The Internal Revenue Service has issued a notice asking for comments on the effect of the new revenue recognition standards on taxpayers’ methods of tax accounting.
Last year, the Financial Accounting Standards Board and the International Accounting Standards Board agreed on a long-awaited converged standard on revenue recognition. The new standard was originally set to take effect in 2017, but both boards are proposing to defer the effective date until 2018 to give companies more time to adjust.
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The IRS noted that the new standards for the timing of income for financial accounting purposes may affect the timing of income for tax accounting purposes for many taxpayers, such as taxpayers presently using the percentage of completion method, deriving income from the provision of services, engaging in bill and hold transactions for the sale of goods, accounting for sales and returns of goods, and earning income from warranties. In addition, the IRS pointed out that the new standards may affect some industries more than others. Commenters on the new standards have noted that the software, entertainment, manufacturing, and construction industries may be particularly affected because the new standards may change the timing of income recognition for financial accounting purposes significantly for these industries.
Accounting method changes for federal income tax purposes require the permission of the IRS, the IRS observed, and the new revenue recognition standards raise a number of substantive and procedural issues for the IRS, including whether the new standards are permissible methods of accounting for federal income tax purposes, the types of accounting method change requests that will result from adopting the new standards, and whether the current procedures for obtaining IRS consent to change a method of accounting are adequate to accommodate those requests.
Adoption of the new standards might also create or increase differences between financial accounting and tax accounting rules. The Treasury Department and the IRS are considering whether to issue guidance on the new standards and are requesting public comments on the scope, substance and form of guidance needed.
