SituationsinWhichDeterminingtheApplicableTaxRateMayBeComplex 115

4.09 Graduated Tax Rates 117

4.10 MeasurementWhenGraduatedTaxRatesAreaSignificantFactor 118

4.11 MeasurementWhenFutureTaxLossesAreExpectedinaGraduatedTaxRateStructure 119

4.12 Measurement When Phased-In Changes in Tax Rates Are Enacted 120

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

4.14 ConsiderationofU.S.AMTCreditCarryforwards 122

4.15 AMT Rate Not Applicable for Measuring DTLs 122

4.16 ExampleIllustratingtheApplicationofASC740totheAMTSystemintheU.S. FederalJurisdiction 123

4.17 ConsiderationofSpecialDeductionsThatArePermittedUndertheTaxLaw 124

4.18 MeasurementofBasisDifferencesinanAdjustedGrossReceiptsTaxRegime 127

4.19 Deferred Tax Treatment of Hybrid Taxes 128

4.20 ApplicabilityofPushdownAccountingtoIncomeTaxesandForeignCurrency Translation Adjustments 132

Establishment of a Valuation Allowance for Deferred Tax Assets 134

4.21 ConsiderationofFutureEvents 136

4.22 Sources of Taxable Income 137

4.23 Examples Illustrating Sources of Taxable Income 137

4.24 EvaluatingaDTA(forRealization)ofaDebtSecurityAttributedtoanUnrealized Loss Recognized in OCI* 138

4.25 DeterminingthePatternofReversalsofTemporaryDifferences 141

4.26 Examples Illustrating the Determination of the Pattern of Reversals of TemporaryDifferences 142

4.27 UsingtheReversalofaDTLforanIndefinite-LivedAssetasaSourceofTaxableIncome 149

4.28 AMTValuationAllowances 150

4.28A Assessing Realization of a DTA for Regular Tax NOL Carryforwards When an Entity Anticipates Paying AMT Perpetually 151

4.29 DefinitionofaTax-PlanningStrategy 153

4.30 Examples of Qualifying Tax-Planning Strategies 155

4.31 Examples of Nonqualifying Tax-Planning Strategies 156

4.32 Recognition and Measurement of a Tax-Planning Strategy 158

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4.33 TheMore-Likely-Than-NotStandard 159

4.34 ExamplesIllustratingtheMeasurementofValuationAllowancesWhenTax-Planning Strategies Are Involved 159

4.35 DeterminationoftheNeedforaValuationAllowanceRelatedtoFTCs 163

4.36 DefinitionofCumulativeLossesinRecentYears 165

4.37 ConsiderationofNegativeEvidenceintheDeterminationofWhetheraValuation Allowance Is Required 166

4.38 CumulativeLosses:AnObjectivelyVerifiableFormofNegativeEvidence 167

4.39 Going-Concern Opinion as Negative Evidence* 168

4.40 EstimatesofFutureIncome 168

4.41 EffectofNonrecurringItemsonEstimatesofFutureIncome 169

4.42 ExampleIllustratingtheEstimationofFutureTaxableIncomeWhenNegativeEvidence intheFormofCumulativeLossesExists 170

4.43 PositiveEvidenceConsideredintheDeterminationofWhetheraValuationAllowance Is Required 172

4.44 AdditionalExamplesofObjectivelyVerifiablePositiveEvidence 173

4.45 ExampleIllustratingtheDeterminationofaValuationAllowanceWhenItIsMoreLikely ThanNotThataPortionofExistingTaxBenefitsWillNotBeRealized 174

4.46 ReductionofaValuationAllowanceWhenNegativeEvidenceIsNoLongerPresent 176

4.47 ValuationAllowances:TimeFrameforAssessingFutureTaxableIncome 178

Tax Rates Applicable to Items Not Included in Income From Continuing Operations 178

Allocation of Consolidated Tax Expense to Separate Financial Statements of Members 179

4.48 SubsidiaryFinancialStatements[Deleted] 179

4.49 AcceptableMethodsofAllocatingTaxtoSeparateFinancialStatements 179

4.50 Preferable Allocation Method for Public Entities 183

4.51 Change in Application of Tax Allocation Methods 183

4.52 ValuationAllowanceintheSeparateFinancialStatementsofaConsolidatedGroupMember 183

4.52A AccountingforIncomeTaxesintheBalanceSheetofSeparateFinancialStatements: DTAs Related to Tax Attributes 184

4.53 Tax Consequences of Tax-Sharing Agreements That Are Not Acceptable for FinancialReportingPurposes 186

4.54 ReportingAcquisitionDebtinSeparateFinancialStatements 187

4.55 TaxBenefitoftheDeductibleInterestintheSeparateFinancialStatements 188

4.56 ApplicationoftheSeparateReturnMethodinCombinedorCarve-OutFinancial StatementsofMultipleLegalEntities,MultipleDivisions,orBoth 188

4.57 AllocatingIncomeTaxestoNonmembersinCarve-OutFinancialStatements 189

4.57A AccountingforTaxableTemporaryDifferencesResultingFromInvestmentsinForeignSubsidiariesandForeignCorporateJointVenturesinSeparateFinancialStatements PreparedbyUsingtheSeparateReturnMethod* 190

4.57B AccountingforIncomeTaxesintheBalanceSheetofSeparateFinancialStatements:UnrecognizedTaxBenefitsandCurrentTaxesPayableorReceivable* 192

