CCH Accounting for Income Taxes (2022)

Preface

About the Authors

SECTION I: INTERPRETATIONS OF TOPIC 740, INCOME TAXES

• Income Tax—Overall (740-10)
• Section 740-10-05: Overview and Background—General
• Section 740-10-10: Objectives—General
• Section 740-10-15: Scope and Scope Exceptions—General
• 740-10-15-2.A: Not-for-Profit Entities: Tax on Investment Income
• 740-10-15-2.B: Applicability of the Provisions in Subtopic 740-10 Related to Uncertain Tax Positions to Entities That Typically Are Not Taxpayers
• 740-10-15-3.A: Mexican Profit-Sharing Arrangements
• 740-10-15-3.B: Michigan Business Tax
• 740-10-15-3.C: Accounting for Investments in Affordable Housing Projects
• 740-10-15-3.D: Mexican Flat Tax
• 740-10-15-4.A: Taxes Assessed on Dividends
• 740-10-15-4.B: Texas State Franchise Tax
• 740-10-15-4.C: Attribution of Income Taxes to the Entity or Its Owners
• Section 740-10-20: Glossary
• Section 740-10-25: Recognition—General
• (Exceptions to the Basic Requirements)
• 740-10-25-3.A: Safe Harbor Leases
• 740-10-25-3.B: Identified Intangible Assets That Are Not Amortizable for Tax Purposes
• 740-10-25-3.C: Computation of Deferred Taxes Related to Identified Intangible Assets That Are Not Amortizable for Tax Purposes
• 740-10-25-3.D: Reorganization Value in Excess of Amounts Allocable to Identified Assets
• 740-10-25-3.E: Applicability of Paragraph 740-10-25-3(f) to U.S. GAAP Financial Statements of Non-U.S. Entities, Including Financial Statements of Non-U.S. Entities Operating in Highly Inflationary Economies
• 740-10-25-3.F: Nonmonetary Assets and Liabilities of Foreign Operations for Which the Local Currency Is Not the Functional Currency
• 740-10-25-3.G: Inflationary Profits Tax in Countries with Hyperinflation
• 740-10-25-3.H: Effect of a Change in an Important Assumption on the Accounting for Leveraged Leases
• 740-10-25-3.I: Distinguishing Foreign From Domestic Subsidiaries
• 740-10-25-3.J: Temporary Differences Related to CTA
• 740-10-25-3.K: Deferred Tax Accounting for "Outside Basis Differences" When a Change From Consolidation to Equity or Cost Method of Accounting Occurs
• 740-10-25-3.L: Subtopic 740-30 Exception Related to the Tax Bad Debt Reserve of a Savings and Loan Association
• 740-10-25-3.M: Scope of Subtopic 740-30 Exception Related to Investments in Foreign Subsidiaries
• 740-10-25-3.N: Monetary Restatement of Fixed Assets in Italy
• 740-10-25-3.O: Recognition of a Deferred Tax Liability for a Portion of an Outside Basis Difference
• 740-10-25-3.P: Dividends Received Deduction on the Repatriation of Certain Foreign Earnings Allowed by the 2004 Tax Act
• (Recognition Threshold for Uncertain Tax Positions)
• 740-10-25-3.Q: Intercompany Transfers of Intellectual Property
• 740-10-25-6.B: Treatment of Subsequent Events at Transition to the Provisions of Subtopic 740-10 Related to Uncertain Tax Positions
• 740-10-25-7.A: Administrative Practices and Precedents
• 740-10-25-10.A: Effectively Settled through Examination, Negotiation, or Litigation
• 740-10-25-13.A: Unit of Account
• 740-10-25-14.A: Consideration of Subsequent Events Differs From Topic 450, Contingencies
• 740-10-25-17.A: Interaction Between Net Operating Loss Carryforwards and Liabilities for Unrecognized Tax Benefits
• (Temporary Differences)
• 740-10-25-23.A: Accounting for Temporary Differences in Monetary Assets and Liabilities Caused by Changes in Currency Exchange Rates When an Entity's Functional Currency Is Different From Its Local (Tax Reporting) Currency
