Accounting for Income Taxes-Applying SFAS No. 109/FIN 48: A Whole New Ballgame!

• Chapter 0 - Overview
• Chapter 1 - Theoretical Concepts of FASB ASC 740 (SFAS No. 109)
  • Learning Objectives
  • Overview
  • FASB ASC 740 (SFAS No. 109)
    • Scope of FASB ASC 740 (SFAS No. 109)
    • Objectives and Basic Principles
  • Temporary Differences
    • Recognition and Measurement
    • Annual Computation of Deferred Tax Liabilities and Assets
    • Applicable Tax Rate
  • Sources of Taxable Income
  • Tax-Planning Strategies
  • Determination of the Valuation Allowance
    • Changes in the Valuation Allowance
  • Changes in Tax Laws or Rates
    • Emerging Issue Task Force Consensus Opinion
  • Change in the Tax Status of a Company
    • Nontaxable to Taxable
    • Taxable to Nontaxable
    • Date of Recognition
    • C Corporation to S Corporation
  • FIN 48 – Accounting for Uncertainty in Income Taxes – An Interpretation of FASB ASC 740 (SFAS Statement No. 109)
    • Objective and Rationale
    • Scope
    • Initial Recognition
    • Subsequent Recognition and Measurement and Changes in Judgment
    • Measurement
    • Disclosures
    • Interest and Penalties
  • APB Opinion No. 23 and U.S. Steamship Enterprise
    • Temporary Differences
  • Intraperiod Tax Allocation
  • Financial Statement Presentation
    • Financial Statement Disclosure
  • Effective Date and Transition
  • Provisions of FASB ASC 740 (SFAS No. 109) – Summary Chart
  • Questions
• Chapter 2 - Concept of Temporary Differences
  • Learning Objectives
  • Differences in Tax Accounting and Financial Accounting
  • Differences That Do Not Have Tax Consequences
  • Identifying and Measuring Temporary Differences
    • Taxable and Deductible Temporary Differences
    • Types of Temporary Differences
    • Identifying Temporary Differences
    • Offset of Taxable and Deductible Amounts
    • Pattern of Taxable or Deductible Amounts
  • Questions
  • Case Studies
    • Case 2-1
    • Case 2-2
    • Case 2-3
    • Case 2-4
• Chapter 3 - FASB ASC 740 (SFAS No. 109) – Accounting Procedures and a Four-Column Worksheet to Help Meet Reporting and Disclosure Requirements
  • Learning Objectives
  • Operating Loss Carryforwards
    • Tax Credit Carryforwards
    • AMT Tax Credit Carryforwards
  • Tax Planning Strategies
    • Net of Significant Expenses
    • Illustration of a Tax-Planning Strategy
  • Determination of the Valuation Allowance
    • Determining the Need for a Valuation Allowance
    • Auditing Considerations of Deferred Tax Assets and Liabilities under FIN 48
    • Tax Accounting and Tax Internal Controls (SOX 404)
  • Recognition of Tax Benefits for Carrybacks and Carryforwards
  • Computation Worksheet to Meet Reporting and Disclosure Requirements of FASB ASC 740 (SFAS No. 109)
    • Steps to Complete the Worksheet for FASB ASC 740 (SFAS No. 109)
    • Worksheet for FASB ASC 740 (SFAS No. 109)
    • Applicable Tax Rate
    • Average Tax Rate
  • Case Studies
    • Case 3-1
    • Case 3-2
• Chapter 4 - Accounting for Uncertainty in Income Taxes under FIN 48
  • Learning Objectives
  • Aggressive Tax Positions
    • FASB ASC 450 (SFAS No. 5) Treatment of Uncertain Tax Positions
  • Accounting for Uncertainty in Income Taxes
    • Objective and Rationale
    • Scope
    • Tax Position
    • Initial Recognition
    • Uncertain Tax Position (FIN 48) Liability versus Deferred Tax Asset or Liability
    • Unit of Account
    • Financial and Tax Auditing Considerations under FIN 48
    • Independence Impact of Providing Uncertain Tax Position (FIN 48) Services to on Attest Client . 4-12 Subsequent Recognition and Measurement and Changes in Judgment
