Alert: FASB Accounting Standards Update No. 2019-12 – Simplifying the Accounting for Income Taxes

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2019-12 – Simplifying the Accounting for Income Taxes

On December 18, 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12 Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. This ASU is issued as part of the FSAB’s simplification initiative aimed at reducing overall complexity in accounting standards while maintaining or improving the usefulness of information provided to users of financial statements. The ASU aims to simplify the accounting for income taxes by reducing complexities and improving the consistent application of certain requirements.

The following exceptions have been removed as a result of this ASU:

  • Exception to the incremental approach for intraperiod tax allocation, if there is a loss from continuing operations and income or a gain outside of continuing operations.
  • Exception to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
  • Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary.
  • Exception to the method of calculating interim period income tax when a year-to-date loss exceeds the anticipated loss.

The following clarifications and amendments to existing guidance have been added:

  • A requirement to recognize a franchise tax partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.
  • A requirement to evaluate whether a step-up in the tax basis of goodwill relates to a business combination or a separate transaction.
  • Clarification that an entity is not required to allocate amounts of consolidated current and deferred taxes to a legal entity (such as a single-member limited liability company)that is not subject to income tax in its separate financial statements; however, may elect to do so if the legal entity is both not subject to tax and disregarded by the taxing authority.
  • Clarification to reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
  • Minor Codification improvements related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

The amendments are effective, with early adoption permitted, as follows:

  • For public business entities, the amendments are effective in fiscal years beginning after December 15, 2020, including interim periods therein.
  • For all other entities, the amendments are effective in fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Specific transition requirements related to certain amendments are provided as follows:

  • Guidance on separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented.
  • Guidance on changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.
  • Guidance on franchise taxes partially based on income should be applied on either a full retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

All other amendments for which there is no specific application guidance should be applied on a prospective basis. Certain transition disclosures should also be provided.

To access the full script of ASU No. 2019-12, click here.

This communication contains a general overview of the topic and is current as of December 18, 2019. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person’s use of or reliance upon this material. © MNP LLP 2019. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.