4.58 DisclosureRequirementsWhenanUnincorporatedDivisionsStatementofRevenuesandExpensesIsPresentedinaPublicFiling[Deleted] 193

4.59 Single Member LLC Tax Allocation 193

4.60 ChangeFromSingleMemberLLCtoMultipleMemberLLC(orViceVersa) 194

4.61 Publicly Held Single Member LLC 194

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Interest and Penalties on Unrecognized Tax Benefits 194

Information Affecting Measurement of Tax Positions 195

4.62 UseofAggregationandOffsettinginMeasuringaTaxPosition 195

4.63 Measurement: Weighing of Information 195

4.64 Measuring a Tax Position Assigning Probabilities in a Cumulative-Probability Assessment 195

4.65 Cumulative-Probability Table 196

4.66 Cumulative-ProbabilityApproachVersusBestEstimate 196

4.67 ExampleIllustratingtheMeasurementoftheBenefitofanUncertainTaxPosition 197

4.68 MeasurementofTaxPositionsThatAreConsideredBinary 197

4.69 UncertaintyinDeductionTiming 198

4.70 MeasurementofUncertainTaxPositionsinTransferPricingArrangements 200

Changes in Tax Laws or Rates 203

4.71 Change in Tax Law That Allows an Entity to Monetize an Existing DTA or Tax Credit in LieuofClaimingtheBenefitintheFuture 203

Deferred Credit Arising From Asset Acquisitions That Are Not Business Combinations 204

Chapter 5 Presentation 205Statement of Financial Position Classification of Income Tax Accounts 205

5.01 Current/NoncurrentClassificationofDTLsandDTAs 208

5.02 PresentationofDeferredFederalIncomeTaxesAssociatedWithDeferredState Income Taxes 208

5.03 RecognitionofChangesinIndemnificationAssetsUnderaTaxIndemnificationArrangement 209

5.04 ValuationAllowance:ClassificationinaClassifiedBalanceSheet 210

5.05 AccountingfortheTaxEffectsofaChangeinTaxAccountingMethod 212

5.06 BalanceSheetClassificationoftheLiabilityforUTBs 213

5.07 FinancialStatementDisplayofFutureObligationstoTaxAuthoritiesUnder Regulation S-X, Rule 5-02 214

5.08 InteractionofUTBsandTaxAttributes 214

5.09 BalanceSheetPresentationofUTBsResultingFromTransferPricingArrangements 215

5.10 PresentationofProfessionalFees 216

Income Statement Presentation of Certain Measurement Changes to Income Tax Accounts 217

Income Statement Classification of Interest and Penalties 218

5.11 ClassificationofInterestandPenaltiesintheFinancialStatements 218

Investment Tax Credits Under the Deferral Method 219

Chapter 6 Disclosure 220Statement of Financial Position-Related Disclosures 220

6.01 Required Level of Detail 221

6.02 DefinitionofSignificantWithRespecttoDisclosingtheTaxEffectofEachTypeof TemporaryDifferenceandCarryforwardThatGivesRisetoDTAsandDTLs 221

6.03 DisclosureofWorthlessTaxBenefits 221

6.04 ChangeinTaxStatustoTaxable:FinancialReportingConsiderations 222

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Income-Statement-Related Disclosures 223

6.05 Disclosure of the Components of Deferred Tax Expense 223

6.06 DisclosureoftheTaxEffectofaChangeinTaxLaw,Rate,orTaxStatus 224

Income Tax Expense Compared to Statutory Expectations 224

6.07 EvaluatingSignificanceofReconcilingItemsintheRateReconciliation 225

6.07A AppropriateFederalStatutoryRateforUseintheRateReconciliationofaForeign Reporting Entity 226

6.07B ComputingtheForeignRateDifferentialintheRateReconciliation 226

Unrecognized Tax Benefits-Related Disclosures 227

6.08 PeriodicDisclosuresofUTBs 228

6.09 Disclosure of Expiration of Statute of Limitations 228

6.10 DisclosureRequirementsforEffectivelySettledTaxPositions 228

6.11 DisclosureofUTBsThatCouldSignificantlyChangeWithin12MonthsoftheReportingDate 229

6.12 InterimDisclosureConsiderationsRelatedtoUTBsThatWillSignificantlyChange Within 12 Months 230

6.13 AmountsIncludedintheTabularReconciliationofUTBs 230

6.14 Separate Disclosure of Interest Income, Interest Expense, and Penalties 230

6.15 DisclosureofInterestandPenaltiesRecordedintheTabularReconciliationofUTBs 231

6.16 PresentationofChangesRelatedtoExchangeRateFluctuationsintheTabularReconciliation 231

6.17 DisclosureofFullyReservedDTAsintheReconciliationofUTBs 231

6.18 ItemsIncludedintheTabularDisclosureofUTBsFromUncertainTaxPositionsMay AlsoBeIncludedinOtherDisclosures 232

6.19 DisclosureoftheSettlementofaTaxPositionWhentheSettlementAmountDiffers FromtheUTB 232

6.20 ConsiderationofTabularDisclosureofUTBsinanInterimPeriod 233

6.21 PresentationintheTabularReconciliationofaFederalBenefitAssociatedWith UnrecognizedStateandLocalIncomeTaxPositions 233