• 740-10-25-23.B: Identifying Temporary Differences in Tax Systems That Exclude Significant Types of Income or Expense From the Computation of the Base Amount Subject to Tax
• 740-10-25-29.A: Accounting for Temporary Differences and Carryforwards Acquired Other Than in a Business Combination
• 740-10-25-30.A: Basis Differences of Regulated Investment Companies, Cooperatives, and Similar Entities
• 740-10-25-30.B: Determining If a Basis Difference Is a Taxable Temporary Difference
• 740-10-25-30.C: Accounting for the Effects of Temporary Differences During a Tax Holiday
• 740-10-25-30.D: Accounting for the Tax Consequences of the Medicare Prescription Drug, Improvement and Modernization Act of 2003
• 740-10-25-30.E: Corporate Owned Life Insurance
• 740-10-25-30.F: Timing of Recognition of Conversion to a REIT
• (Changes in Tax Status)
• 740-10-25-32.A: Common Control Merger of Taxable and Nontaxable Entities
• (Investment Tax Credits)
• 740-10-25-46.A: Distinguishing Investment Tax Credits From Government Grants
• (Interest and Penalties)
• 740-10-25-56.A: Capitalization of Interest
• 740-10-25-56.B: Ratio of Earnings to Fixed Charges
• 740-10-25-56.C: Interest Income Related to Income Tax Uncertainties
• Section 740-10-30: Initial Measurement—General
• (Uncertain Tax Positions)
• 740-10-30-3.A: Effect of Noncontrolling Interests in Subsidiary Tax Pass-Through Entities
• 740-10-30-7.A: Example of How to Measure the Tax Benefits to Be Recognized Under Subtopic 740-10740-10-30-7.B: All Income Tax Uncertainties Need to Be Accounted for Pursuant to Subtopic 740-10
• (Applicable Tax Rates)
• 740-10-30-8.A: Losses of a Foreign Branch
• 740-10-30-8.B: State Apportionment Factors
• 740-10-30-9.A: Percentage Depletion
• 740-10-30-9.B: Small Life Insurance Entities
• 740-10-30-9.C: Canadian Crown Royalties and Resource Allowance
• 740-10-30-9.D: Effect of Changes in the Estimated Graduated Tax Rate
• 740-10-30-9.E: Measuring Deferred Taxes When Different Tax Rates Are Applied to Distributed and Undistributed Earnings
• 740-10-30-9.F: Qualified Production Activities
• (Establishment of a Valuation Allowance)
• 740-10-30-17.A: Deferred Tax Assets Resulting From OPEB Liabilities
• 740-10-30-17.B: Temporary Differences Related to Mexican Inventories
• 740-10-30-17.C: Limitations on Future Events Anticipated When Assessing the Realizability of Deferred Tax Assets
• 740-10-30-17.D: Valuation Allowance: Recognizing Impairment of Deferred Tax Assets Compared With Impairment of Long-Lived Intangible Assets
• 740-10-30-18.A: Sources of Taxable Income
• 740-10-30-18.B: AMT Credit Carryforwards and Valuation Allowances
• 740-10-30-18.C: Consideration of Deferred Tax Liabilities Related to Investments in Leveraged Leases When Assessing the Need for a Valuation Allowance for Deferred Tax Assets
• 740-10-30-18.D: Consideration of "Held-to-Maturity" Securities When Assessing the Need for a Valuation Allowance for Deferred Tax Assets
• 740-10-30-18.E: RAP/GAAP Differences for Financial Institutions
• 740-10-30-18.F: Accounting for Deferred Tax Assets Related to Available-for-Sale Debt Securities
• 740-10-30-19.A: Changing the Timing or Character of Future Taxable Income
• 740-10-30-19.B: Using the Sale of Appreciated Operating Assets as a Tax-Planning Strategy
• 740-10-30-19.C: The Effect of Uncertainty on Tax-Planning Strategies
• 740-10-30-19.D: Income Statement Classification of Direct Costs of Executing a Tax Strategy
• 740-10-30-21.A: Definition of Cumulative Losses in Recent Years
• 740-10-30-21.B: Significance of Cumulative Losses in Recent Years
• 740-10-30-21.C: Other Examples of Negative Evidence
