A Roadmap to Accounting for Income Taxes - Deloitte

A Roadmap to Accounting for Income Taxes

2017

Other Publications in Deloitte's 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 Entity's 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)

Roadmaps on these topics will be available soon: Leases

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. 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 us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright ? 2017 Deloitte Development LLC. All rights reserved.

Contents

Prefacexvi

Acknowledgmentsxvii

Contactsxvi

Executive Summary

xviii

Chapter 1 -- Overview

1

1.01 Overview of ASC 740

3

1.02 Objectives of ASC 740

4

Chapter 2 -- Scope

6

2.01 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 Income Tax Indemnifications Upon Sale of a Subsidiary That Previously Filed a

Separate Tax Return

12

Chapter 3 -- Recognition and Derecognition

14

General Recognition Approach

14

3.01 Exceptions to Recognition of Deferred Taxes

17

3.02 Definition of Subsidiary and Corporate Joint Venture*

18

3.03 Definition of Foreign and Domestic Investments

18

3.04 Definition of "Inside" and "Outside" Basis Differences

20

3.05 Recognition of Deferred Taxes for Inside Basis Differences

21

3.06 Deferred Tax Considerations Related to Withholding Taxes Imposed on Distributions From

Disregarded Entities and Foreign Subsidiaries

21

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

23

3.08 Hedge of a Net Investment in a Foreign Subsidiary

24

3.09 Deferred Taxes Recorded Through the Currency Translation Adjustment

24

3.10 Whether a Change in Management's Plans for Reinvestment or Repatriation of Foreign

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

Undistributed Earnings

26

3.12 Tax Consequences of Bad-Debt Reserves of Thrift Institutions

26

3.13 Tax Consequences of a Reduction of the Tax Base-Year Bad-Debt Reserve in an Annual Period 29

3.14 Tax Consequences of a Reduction of the Tax Base-Year Bad-Debt Reserve in an Interim Period 30

3.15 Realization of a DTA of a Savings and Loan Association: Reversal of a Thrift's Base-Year Tax

Bad-Debt Reserve

30

3.15A Regulated Entities Subject to ASC 980*

31

3.15B Construction in Progress and Plant in Service Recorded Net-of-Tax*

31

3.16 Intra-Entity Transactions Between Different Tax-Paying Components

31

3.17 Subsequent Changes in Tax Rates Involving Intra-Entity Transactions

32

3.18 Indexing of the Tax Basis of Assets and Liabilities

33

Tax Positions

34

3.19 Consideration of Tax Positions Under ASC 740

36

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

37

3.20A Unrecognized Tax Benefits and Spin-Off Transactions

37

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

39

3.22 Recognition and Measurement -- Assumptions to Be Used

40

3.23 Decision Tree for Recognizing Benefits of a Tax Position

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 Impact of the Likelihood of the U.S. Supreme Court's Hearing the Case

43

3.27 Consideration of Widely Understood Administrative Practices and Precedents

43

3.28 Applying ASC 740 to Questions About Economic Nexus

44

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

44

3.30 Determining the Unit of Account

45

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

46

3.32 Applying the Unit of Account

46

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

Benefits of a Tax Position

47

3.34 Evaluating the Recognition Threshold After Examination of a Tax Year

48

3.35 Effectively Settled Tax Positions

48

3.36 Finality or Certainty of Outcome in Subsequent Recognition, Derecognition, or

Measurement of a Tax Position

49

3.37 New Information Obtained After the Balance Sheet Date Concerning Uncertain Tax Positions 50

3.38 Interim Accounting for a Change in Judgment

51

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

51

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

52

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

53

3.42 Deferred Tax Consequences of UTBs

55

Temporary Differences

56

3.43 Tax Bases Used in the Computation of Temporary Differences

60

3.44 Temporary Differences

60

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3.45 Income Tax Consequences of Issuing Debt With a Conversion Feature Accounted

for Separately as a Derivative

61

3.46 Income Tax Effects on Medicare Part D Subsidy Receipts

64

3.47 Recognizing Deferred Taxes for Indefinite-Lived Assets

64

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

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 Accounting for Foreign Branch Operations