6.22 DisclosureofUTBsThat,IfRecognized,WouldAffecttheETR 233

6.23 ExampleofUTBsThat,IfRecognized,WouldNotAffecttheETR 233

6.24 DisclosureofLiabilitiesforUTBsintheContractualObligationsTable 234

Public Entities Not Subject to Income Taxes 234

6.25 TaxBasesinAssets 234

Entities With Separately Issued Financial Statements That Are Members of a Consolidated Tax Return 235

6.26 DisclosuresRequiredintheSeparateFinancialStatementsofaMemberofaConsolidated Tax Return 235

6.26A DisclosureRequirementsWhenAbbreviatedFinancialStatementsArePresentedina PublicFiling 236

Policy-Related Disclosures 236

Other Disclosures 237

6.27 DisclosingtheEffectsofIncomeTaxUncertaintiesinaLeveragedLease 237

SEC Staff Disclosure Guidance 238

6.27A DisclosureoftheComponentsofIncome(orLoss)BeforeIncomeTaxExpense(orBenefit) asEitherForeignorDomesticBranchesandIntra-EntityTransactions 241

Non-GAAP Measures Treatment of Tax Adjustments 243

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Chapter 7 Intraperiod Tax Allocation 246Allocation of Income Tax Expense or Benefit for the Year 246

7.01 Intraperiod Tax Allocation: General Rule 247

7.02 Intraperiod Tax Allocation: Application Level 248

Allocation to Continuing Operations 248

7.03 IntraperiodTaxAllocation:ApplicationoftheWithandWithoutRules 249

7.04 IntraperiodTaxAllocationofChangesinValuationAllowances 250

7.05 ChangesinValuationAllowancesResultingFromItemsOtherThanContinuingOperations 252

7.06 IntraperiodTaxAllocationWhenThereIsaLossFromContinuingOperationsinthe Current Period 253

7.06A Application of ASC 740-20-45-7 to Amounts Credited Directly to APIC 255

7.06B ApplicationofASC740-20-45-7toForeignCurrencyExchangeGains 256

7.07 ConsiderationofCreditEntriesforReclassificationAdjustmentsThatAreRecordedinOCI During the Reporting Period When the General Intraperiod Tax Allocation Rule Is Applied 257

7.08 Implications of the Character of Income (or Loss) When the Exception to the General Intraperiod Tax Allocation Rule Is Applied 258

7.09 Intraperiod Tax Allocation: Treatment of Certain Out-of-Period Adjustments 259

7.10 IntraperiodTaxAllocation:TaxBenefitFromaWorthlessStockDeduction 260

7.11 IntraperiodAllocationofOut-of-PeriodTaxEffectsofUTBsThatOriginatedin Discontinued Operations 261

7.12 TaxBenefitsforDividendsPaidtoShareholders:Recognition 263

7.13 Income Tax Accounting Considerations Related to When a Subsidiary Is Deconsolidated 263

7.14 Fresh-StartAccounting:SubsequentIncreaseorDecreaseinaValuationAllowance 265

7.15 SubsequentChangesinValuationAllowancesforPre-Quasi-ReorganizationTaxBenefits 265

7.16 SubsequentRecognitionofTaxBenefitsFromaQuasi-Reorganization 266

Allocations to Items Other Than Continuing Operations 266

7.17 TaxConsequencesofSecuritiesClassifiedasHeldtoMaturity,Trading,andAvailableforSale 271

7.18 AFSSecurities:MethodsofAccountingforDeferredTaxes 273

7.19 AFSSecurities:ValuationAllowanceforUnrealizedLosses 274

7.20 AFSSecurities:ValuationAllowanceChangesNotRecordedDirectlyinShareholdersEquity 274

7.21 AssessingRealizationofTaxBenefitsFromUnrealizedLossesonAFSSecurities 275

7.21A Application of ASC 740-20-45-7 to Recoveries of Losses in Accumulated OCI* 276

7.22 HoldingGainsandLossesRecognizedforBothFinancialReportingandTaxPurposes 278

7.23 TreatmentofTaxBenefitforDividendsPaidonSharesHeldbyanESOP 280

7.24 Tax Consequences of Transactions Among (and With) Shareholders 281

Chapter 8 Other Considerations or Special Areas 283Background and Scope 283

Undistributed Earnings of Subsidiaries and Corporate Joint Ventures 285

8.01 DefinitionofForeignandDomesticInvestments 285

8.02 AccountingforTemporaryDifferencesRelatedtoanInvestmentinaCorporation 287

8.03 UnremittedEarningsofaForeignSubsidiaryWhenThereIsanOverallDeductible OutsideBasisDifference 288

8.03A OutsideBasisDifferenceinaForeignSubsidiarySubpartFIncome 289

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8.03B OutsideBasisDifferenceinaForeignSubsidiaryDeferredSubpartFIncome 290

8.04 UnbornForeignTaxCredits 291

8.05 ConsiderationoftheVIEModelinASC810-10intheEvaluationofWhetherto Recognize a DTL* 293

8.06 TaxConsequencesofInvestmentsinPass-ThroughorFlow-ThroughEntities 294

8.07 Parents Deferred Tax Considerations When Intra-Entity Loans That Are of a Long-Term-InvestmentNatureAreNotDenominatedintheFunctionalCurrency 296