• 740-10-30-21.D: Going-Concern Report as Negative Evidence
• 740-10-30-22.A: Appreciation in Market Value of an Asset as Positive Evidence
• 740-10-30-22.B: Forecast of Future Income as Positive Evidence
• (Separate Financial Statements of a Component of a Consolidated Group)
• 740-10-30-27.A: Allocating Taxes Among Members of the Consolidated Group
• 740-10-30-27.B: Examples of Separate Return and Pro Rata Allocation Approaches 740-10-30-27.C: Valuation Allowances in Separate Entity Financial Statements
• 740-10-30-27.D: Change in Method of Intercorporate Tax Allocation
• 740-10-30-27.E: Subpart F Income
• 740-10-30-27.F: Tax Effects of Push Down of Debt in an Acquisition
• 740-10-30-27.G: Presenting Income Taxes in Carveout Financial Statements
• 740-10-30-27.H: Presenting Income Taxes in the Separate Financial Statements of a Single Member LLC
• Section 740-10-35: Subsequent Measurement—General
• Section 740-10-40: Derecognition—General
• Section 740-10-45: Other Presentation Matters—General
• (Statement of Financial Position Classification)
• 740-10-45-4.A: Classification of Deferred Taxes Related to LIFO Inventory
• 740-10-45-5.A: Effect of a Valuation Allowance on Financial Statement Classification
• 740-10-45-9.A: Current/Noncurrent Classification of Tax Carryforwards
• 740-10-45-9.B: Presentation of Deferred Taxes Related to Intercompany Profits
• 740-10-45-11.A: Determining the Current Portion of the Liability for Unrecognized Tax Benefits
• 740-10-45-11.B: Balance Sheet Classification of Long-Term Liabilities for Unrecognized Tax Benefits
• (Change in Tax Law or Rates)
• 740-10-45-15.A: Changes in Tax Law
• 740-10-45-15.B: Effect of Tax Law Change on Current Tax Provision
• 740-10-45-15.C: Calculation of the Effect of the Increase in Corporate Tax Rates
• 740-10-45-15.D: Effect of Tax Law Changes on Items Other Than Income From Continuing Operations in the Year of the Change
• 740-10-45-15.E: Computing the Effect of the Tax Law Change on Certain Business Combinations
• 740-10-45-15.F: Presentation of Effect of Tax Law Change in the Income Statement
• 740-10-45-15.G: Accounting for Rate Regulation Implication of a Tax Rate Change
• 740-10-45-15.H: Determining the Enactment Date in Tax Jurisdictions Outside of the United States
• (Income Statement Classification of Penalties and Interest)
• 740-10-45-25.A: Changing Accounting Policies for Penalties and Interest
• Section 740-10-50: Disclosure—General
• 740-10-50-2.A: Classification of Liabilities for Tax Contingencies
• 740-10-50-2.B: Level of Detail in Determining Deductible and Taxable Temporary Differences
• 740-10-50-2.C: Disclosure of Certain Significant Risks and Uncertainties
• 740-10-50-2.D: SEC Schedule of Valuation Allowances
• 740-10-50-2.E: Additional Disclosures for SEC Registrants
• 740-10-50-6.A: Level of Detail of Types of Temporary Differences
• 740-10-50-6.B: Disclosure of Carryforwards
• 740-10-50-6.C: Direct Financing or Sales-Type Lease Temporary Differences
• 740-10-50-9.A: Interest and Penalties
• 740-10-50-9.B: Disclosure of the Effect of the Change in Tax Rates on Deferred Tax Liabilities and Assets
• 740-10-50-9.C: Disclosures Related to Tax Benefits From Share-Based Payments
• 740-10-50-12.A: Effective Tax Rate Reconciliation: Change in Valuation Allowance
• 740-10-50-12.B: Effect of Noncontrolling Interests in Subsidiary Tax Pass-Through Entities on the Effective Tax Rate Reconciliation
• 740-10-50-14.A: Disclosure of Future Taxable Income Assumptions
• 740-10-50-14.B: Disclosures Related to Safe Harbor Leases