70

3.51B Deferred Income Taxes Related to a Foreign Branch: Accounting for Changes in

a Parent's Deferred Taxes Due to Changes in Exchange Rates

74

Basis Differences That Are Not Temporary Differences

76

3.52 Permanent Differences

77

3.53 Examples of Basis Differences That Are Not Temporary Differences

78

Change in Tax Status

80

3.54 Change in Tax Status of an Entity

80

3.54A Tax Effects of a "Check-the-Box" Election

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 Entity's 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 Voluntary Change in Tax Status of an Acquired Entity

88

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

88

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

88

3.62 Built-in Gain: Recognition and Measurement

89

Tax Holidays

91

3.63 Tax Consequences of Tax Holidays

91

3.63A Accounting for Temporary Differences Related to Investment Tax Credits*

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

98

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

98

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

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 Interest Income on UTBs

104

3.69 Capitalization of Interest Expense

105

3.70 Recognition of the Accrual for Penalties

105

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Chapter 4 -- Measurement

General Measurement Approach 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

Applicable Tax Rate Used to Measure Deferred Taxes 4.02 Tax Rate Used in Measuring Operating Losses and Tax Credits 4.03 Determining the Applicable Tax Rate on a Loss Carryback 4.04 Measuring Deferred Taxes for Indefinite-Lived Intangible Assets When Different Tax Rates May Apply 4.05 Use of a Blended Rate to Measure Deferred Taxes 4.06 Effect of Tax Holidays on the Applicable Tax Rate 4.07 Consideration of Certain State Matters, Including Optional Future Tax Elections, in the Measurement of DTAs and DTLs 4.08 Situations in Which Determining the Applicable Tax Rate May Be Complex 4.09 Graduated Tax Rates 4.10 Measurement When Graduated Tax Rates Are a Significant Factor 4.11 Measurement When Future Tax Losses Are Expected in a Graduated Tax Rate Structure 4.12 Measurement When Phased-In Changes in Tax Rates Are Enacted 4.13 Measurement When Contingent Phased-In Changes in Tax Rates Are Enacted 4.14 Consideration of U.S. AMT Credit Carryforwards 4.15 AMT Rate Not Applicable for Measuring DTLs 4.16 Example Illustrating the Application of ASC 740 to the AMT System in the U.S. Federal Jurisdiction 4.17 Consideration of Special Deductions That Are Permitted Under the Tax Law 4.18 Measurement of Basis Differences in an Adjusted Gross Receipts Tax Regime 4.19 Deferred Tax Treatment of Hybrid Taxes 4.20 Applicability of Pushdown Accounting to Income Taxes and Foreign Currency Translation Adjustments

Establishment of a Valuation Allowance for Deferred Tax Assets 4.21 Consideration of Future Events 4.22 Sources of Taxable Income 4.23 Examples Illustrating Sources of Taxable Income 4.24 Evaluating a DTA (for Realization) of a Debt Security Attributed to an Unrealized Loss Recognized in OCI* 4.25 Determining the Pattern of Reversals of Temporary Differences 4.26 Examples Illustrating the Determination of the Pattern of Reversals of Temporary Differences 4.27 Using the Reversal of a DTL for an Indefinite-Lived Asset as a Source of Taxable Income 4.28 AMT Valuation Allowances 4.28A Assessing Realization of a DTA for Regular Tax NOL Carryforwards When an Entity Anticipates Paying AMT Perpetually 4.29 Definition of a Tax-Planning Strategy 4.30 Examples of Qualifying Tax-Planning Strategies 4.31 Examples of Nonqualifying Tax-Planning Strategies 4.32 Recognition and Measurement of a Tax-Planning Strategy

106

106

108 109 111 111

112 112 113

113 115 117 118 119 120 121 122 122

123 124 127 128

132 134 136 137 137

138 141

142 149 150

151 153 155 156 158

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4.33 The "More-Likely-Than-Not" Standard

159

4.34 Examples Illustrating the Measurement of Valuation Allowances When Tax-Planning

Strategies Are Involved

159

4.35 Determination of the Need for a Valuation Allowance Related to FTCs

163

4.36 Definition of "Cumulative Losses in Recent Years"

165

4.37 Consideration of Negative Evidence in the Determination of Whether a Valuation

Allowance Is Required

166

4.38 Cumulative Losses: An Objectively Verifiable Form of Negative Evidence

167

4.39 Going-Concern Opinion as Negative Evidence*

168

4.40 Estimates of Future Income

168

4.41 Effect of Nonrecurring Items on Estimates of Future Income

169

4.42 Example Illustrating the Estimation of Future Taxable Income When Negative Evidence

in the Form of Cumulative Losses Exists

170

4.43 Positive Evidence Considered in the Determination of Whether a Valuation Allowance

Is Required

172

4.44 Additional Examples of Objectively Verifiable Positive Evidence

173

4.45 Example Illustrating the Determination of a Valuation Allowance When It Is More Likely

Than Not That a Portion of Existing Tax Benefits Will Not Be Realized

174

4.46 Reduction of a Valuation Allowance When Negative Evidence Is No Longer Present

176

4.47 Valuation Allowances: Time Frame for Assessing Future Taxable Income

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 Subsidiary Financial Statements [Deleted]