Equity Method Investee Considerations 297

8.08 TaxEffectsofInvestorBasisDifferencesRelatedtoEquityMethodInvestments 297

8.09 Deferred Tax Consequences of an Investment in an Equity Method Investment (a 50-Percent-or-Less-Owned Investee) 298

8.10 TaxConsequencesFromSalesofStockbyEquityMethodInvestees[Deleted] 299

8.11 PresentationofTaxEffectsofEquityinEarningsofanEquityMethodInvestee 299

8.12 NoncontrollingInterestsinPass-ThroughEntities:IncomeTaxFinancialReporting Considerations 299

8.13 AccountingfortheTaxEffectsofTransactionsWithNoncontrollingShareholders 300

8.13A AccountingforanInvestmentTaxCreditReceivedFromanInvestmentinaPartnership AccountedforUndertheEquityMethod* 302

Other Considerations Related to Foreign and Domestic Subsidiaries 304

8.14 Deferred Tax Consequences of an Investment in a More-Than-50-Percent-Owned Subsidiary* 305

8.15 Tax-FreeLiquidationorMergerofaSubsidiary 306

8.16 Exception to Deferred Taxes for an Investment in a More-Than-50-Percent-Owned DomesticSubsidiary[Deleted] 307

8.17 TaxConsequencesofBusinessCombinationsAchievedinStages:OtherTaxConsiderations 307

8.18 StateTaxConsiderationsinConnectionWiththeAssessmentofOutsideBasisDifferences UnderASC740-30-25-7 308

8.19 Realization of a DTA Related to an Investment in a Subsidiary: Deferred Income Tax Exceptions Not a Source of Income* 309

8.20 RecognitionofaDTARelatedtoaSubsidiaryClassifiedasaDiscontinuedOperation 310

8.21 ChangeinInvestmentFromaSubsidiarytoanEquityMethodInvestee 311

Exceptions to Comprehensive Recognition of Deferred Income Taxes for Outside Basis Differences 312

8.22 EvidenceNeededtoSupporttheIndefiniteReinvestmentAssertion 313

8.23 DTLforaPortionofanOutsideBasisDifference 313

8.24 AbilitytoOvercomethePresumptioninASC740-30-25-3intheFutureAfteraChangeinManagementsPlansforReinvestmentorRepatriationofForeignEarnings 314

8.25 WhetheraChangeinManagementsPlansforReinvestmentorRepatriationofForeign Earnings Is a Recognized or Nonrecognized Subsequent Event 315

Presentation and Disclosure Considerations 316

8.26 DisclosureofOutsideBasisDifferences 317

Chapter 9 Interim Reporting 318Background and Scope 318

Recognition 319

9.01 Estimating the AETR for Interim Reporting of Income Taxes 321

9.02 Tax-Exempt Interest in the Calculation of the Estimated AETR 324

9.03 ImpactofChangesinanIndefiniteReinvestmentAssertionforInterim-PeriodTaxPurposes 324

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9.04 BalanceSheetEffectsoftheInterimProvisionforIncomeTaxes 325

9.05 Interim Implications of Intraperiod Tax Allocation for Discontinued Operations When ThereIsaLossFromContinuingOperations 326

9.06 CalculatinganInterimTaxProvisionWhenaPortionofOrdinaryIncomeCannotBe Reliably Estimated* 329

9.06A Calculating an Interim Tax Provision When the AETR Is Highly Sensitive to Changes in Estimates of Ordinary Income or Loss* 330

9.07 Interim-Period Treatment of a Nonrecognized Subsequent Event With Respect to the Estimated AETR 330

9.08 Adjustments of Intraperiod Tax Allocation Made in a Prior Interim Period 330

9.09 ChangesintheValuationAllowanceinanInterimPeriod 331

9.10 Changes in Tax Laws and Rates Occurring in Interim Periods 334

9.11 InterimIncomeTaxAccountingforSignificantUnusualorInfrequentlyOccurringItems 338

Measurement 340

9.12 RecognitionoftheTaxBenefitofaLossinanInterimPeriod 346

9.13 Intraperiod Tax Allocation in Interim Periods 346

9.14 RecognizingInterestExpenseforInterim-PeriodReportingWhenInterestIsClassified as Income Tax Expense 347

9.15 ComputinganInterimTaxProvisionforanEntitySubjecttoTaxinMultipleJurisdictions 348

9.16 ImpactofZero-Tax-RateJurisdictionsandNontaxableEntitiesonanEntitysAETR 350

Presentation and Disclosure Considerations 351

Chapter 10 Share-Based Compensation 353Background and Scope 354

Recognition 354

10.01 TaxEffectsofShare-BasedCompensation 357

10.02 IncentiveStockOptions 357

10.03 NonqualifiedStockOptions 358

10.04 Change in Tax Status of an Award 358

10.05 RechargePaymentsMadebyForeignSubsidiaries* 359

10.06 Impact of Research and Development Cost-Sharing Arrangements* 360

10.07 TheEffectofUTBLiabilitiesonRealizationofExcessTaxBenefits* 361

10.08 PermanentDifferencesRelatedtoanExchangeofAwards 362

10.09 AccountingforExcessTaxBenefitsIncludedinanNOLCarryforwardAcquiredina BusinessCombination* 362

10.10 AccountingforIncomeTaxesRelatedtoCapitalizedShare-BasedPayment Compensation Cost* 363

Measurement 366

10.11 MeasuringDTAsinReferencetotheCurrentStockPrice 369

10.12 BasicIncomeTaxEffectsofShare-BasedPaymentAwards* 370

10.13 TaxEffectsofAwardsWithGradedVesting 371

10.14 RecognizingIncomeTaxEffectsonanAward-by-AwardBasis* 372

10.15 IncomeTaxEffectsofEarlyExerciseofRestrictedStockAwards 375

10.16 MeasuringtheExcessTaxBenefitAssociatedWithShare-BasedCompensation:Tax CreditsandOtherItemsThatAffecttheETR* 375

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10.17 Change in Tax Rates 376