• 740-10-50-14.C: Disclosure of the Effect of a Change in Tax Law or Rates on Leveraged Leases
• 740-10-50-15.A: Amounts Included in the Tabular Rollforward
• 740-10-50-15.B: Effective Tax Rate Disclosure
• 740-10-50-15.C: Treatment of the Federal Tax Benefit From State Tax Expense
• 740-10-50-16.A: Disclosure of Public Partnership Basis Differences
• 740-10-50-17.A: Required Disclosures in Separate Entity Financial Statements
• Section 740-10-55: Implementation Guidance and Illustrations—General
• Section 740-10-60: Relationships—General
• Section 740-10-S20: Securities and Exchange Commission Sections—Glossary
• Section 740-10-S25: Securities and Exchange Commission Sections—Recognition
• Section 740-10-S50: Securities and Exchange Commission Sections—Disclosures
• Section 740-10-S55: Securities and Exchange Commission Sections—Implementation Guidance and Illustrations
• Section 740-10-S99: Securities and Exchange Commission Sections—SEC Materials
• Income Tax—Intraperiod Tax Allocation (740-20)
• Section 740-20-05: Overview and Background—General
• Section 740-20-15: Scope and Scope Exceptions—General
• Section 740-20-20: Glossary
• Section 740-20-45: Other Presentation Matters—General
• 740-20-45-3.A: Subsequent Recognition of Tax Benefits Existing at the Date of Emerging From Bankruptcy
• 740-20-45-3.B: Order of Recognition of Pre and Post Quasi-Reorganization Tax Benefits
• 740-20-45-3.C: Tax Effects of Gains and Losses Included in Comprehensive Income but Excluded From Net Income
• 740-20-45-3.D: Tax Effects of Gains and Losses Included in Comprehensive Income but Excluded From Net Income When There Is a Change in Tax Rates or Laws
• 740-20-45-3.E: Tax Benefit Substitution
• 740-20-45-8.A: Computation of the Incremental Effect of an Item Other Than Income From Continuing Operations
• 740-20-45-8.B: Exceptions to the General Rule That the Tax Effect of an Item Other Than Income From Continuing Operations Is Computed as the Incremental Tax Effect of That Item
• 740-20-45-8.C: Intraperiod Tax Allocation of Changes in Valuation Allowances
• 740-20-45-8.D: Valuation Allowance Required Due to Spinoff
• 740-20-45-8.E: Change in Tax Basis of Assets and Liabilities as a Result of a Spinoff
• 740-20-45-8.F: Adjustments of Prior Interim Period's Intraperiod Tax Allocation
• 740-20-45-8.G: Intraperiod Tax Allocation of Changes in Valuation Allowances Due to Net Unrealized Losses on Available-for-Sale Securities
• 740-20-45-8.H: Income Statement Presentation in the Consolidated Financial Statements of a Subsidiary's Deferred Tax Assets and Liabilities When That Subsidiary Is Sold
• 740-20-45-8.I: Intraperiod Tax Allocation of Income Tax Uncertainties
• 740-20-45-8.J: Allocation of Income Taxes to a Cumulative Effect of a Change in Accounting Reflected Directly to Beginning of the Period Retained Earnings
• 740-20-45-8.K: Accounting for the Income Tax Consequences of Transactions With Noncontrolling Interest Holders
• 740-20-45-11.A: Tax Effects of Stock Issuance to Acquire an Asset
• 740-20-45-11.B: Timing of Recognition of "Excess" Tax Benefits Related to Employee Share-Based Payments
• 740-20-45-11.C: Accounting for the Tax Effects of Employee Share-Based Payments Prior to Exercise
• 740-20-45-11.D: Effect on Diluted EPS Calculation of Excess Tax Benefits or Shortfalls of Tax Benefits From Stock Plans
• 740-20-45-11.E: Transactions Among (and With) Shareholders That Have Tax Effects for the Entity
• 740-20-45-11.F: Tax Effects of Debt With Detachable Warrants