179

4.49 Acceptable Methods of Allocating Tax to Separate Financial Statements

179

4.50 Preferable Allocation Method for Public Entities

183

4.51 Change in Application of Tax Allocation Methods

183

4.52 Valuation Allowance in the Separate Financial Statements of a Consolidated Group Member 183

4.52A Accounting for Income Taxes in the Balance Sheet of Separate Financial Statements:

DTAs Related to Tax Attributes

184

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

Financial Reporting Purposes

186

4.54 Reporting Acquisition Debt in Separate Financial Statements

187

4.55 Tax Benefit of the Deductible Interest in the Separate Financial Statements

188

4.56 Application of the Separate Return Method in Combined or Carve-Out Financial

Statements of Multiple Legal Entities, Multiple Divisions, or Both

188

4.57 Allocating Income Taxes to Nonmembers in Carve-Out Financial Statements

189

4.57A Accounting for Taxable Temporary Differences Resulting From Investments in Foreign

Subsidiaries and Foreign Corporate Joint Ventures in Separate Financial Statements

Prepared by Using the Separate Return Method*

190

4.57B Accounting for Income Taxes in the Balance Sheet of Separate Financial Statements:

Unrecognized Tax Benefits and Current Taxes Payable or Receivable*

192

4.58 Disclosure Requirements When an Unincorporated Division's Statement of Revenues and

Expenses Is Presented in a Public Filing [Deleted]

193

4.59 Single Member LLC Tax Allocation

193

4.60 Change From Single Member LLC to Multiple Member LLC (or Vice Versa)

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 Use of Aggregation and Offsetting in Measuring a Tax Position

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-Probability Approach Versus Best Estimate

196

4.67 Example Illustrating the Measurement of the Benefit of an Uncertain Tax Position

197

4.68 Measurement of Tax Positions That Are Considered Binary

197

4.69 Uncertainty in Deduction Timing

198

4.70 Measurement of Uncertain Tax Positions in Transfer Pricing Arrangements

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

Lieu of Claiming the Benefit in the Future

203

Deferred Credit Arising From Asset Acquisitions That Are Not Business Combinations

204

Chapter 5 -- Presentation

205

Statement of Financial Position Classification of Income Tax Accounts

205

5.01 Current/Noncurrent Classification of DTLs and DTAs

208

5.02 Presentation of Deferred Federal Income Taxes Associated With Deferred State

Income Taxes

208

5.03 Recognition of Changes in Indemnification Assets Under a Tax Indemnification Arrangement 209

5.04 Valuation Allowance: Classification in a Classified Balance Sheet

210

5.05 Accounting for the Tax Effects of a Change in Tax Accounting Method

212

5.06 Balance Sheet Classification of the Liability for UTBs

213

5.07 Financial Statement Display of Future Obligations to Tax Authorities Under

Regulation S-X, Rule 5-02

214

5.08 Interaction of UTBs and Tax Attributes

214

5.09 Balance Sheet Presentation of UTBs Resulting From Transfer Pricing Arrangements

215

5.10 Presentation of Professional Fees

216

Income Statement Presentation of Certain Measurement Changes to Income Tax Accounts

217

Income Statement Classification of Interest and Penalties

218

5.11 Classification of Interest and Penalties in the Financial Statements

218

Investment Tax Credits Under the Deferral Method

219

Chapter 6 -- Disclosure

Statement of Financial Position-Related Disclosures 6.01 Required Level of Detail 6.02 Definition of "Significant" With Respect to Disclosing the Tax Effect of Each Type of Temporary Difference and Carryforward That Gives Rise to DTAs and DTLs 6.03 Disclosure of Worthless Tax Benefits 6.04 Change in Tax Status to Taxable: Financial Reporting Considerations

220

220 221

221 221 222

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