10.18 AmountsIncludedintheExcessTaxBenefitsAvailableforOffset(APICPool) 377

10.19 RealizationofExcessTaxBenefits* 377

10.20 TaxEffectsofExpirationofaVestedAward* 379

10.21 Combining Employee and Nonemployee APIC Pools* 380

10.22 EffectofAcquisitions,Sales,Spin-Offs,andInvestmentsinEquityMethodInvesteeson the APIC Pool Parent-Company Awards* 380

10.23 ComputingtheAPICPoolinInterimFinancialStatements* 381

10.24 InterimFinancialStatementsAnticipatingtheTaxEffectsofShare-BasedPaymentAwards* 382

10.25 RecordingTaxBenefitsofAwardsGrantedBeforetheAdoptionofStatement123(R) 383

10.26 EffectontheAPICPoolWhentheFullCorrespondingDTADoesNotExistUponExercise* 384

10.27 ValuationAllowancesonExcessTaxBenefitsEstablishedBeforetheAdoptionof Statement 123(R) 387

10.28 Application of the Prospective Application Method to Nonpublic Entities APIC Pool 387

10.29 CalculatingtheAPICPoolWhenaCompanyBecomesPublicAfterAdoptingStatement123 388

Presentation Considerations 390

10.30 BalanceSheetClassificationofDTAsRelatedtoNonqualifiedStockOptions* 393

10.31 ESOP: Income Tax Accounting Example* 394

10.32 TaxBenefitofESOPDividends* 395

Earnings per Share Considerations 396

10.33 InclusionofOut-of-the-MoneyShare-BasedPaymentAwardsWithaDilutiveEffect UndertheTreasuryStockMethodBecauseofTaxBenefitDeficiencies* 396

10.34 TaxBenefitComponentofAssumedProceeds* 397

10.35 RealizationofExcessTaxBenefitsintheCalculationoftheTaxBenefitComponent of Assumed Proceeds* 398

10.36 EstimatingExpectedDisqualifyingDispositionsintheCalculationoftheTaxBenefit Component of Assumed Proceeds* 399

10.37 Earnings-per-ShareTreatmentoftheTaxBenefitsofDividendsonUnallocatedStock 400

Statement of Cash Flows 400

10.38 IncomeTaxEffectsofShare-BasedPaymentAwards* 400

10.39 TaxBenefitDeficienciesofShare-BasedPaymentAwards* 401

ASU 2016-09 FAQs 402

Chapter 11 Business Combinations 406Background and Scope 406

Recognition 407

11.01 TaxConsequencesofBusinessCombinations 409

11.01ADeterminingWhetherIncomeTaxElections,TaxPlanning,orSubsequentBusiness IntegrationStepsShouldBeIncludedintheApplicationoftheAcquisitionMethodof AccountingtoaBusinessCombination 410

11.02 RecognitionofanAcquiringEntitysTaxBenefitsNotConsideredinAcquisitionAccounting 411

11.02A Considering Whether Acquired Deferred Tax Liabilities Support the Realization of Acquired or Acquirer Deferred Tax Assets* 411

11.03 RecognitionofanAcquiringEntitysTaxBenefitsAftertheAcquisitionDate 413

11.04 AccountingforUncertaintyinIncomeTaxesinBusinessCombinations 414

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11.05 Deferred Taxes Associated With Acquired Intangible Assets 414

11.06 RecordingDeferredTaxesinaBusinessCombinationonInsideandOutside BasisDifferences 414

11.07 Accounting for the Settlement of a Preexisting Relationship 417

11.08 Reacquired Rights 418

11.09 IncomeTaxAccountingforTransactionCostsinaBusinessCombination 421

11.10 IncomeTaxAccountingforAcquisition-RelatedCostsIncurredinaPeriodBefore ConsummationofaBusinessCombination* 422

11.11 IncomeTaxAccountingforAcquisition-RelatedCostsIncurredinaBusinessCombination* 423

11.12 TaxConsequencesofBusinessCombinationsAchievedinStages:Remeasurementofthe Original Investment 425

11.13 TaxConsequencesofBusinessCombinationsAchievedinStages:OtherTaxConsiderations 427

11.14 AccountingforIncomeTaxesinaBusinessCombinationThatResultedinaBargainPurchase 429

11.15 AccountingfortheTaxEffectsofContingentEnvironmentalLiabilitiesAssumedina BusinessCombination 431

11.16 ResearchandDevelopmentAssetsAcquiredinaBusinessCombination 433

11.17 ObtainingTaxBasisStep-UpofAcquiredNetAssetsThroughPaymenttoaTaxAuthority 434

11.18 IncomeTaxAccountingforAssetsAcquiredinaBusinessCombinationThatWere Subject to an Intra-Entity Sale 434

11.19 TaxConsiderationsRelatedtoLeveragedLeasesAcquiredinaBusinessCombination 434

11.19AIncomeTaxBenefitsFromAmortizationofIntangibleAssetsinFairValueMeasurements* 435