• 740-20-45-11.G: Tax Effects of an Induced Conversion of Convertible Debt
• 740-20-45-11.H: Classification in the Statement of Cash Flows of the Income Tax Benefit Realized on Exercise of a Nonqualified Employee Share Option
• 740-20-45-11.I: Incentive Stock Options and Employee Stock Purchase Plans
• 740-20-45-11.J: Accounting for the Shortfall in Tax Benefits Associated With an Equity Award
• 740-20-45-11.K: Income Tax Consequences of Issuing Convertible Debt With a Beneficial Conversion Feature
• 740-20-45-11.L: Income Tax Benefits of Dividends on Share-Based Payment Awards
• Section 740-20-55: Implementation Guidance and Illustrations—General
• Section 740-20-60: Relationships—General
• Income Tax—Other Considerations or Special Areas (740-30)
• Section 740-30-05: Overview and Background—General
• Section 740-30-15: Scope and Scope Exceptions—General
• Section 740-30-20: Glossary
• Section 740-30-25: Recognition—General
• 740-30-25-5.A: Tax Effects of Investments in Partnerships
• 740-30-25-5.B: Measurement of Deferred Tax Liabilities and Assets Related to Investments in Equity Method Investees
• 740-30-25-7.A: Excess of Financial Reporting Basis Over Tax Basis (or Vice Versa) of Investments in Subsidiaries ("Outside" Basis Differences)
• 740-30-25-7.B: Accounting for Outside Basis Differences Caused by a Subsidiary's Inside Basis Differences
• 740-30-25-7.C: Deferred Tax Accounting on Inside Basis Differences of a Subsidiary in the Consolidated Financial Statements of the Parent
• 740-30-25-7.D: Deferred Tax Accounting for Investments in Entities Consolidated Pursuant to the Variables Interest Entities Subsections of Topic 810, Consolidation
• 740-30-25-8.A: Acquisition of Noncontrolling Interest of a Subsidiary at an Amount in Excess of Book Value
• 740-30-25-9.A: Foreseeable Future
• 740-30-25-9.B Recognition of Deferred Tax Assets for a Parent Entity's Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation
• 740-30-25-9.C: Foreseeable Future and the Realization of Tax Benefits in One of Two Jurisdictions
• Section 740-30-45: Other Presentation Matters—General
• Section 740-30-50: Disclosure—General
• 740-30-50-2.A: Subtopic 740-30 Disclosure of Outside Basis Differences
• Income Tax—Interim Reporting (740-270)
• Section 740-270-05: Overview and Background—General
• Section 740-270-15: Scope and Scope Exceptions—General
• Section 740-270-20: Glossary
• Section 740-270-25: Recognition—General
• 740-270-25-7.A: Changes in Valuation Allowances During Interim Periods
• Section 740-270-30: Initial Measurement—General
• 740-270-30-4.A: Definition of Ordinary Income
• 740-270-30-6.A: Effect of Noncontrolling Interests in Subsidiary Tax Pass-Through Entities on the Estimated Annual Effective Tax Rate Used to Determine Income Tax Expense or Benefit in Interim Periods
• 740-270-30-6.B: Effect of the Purchase of a Noncontrolling Interest in Tax Pass-Through Subsidiary on the Estimated Annual Effective Tax Rate
• 740-270-30-6.C: Effect of a Business Combination on the Estimated Annual Effective Tax Rate
• 740-270-30-10.A: Items Excluded From the Estimated Annual Effective Tax Rate
• 740-270-30-18.A: Changes in a Valuation Allowance in Interim Periods Subsequent to a Quasi-Reorganization, or Fresh-Start Accounting
• 740-270-30-18.B: When to Use the Discrete Method to Recognize the Income Tax Effects of Ordinary Income
• Section 740-270-35: Subsequent Measurement—General
• Section 740-270-45: Other Presentation Matters—General
• Section 740-270-50: Disclosure—General
• Section 740-270-55: Implementation Guidance and Illustrations—General

