A post-implementation review of a 1992 accounting standard addressing the accounting for income taxes found that the standard generally achieved its intended purpose, but may not have reduced the complexity of accounting for income taxes.

FASB Statement No. 109, Accounting for Income Taxes, requires companies to recognize the estimated amount of taxes payable or refundable for the current year. It also requires companies to recognize deferred tax liabilities and assets for future tax consequences of events that have been recognized in a company’s financial statements or tax returns. Statement 109 applies to public and private companies.

A post-implementation review team formed by the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board, found that Statement 109 adequately resolved the issues underlying its stated need but may not have reduced the complexity of accounting for income taxes. However, it is not clear whether the complexity is a result of Statement 109’s requirements, factors occurring after the issuance of Statement 109 (such as significant changes in the business environment and tax laws, along with increased foreign operations by U.S. companies), or both.

Information resulting from the application of Statement 109 provides investors with decision-useful information, the team acknowledged, although certain income tax information may not be sufficiently aligned with investor needs. For example, income tax information may not be detailed enough for users to analyze the cash effects associated with income taxes, particularly current-period taxes paid by jurisdiction (such as U.S. or foreign), estimate future tax payments and analyze earnings determined to be indefinitely reinvested in foreign subsidiaries.

Most of Statement 109’s requirements are understandable, can be applied as intended, and enable income tax information to be reported reliably, the team acknowledged. But there are a number of aspects of income tax accounting that remain challenging for stakeholders: intra-period tax allocations, accounting for intercompany transfers of assets, and accounting for earnings determined to be indefinitely reinvested in foreign subsidiaries and the related disclosures.

[IMGCAP(1)]There are significant ongoing costs to comply with Statement 109, however. Some of those costs relate to factors arising after the issuance of Statement 109, including the introduction of the Sarbanes-Oxley Act of 2002 and an increase in the complexity of business transactions, U.S. and foreign tax laws, and business conducted in foreign jurisdictions by U.S. companies.

“The post-implementation review report on Statement 109 identified many positive aspects of the income tax standard, including its decision-usefulness to users and understandability for preparers,” FASB chairman Russell G. Golden said in a statement. “Stakeholders have indicated that income tax accounting remains complex, and we are eager to consider the PIR team’s findings. We anticipate providing our initial response in the coming weeks.”

Statement 109 did not result in any significant changes in operating or financial reporting practices, nor did it have any significant unanticipated consequences.

The post-implementation review team had no significant standard-setting process recommendations as a result of the review. 

The review of Statement 109 was undertaken by an independent team of the Financial Accounting Foundation, the parent organization of both FASB and the Governmental Accounting Standards Board. The team received input for its review from investors and other financial statement users, as well as from preparers, auditors and academics. The team’s formal report is available here.

[IMGCAP(2)]“On behalf of the FAF and the FASB, I’d like to thank the stakeholders who helped the PIR team assess the application, usefulness, and effectiveness of the income tax standard for public and private companies,” FAF president and CEO Teresa S. Polley said in a statement.

With the completion of the FAS 109 review, the PIR team has begun a review of FASB Statement No. 123(R), Share-Based Payment. The PIR team plans to begin a review of FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, after completing a review of FASB Statement No. 157, Fair Value Measurements, early next year. The PIR team will also initiate a review of GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and related GASB Statement No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues, after completing their review of GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, next year.

People who would like the opportunity to participate in upcoming PIR surveys, conducted by an independent survey firm on behalf of the Financial Accounting Foundation, should register online. For more information on the PIR process, visit the FAF’s Web site.

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