11.20 Deferred Taxes Associated With Goodwill 436

11.21 Allocation of Tax Amortization of Goodwill 439

11.22 Deferred Taxes Associated With Goodwill in Pre-Statement 141(R) Acquisitions 440

11.23 TaxBenefitsofTax-DeductibleShare-BasedPaymentAwardsExchangedinaBusinessCombination* 443

11.23ASettlementofShare-BasedPaymentAwardsHeldbytheAcquireesEmployees 451

11.24 TaxBenefitsReceivedFromtheDisqualifyingDispositionofIncentiveStockOptions ExchangedinaBusinessCombination* 452

11.25 RevisionstoAccountingforaBusinessCombinationAftertheMeasurementPeriod 455

Measurement 457

11.26 Initial Measurement of the Income Tax Consequences of Contingent Consideration in aBusinessCombination 458

11.27 Subsequent Measurement of the Income Tax Consequences of Contingent ConsiderationinaBusinessCombination 459

11.28 ApplicableTaxRates:BusinessCombinationAccounting 462

11.29 InitialMeasurementoftheTaxEffectsofContingenciesAssumedinaBusinessCombination 463

11.30 SubsequentMeasurementoftheTaxEffectsofContingenciesAssumedina BusinessCombination 464

11.31 ImpactofIndefinite-LivedIntangibleAssetsonAccountingforIncomeTaxes[Deleted] 468

11.32 Goodwill Impairment Test Tax Considerations 468

11.33 DeterminingtheDeferredTaxEffectsofaGoodwillImpairment 470

11.34 TaxEffectsofGoodwillRemaininginaReportingUnitUponDisposalofaSubsidiary ThatWasPreviouslyIntegratedIntotheReportingUnit 473

11.35 AccountingforChangesinForfeitureEstimatesAffectingShare-BasedPaymentAwardsExchangedinaBusinessCombination 475

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Presentation and Disclosure Considerations 479

11.36 AccountingforChangesintheAcquirersandAcquireesValuationAllowancesasofand After the Consummation or Acquisition Date 480

11.37 ChangesinUncertainIncomeTaxPositionsAcquiredinaBusinessCombination 481

11.38 UncertaintyinIncomeTaxesinaBusinessCombinationMeasurementPeriod 482

Chapter 12 Foreign Currency Matters 48312.01 Price-Level-AdjustedFinancialStatements 486

12.02 Accounting for Deferred Taxes Related to Nonmonetary Assets and Liabilities When theFunctionalCurrencyIsNottheLocalCurrency 486

12.03 ChangeintheFunctionalCurrencyWhenanEconomyCeasestoBeConsidered HighlyInflationary 488

12.04 DeferredIncomeTaxEffectsWhentheFunctionalCurrencyChangesFromtheLocal Currency to the Reporting Currency 489

12.05 Accounting for Deferred Taxes Related to Monetary Assets When the Reporting CurrencyIstheFunctionalCurrency 493

12.06 DeferredTaxConsiderationsRelatedtoaForeignSubsidiaryWhenIntra-EntityLoans That Are of a Long-Term-Investment Nature Are Denominated in the Parents Currency 496

Chapter 13 Qualified Affordable Housing Project Investments 49913.01 TaxBenefitsResultingFromInvestmentsinAffordableHousingProjects(Beforethe

AdoptionofASU2014-01[Deleted] 499

13.02 TaxBenefitsResultingFromInvestmentsinAffordableHousingProjects 504

13.02ADeterminingWhetheranInvestorHastheAbilitytoExerciseSignificantInfluenceOveranEntityThatInvestsinQualifiedAffordableHousingProjects 506

13.03 ApplicabilityoftheProportionalAmortizationMethodtoaQualifiedAffordableHousingProjectInvestmentThatGeneratesOtherTaxCreditsinAdditiontoAffordableHousingCredits 507

13.04 RecognizingDeferredTaxesWhentheProportionalAmortizationMethodIsUsedto AccountforanInvestmentinaQualifiedAffordableHousingProject 508

Appendix A Implementation Guidance and Illustrations 512

Appendix B Glossary of Terms in the ASC 740 Topic and Subtopics 585

Appendix C Sample Disclosures of Income Taxes 595

Appendix D Sample SEC Comments: Income Taxes 618

Appendix E Accounting for Income Taxes Under IFRSs 642

Appendix F Glossary of Standards and Other Literature 773

Appendix G Abbreviations 780

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Preface

To our friends and clients:

Were pleased to present the 2017 edition of A Roadmap to Accounting for Income Taxes. This Roadmap provides Deloittes insights into and interpretations of the income tax accounting guidance in ASC 7401 and IFRSs2 (in Appendix E). 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 Deloittes interpretations and examples in a comprehensive, reader-friendly format. The Roadmaps organization mirrors the order of ASC740 and reflects ASUs issued through September 30, 2017. Each chapter of this publication typically starts with a brief introduction and includes excerpts from ASC 740, Deloittes 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, examples related to some of the guidance included in the previous edition have been added or substantively revised, 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 2016 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.