SECTION II: FUTURE EXPECTATIONS AND PROJECTS

• Recent Developments

SECTION III: APPENDICES

• Appendix I: Interpretations of Income Tax-Related Paragraphs in Selected Other Topics
• Topic 805, Business Combinations
• Section 805-740-05: Overview and Background—General
• Section 805-740-15: Scope and Scope Exceptions—General
• Section 805-740-20: Glossary
• Section 805-740-25: Recognition—General
• 805-740-25-3.A: Reduction of Acquiring Entity's Valuation Allowance as a Result of a Business Combination
• 805-740-25-3.B: Step Acquisitions
• 805-740-25-3.C: Accounting for Preacquisition Income Tax Contingencies (and Contingencies Arising From the Acquisition)
• 805-740-25-3.D: Acquired Subtopic 740-30 Differences
• 805-740-25-3.E: Accounting for Differences Between the Financial Reporting and Tax Bases of Goodwill When Goodwill Is Amortizable for Tax Purposes
• 805-740-25-3.F: Accounting for the Tax Benefits of Share-Based Awards Issued in a Business Combination
• 805-740-25-3.G: Accounting for the Income Tax Consequences of Acquisition-Related Costs
• 805-740-25-3.H: Accounting for the Deferred Tax Consequences of Contingent Consideration Arrangements
• 805-740-25-3.I: Accounting for the Deferred Tax Consequences of Acquired Contingent Assets and Assumed Contingent Liabilities
• Section 805-740-30: Initial Measurement—General
• 805-740-30-3.A: Changes to the Acquiring Entity's Valuation Allowance During the Measurement Period
• Section 805-740-35: Subsequent Measurement—General
• Section 805-740-45: Other Presentation Matters—General
• 805-740-45-2.A: Subsequent Accounting for Effects of Changes in a Valuation Allowance Recognized as Part of the Opening Balance Sheet of an LBO Entity
• 805-740-45-2.B: Subsequent Recognition of Acquired Tax Benefits
• 805-740-45-4.A: Accounting for the Statute of Limitations Related to an Uncertain Tax Position Expiring During the Measurement Period
• Section 805-740-50: Disclosure—General
• Section 805-740-55: Implementation Guidance and Illustrations—General
• Topic 852, Reorganizations
• Section 852-740-45: Other Presentation Matters—General
• 852-740-45-3.A: Quasi-Reorganizations
• 805-740-45-3.B: Reduction in a Valuation Allowance Existing at the Time of a Quasi-Reorganization as the Result of a Business Combination
• Topic 980, Regulated Operations
• Section 980-740-25: Recognition—General
• 980-740-25-1.A: Accounting for the Tax Effects of the Equity Component of the Allowance for Funds Used During Construction
• 980-740-25-2.A: Accounting for Income Tax-Related Regulatory Assets
• Appendix II: Index of Accounting Literature Cited
• Appendix III: Sample Footnotes and Disclosures

Richard R. Petersen is a co-founder and Managing Director of Financial Reporting Advisors LLC (FRA). Based in Chicago, Illinois, FRA provides consulting services related to accounting and SEC reporting, and litigation support services.

Previously, Richard was a partner with Arthur Andersen LLP in its Professional Standards Group (PSG). In this role, he consulted with clients and engagement teams on complex financial reporting matters and authored interpretive guidance on topics, such as consolidations, income taxes, leases, and revenue recognition, for Andersen's worldwide practice. He also represented the firm before various standards setters, including the FASB, the SEC, and the AICPA.

Richard has served as the chair or member of various Emerging Issues Task Force working groups on a wide array of topics, such as consolidation, leases, income taxes, and revenue recognition. He also was a member of the AICPA Taskforce on Reorganization that developed AICPA Practice Bulletin No. 11, Accounting for Preconfirmation Contingencies in Fresh-Start Reporting. Richard is currently a member of the AICPA™'s Accounting Standards Executive Committee (AcSEC).

From 1988 to 1990, Richard was a Practice Fellow at the FASB. He was the project manager for the reconsideration of FASB Statement No. 96, Accounting for Income Taxes, and FASB Statement No. 101, Regulated Enterprises' Accounting for the Discontinuation of Application of FASB Statement No. 71. He also worked on issues related to business combinations and leveraged buyouts.

Richard received his Bachelor of Science in Business Administration from the University of Nebraska at Lincoln. He is a licensed Certified Public Accountant in Nebraska and Illinois and is a member of the AICPA and the Illinois CPA Society.