From the basic principles to more advanced concepts, Lindsay Haskell and Daniel DeLau cover all things ASC 740 in their new CPE course, which includes a 10-step process for getting through the technical complexities of accounting for income taxes. Read on for additional resources to expand your ASC 740 knowledge.

ASC 740 calculations and reporting of income tax provisions requires painstaking attention to detail and expertise, which is often beyond the in-house capabilities at many public corporations and businesses looking to go public. That’s why TaxOps specialists are asked to share their technical knowledge in continuing professional education (CPE) forums.

Recently, Lindsay Haskell, Director of Corporate Tax, and Daniel DeLau, Corporate Tax Advisor, led a CPE discussion hosted by Lorman Educational Services on ASC 740. The CPE now available on-demand focuses on the tax provision compliance process as well as factors that impact financial statements.

10-steps to Compliance

ASC 740 requires companies to accurately calculate and report income tax provisions and uncertain tax positions, along with detailed footnote disclosures. The standard identifies two objectives in accounting for income taxes: one, recognize the amount of income taxes payable or refundable for the current year; and two, recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements and tax returns.

The principles of ASC 740 require a balance sheet focused approach. Calculations must be made for each entity included in the financial statements as well as for each jurisdiction in which an entity operates. TaxOps’ 10-step process for preparing a tax provision provides specific how-to details and examples on calculating current and deferred income tax, permanent and temporary differences, deferred tax assets (DTAs) and deferred tax liabilities (DTLs) (See ASC 740 Step by Step Guide).

In preparing the calculations, practitioners must identify permanent and temporary book-tax differences. The temporary differences must be individually tracked as each difference creates either a deferred tax asset (DTA) or deferred tax liability (DTL).

Changes in DTA’s and DTL’s result in deferred income tax expenses or benefits through the income statement, based on the applicable tax rate–a rate that includes state tax rate calculations adjusted for a federal benefit. The current income tax payable or receivable is also factored into the provision, based upon an estimate of taxable income (again, on an entity-by-entity basis for each jurisdiction in which the entity operates).

Uncertain Tax Positions

A comprehensive tax provision also identifies uncertain tax positions and applicable adjustments. Here, practitioners must evaluate each position reflected on tax returns filed with applicable government agencies to determine if it is more likely than not that the position will be upheld, if audited or evaluated. If not, then a liability reserve is established and updated for potential penalties and interest. For many public companies or businesses looking to go public, these calculations are some of the more intricate analyses to perform. 

Practitioners must evaluate each position reflected on tax returns filed with applicable government agencies to determine if it is more likely than not that the position will be upheld, if audited or evaluated.

Valuation Allowance

Both private and public companies must also calculate valuation allowances – mechanisms that offset a deferred tax asset – and complete various reporting tasks for financial statement footnote disclosures. ASC 740 requires that an analysis of “all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. TaxOps recommends practitioners prepare an annual memo documenting the company’s position and analysis of the need for a valuation allowance.

In Summary

TaxOps has compiled common questions we receive regarding ASC 740 into a FAQs that you can access here. Often overlooked in this complicated set of steps is the effect of state taxation on income tax provisions, transfer pricing issues, and stock-based compensation, all of which can impact provision analyses. To dig deeper, see A Closer Look at Accounting for Income Taxes. More experienced practitioners with questions regarding business combinations and changes in tax rates can attend one of our advanced Accounting for Income Tax presentations at a future date.

Interested in more ASC 740?

Take a deeper dive with how to get provisions done, step-by-step. Download ASC 740 Fundamentals.

Wondering which businesses need tax provisions and when do they need them? Access A Transaction Primer.

Tax provisions under ASC 740 are difficult to manage, but understanding how and when to report them is half the battle.

This series of articles touches on the risk inherent in managing provisions through an initial public offering or other transaction. Businesses planning to go public, and often those with equity and debt backers, must account for income taxes and provisions that can negatively impact transaction value if not thoughtfully managed ahead of time. Mistakes in this area can be costly in profits, shareholder trust, job security and business reputation. Whether growing the value of a business or planning an exit strategy, accurately measuring the tax consequences of complex transactions provides the best protection against errors and omissions that can lead to financial misstatements and transaction risk.

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