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 DARTs 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 AppendixF.2 For the full forms of acronyms, see Appendix G.

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https://dart.deloitte.com/

Matt Himmelman and Steve Barta supervised the overall preparation of the 2017 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 2017 edition would not have been possible without the numerous contributions of the following professionals in the Accounting Services group of Deloitte & Touche LLPs 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 BartonPeggy CullenJennifer DeSanctisKaycee DolanRachel Grandovic

Johanna KooystraKrystle KortAlice LooJonathan MargateKevin Moyers

Patrick OvertonNick Tricarichi

Teri AsaritoLynne CampbellAmy DavidsonGeri DriscollDavid FrangioneMichael LorenzoPeter McLaughlinJeanine PagliaroJoseph Renouf Lora Spickler-AlotSandy Zapata

Acknowledgments

xvii

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 mhimmelman@deloitte.com

Steve Barta Partner Deloitte & Touche LLP +1.415.783.6392 sbarta@deloitte.com

Paul Vitola Partner Deloitte Tax LLP +1.602.234.5143 pvitola@deloitte.com

Patrice Mano Partner Deloitte Tax LLP +1.415.783.6079 pmano@deloitte.com9

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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 Roadmaps 13 chapters and 7 appendixes, which includes guidance that has been amended or added to this edition. This edition does not include updates related to tax reform legislation that was recently proposed by Congress but had not been enacted before this edition was published. If a final bill is enacted, updated guidance addressing the impact of the legislations provisions on the accounting for income taxes under ASC 740 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. Updates to this chapter include the following added guidance:

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

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. Updates to this chapter include the following added and amended guidance:

o 3.02 Definition of Subsidiary and Corporate Joint Venture (amended).

o 3.15A Regulated Entities Subject to ASC 980 (added).

o 3.15B Construction in Progress and Plant in Service Recorded Net-of-Tax (added).

o 3.63A Accounting for Temporary Differences Related to Investment Tax Credits (added).

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. Updates to this chapter include the following added and amended guidance:

o 4.24 Evaluating a Deferred Tax Asset (for Realization) of a Debt Security Attributed to an Unrealized Loss Recognized in OCI (amended).

o 4.39 Going-Concern Opinion as Negative Evidence (amended).

Executive Summary

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o 4.57A Accounting for Taxable Temporary Differences Resulting From Investments in Foreign Subsidiaries and Foreign Corporate Joint Ventures in Separate Financial Statements Prepared Using the Separate Return Method (added).

o 4.57B Accounting for Income Taxes in the Balance Sheet of Separate Financial Statements: Unrecognized Tax Benefits and Current Taxes Payable or Receivable (added).

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 C, which contains comprehensive disclosure examples (discussed below).

Chapter7,IntraperiodTaxAllocation ASC 740 prescribes an accounting model, known as intraperiod tax allocation, for allocating an entitys total annual income tax provision among continuing operations and the other components of an entitys 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 7.21A Application of ASC 740-20-45-7 to Recoveries of Losses in Accumulated OCI (added).

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. Updates to this chapter include the following added and amended guidance:

o 8.05 Consideration of the VIE Model in ASC 810-10 in the Evaluation of Whether to Recognize a Deferred Tax Liability (amended).

o 8.13A Accounting for an Investment Tax Credit Received From an Investment in a Partnership Accounted for Under the Equity Method (added).

o 8.14 Deferred Tax Consequences of an Investment in a More-Than-50-Percent-Owned Subsidiary (amended).

o 8.19 Realization of a Deferred Tax Asset Related to an Investment in a Subsidiary: Deferred Income Tax Exceptions Not a Source of Income (amended).

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 entitys annual tax provision to its interim financial statements. This chapter also discusses estimating an entitys annual effective tax rate (AETR), which is determined and updated in each interim reporting period. Updates to this chapter include the following added and amended guidance:

o 9.06 Calculating an Interim Tax Provision When a Portion of Ordinary Income Cannot Be Reliably Estimated (amended).

o 9.06A Calculating an Interim Tax Provision When the Annual Effective Tax Rate Is Highly Sensitive to Changes in Estimates of Ordinary Income or Loss (added).

Chapter10,Share-BasedCompensation This chapter provides recognition, measurement, and presentation guidance on the tax effects of share-based payment awards. It also includes

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Executive Summary

guidance on interim reporting of tax effects of share-based payment awards and other related topics. Updates to this chapter include the following amended guidance:

o 10.05 Recharge Payments Made by Foreign Subsidiaries (amended).

o 10.06 Impact of Research and Development Cost-Sharing Arrangements (amended).

