The Financial Accounting Standards Board acknowledged Tuesday that a 1992 standard on accounting for income taxes did little to simplify the accounting.
The admission came in response to a recent post-implementation review of the standard by FASB’s parent organization, the Financial Accounting Foundation (see Accounting for Income Taxes Standard Didn’t Make the Accounting Any Easier). The review focused on FASB Statement No. 109, Accounting for Income Taxes, (codified in Accounting Standards Codification Topic 740, Income Taxes). The standard requires organizations that prepare U.S. GAAP financial statements to recognize the amount of taxes payable or refundable for the current year, along with the deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the organization’s financial statements or tax returns.
In a written response to the report, FASB acknowledged the findings that Statement 109 adequately resolved the issues underlying its stated need but that Statement 109 may not have reduced complexity associated with accounting for income taxes. Specifically, FASB admitted that preparers and auditors find certain aspects of Statement 109 to be operationally challenging, including intraperiod tax allocation, intercompany transfer of assets, and situations in which a deferred tax liability is not recognized for temporary differences related to earnings determined to be indefinitely reinvested in foreign subsidiaries.
“The FASB understands there is complexity in the accounting for income taxes for a U.S. entity that operates in multiple jurisdictions and has foreign earnings that are indefinitely reinvested,” wrote FASB chairman Russell Golden.
FASB also acknowledged the finding that, while information resulting from the application of Statement 109 provides investors with decision-useful information, the information may not be detailed enough for users to analyze the cash flows associated with income taxes and to analyze earnings determined to be indefinitely reinvested in foreign subsidiaries.
FASB said it would continue to analyze the findings in the report, including asking for feedback from financial statement users, preparers, auditors and others in order to understand their specific concerns and determine whether there are any cost-effective solutions to address them. FASB also plans to find out more about where they see the priority of addressing those concerns compared to other projects it could undertake to enhance U.S. GAAP.
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