In addition, the amended guidance below has been updated to reflect the accounting before and after the adoption of ASU 2016-09:

o 10.07 The Effect of UTB Liabilities on Realization of Excess Tax Benefits (amended).

o 10.09 Accounting for Excess Tax Benefits Included in an NOL Carryforward Acquired in a Business Combination (amended).

o 10.10 Accounting for Income Taxes Related to Capitalized Share-Based Payment Compensation Cost (amended).

o 10.12 Basic Income Tax Effects of Share-Based Payment Awards (amended).

o 10.14 Recognizing Income Tax Effects on an Award-by-Award Basis (amended).

o 10.16 Effect on the APIC Pool When the Full Corresponding Deferred Tax Asset Does Not Exist Upon Exercise (amended).

o 10.19 Realization of Excess Tax Benefits (amended).

o 10.20 Tax Effects of Expiration of a Vested Award (amended).

o 10.21 Combining Employee and Nonemployee APIC Pools (amended).

o 10.22 Effect of Acquisitions, Sales, Spin-Offs, and Investments in Equity Method Investees on the APIC Pool Parent-Company Awards (amended).

o 10.23 Computing the APIC Pool Impact in Interim Financial Statements (amended).

o 10.24 Interim Financial Statements Anticipating the Tax Effects of Share-Based Payment Awards (amended).

o 10.26 Effect on the APIC Pool When the Full Corresponding Deferred Tax Asset Does Not Exist Upon Exercise (amended).

o 10.30 Balance Sheet Classification of Deferred Tax Assets Related to Nonqualified Stock Options (amended).

o 10.31 Employee Stock Ownership Plan: Income Tax Accounting Example (amended).

o 10.32 Tax Benefit of ESOP Dividends (amended).

o 10.33 Inclusion of Out-of-the-Money Share-Based Payment Awards With a Dilutive Effect Under the Treasury Stock Method Because of Tax Benefit Deficiencies (amended).

o 10.34 Tax Benefit Component of Assumed Proceeds (amended).

o 10.35 Realization of Excess Tax Benefits in the Calculation of the Tax Benefit Component of Assumed Proceeds (amended).

o 10.36 Estimating Expected Disqualifying Dispositions in the Calculation of the Tax Benefit Component of Assumed Proceeds (amended).

o 10.38 Presentation in the Statement of Cash Flows of the Income Tax Effects of Share-Based Payment Awards (amended).

o 10.39 Presentation in the Statement of Cash Flows of Tax Benefit Deficiencies of Share-Based Payment Awards (amended).

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Executive Summary

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 added and amended guidance:

o 11.02A Considering Whether Acquired Deferred Tax Liabilities Support the Realization of Acquired or Acquirer Deferred Tax Assets (added).

o 11.10 Income Tax Accounting for Acquisition-Related Costs Incurred in a Period Before Consummation of a Business Combination (amended).

o 11.11 Income Tax Accounting for Acquisition-Related Costs Incurred in the Period of Consummation of a Business Combination (amended).

o 11.19A Income Tax Benefits From Amortization of Intangible Assets in Fair Value Measurements (added).

In addition, the amended guidance below has been updated to reflect the accounting before and after the adoption of ASU 2016-09:

o 11.23 Tax Benefits of Tax-Deductible Share-Based Payment Awards Exchanged in a Business Combination (amended).

o 11.24 Tax Benefits Received From the Disqualifying Disposition of Incentive Stock Options Exchanged in a Business Combination (amended).

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 entitys functional currency, (2) price-level-related changes, and (3) differences between a foreign entitys 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 excerpts from the ASC 740 glossary of terms that are important to the

accounting for income taxes.

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

be particularly useful for SEC registrants.

Appendix E A comprehensive discussion of the income tax accounting guidance under IFRSs. AppendixF Glossary containing the full titles of topics, standards, and regulations used in the

Roadmap.

Appendix G Glossary containing the full forms of abbreviations used throughout the Roadmap.

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Executive Summary

Chapter 1 Overview

The accounting for income taxes under ASC 740 is sometimes very specific and can be complex. An entitys 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 entitys 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. InvestmentsEquity Method and Joint Ventures, Subtopic 323-740 b. CompensationStock Compensation, Subtopic 718-740 c. Business Combinations, Subtopic 805-740 d. Foreign Currency Matters, Subtopic 830-740 e. Reorganizations, Subtopic 852-740 f. EntertainmentCasinos, Subtopic 924-740g. Extractive ActivitiesOil and Gas, Subtopic 932-740 h. Financial ServicesDepository and Lending, Subtopic 942-740 i. Financial ServicesInsurance, Subtopic 944-740 j. Health Care Entities, Subtopic 954-740 k. Real EstateCommon Interest Realty Associations, Subtopic 972-740 l. Regulated Operations, Subtopic 980-740 m. U.S. Steamship Entities, Subtopic 995-740.

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]

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 entitys 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]

2

Chapter 1 Overview

ASC 740-10 (continued)

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 entitys 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]

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 740740-10-05 (Q&A 01)

As noted in ASC 740-10-10-1, an entitys 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 entitys 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.

3

Chapter 1 Overview

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.

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

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Chapter 1 Overview

recorded for items that will result in the inclusion of future taxable income in an entitys 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 entitys 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 periods 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 entitys 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 1 Overview

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 740s 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.

New in the 2017 Edition:

The following new guidance has been added to Chapter 2:

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

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 200906, 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 entitys domestic and foreign operations that are consolidated, combined, or accounted for by the equity method. [FAS 109, paragraph 4]

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ASC 740-10 (continued)

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 740740-10-15 (Q&A 08)

ASC 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 entitys 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 Taxes740-10-15 (Q&A 20)

In 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 ASC740 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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Chapter 2 Scope

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 entitys 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 740-10-15 (Q&A 21)

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)740-10-15 (Q&A 22)

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 investors 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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Chapter 2 Scope

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 entitys 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 Credits740-10-25 (Q&A 53)

Credits 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