    • FSP FIN 48-1, Definition of Settlement in FASB Interpretation 48
    • More-Likely-Than-Not Level of Confidence
    • Derecognition
    • Measurement
    • Classification
    • Disclosures
    • Uncertain Tax Position (FIN 48) Disclosures Considered Tax Accrual Workpapers
    • Interest and Penalties
    • Transition and Effective Date
    • Deferral of Effective Date for Nonpublic Entities
    • Implications of Adopting FIN 48
  • Questions
  • Case Studies
    • Case 4-1
    • Case 4-2
• Chapter 5 - Reporting and Disclosure under FASB ASC 740 (SFAS No. 109) – Theory and Examples
  • Learning Objectives
  • Financial Statement Disclosure
  • Separately Issued Financial Statements
    • Disclosure of Items Not Recognized
  • Components of Income Tax Expense
    • Methods of Separate Disclosure
  • Financial Statement Presentation
  • Disclosure Requirements
    • Illustrative Footnote
  • FIN 48 – Required Disclosures for Uncertainty in Income Taxes
    • Year-End FIN 48-Related Disclosures Required, Even If You Are Deferring Application
    • SEC Position on Interim Period Disclosures
    • Illustrative Disclosures
  • Illustrations – Financial Statement Disclosures
  • Questions
• Chapter 6 - Advanced Applications of FASB ASC 740 (SFAS No. 109)
  • Learning Objectives
  • Worksheet Adapted to Track Four Deferred Tax Accounts
    • Worksheet for FASB ASC 740 (SFAS No. 109) – Four Deferred Tax Accounts
    • Application of FASB ASC 740 (SFAS No. 109) with Four Deferred Tax Accounts
  • Special Deductions
  • FASB ASC 740 (SFAS No. 109) Applied to Provisions in the American Jobs Creation Act (AJCA) of 2004
    • Tax Deduction Provided to U.S.-Based Manufacturers
  • Recent and Commonly Applied SFAS Pronouncements with Deferred Tax Implications
    • Accounting for Share-Based Payment
    • Accounting for Asset Retirement Obligations
    • Impairment of Long-Lived Assets
    • Fair Value Measurements
  • Questions
  • Case Studies
    • Case 6-1
    • Case 6-2
• Chapter 7 - Accounting for Acquired Temporary Differences in Business Combinations and Other Purchase Transactions
  • Learning Objectives
  • Business Combinations and Noncontrolling Interests Statements Issued
    • Business Combinations
  • Intercompany Transfer of Assets Subsequent to Acquisition
    • Temporary Difference Not Recognized
  • Deferred Tax Accounting and Business Combinations
    • Nontaxable Business Combinations
    • Taxable Business Combinations
    • Nontaxable or Taxable Acquisition Business Combinations
    • EITF Issue 02-13 (FASB ASC 350-20-35 and 55) – Deferred Income Tax Consequences in Applying the Goodwill Impairment Test in FASB ASC 350 (FASB Statement No. 142)
  • Tax Deductible Goodwill
  • Operating Loss and Tax Credit Carryforwards for Business Combinations
    • Acquiring Company’s Deferred Tax Asset
    • Criteria for Recognition of a Carryforward
    • Subsequent Recognition of Carryforward Benefits
  • Deferred Tax Recognition for Discontinued Subsidiaries
    • Emerging Issue Task Force Consensus Opinion
  • Case Studies
    • Case 7-1
    • Case 7-2
    • Case 7-3
    • Case 7-4
• Chapter 8 - FASB ASC 740-20 (SFAS No. 109) – Intraperiod Tax Allocation
  • Learning Objectives
  • Introduction
  • Allocation to Continuing Operations
  • Direct Adjustments to Shareholders' Equity
  • Tax Benefit of Operating Loss Carryforward or Carryback
  • Interest and Penalties
  • Intraperiod Tax Allocation under FASB ASC 740 (SFAS No. 109) – General Considerations
    • Items Requiring Intraperiod Tax Allocation
    • Total Tax Expense – Intraperiod Tax Allocation
    • Graduated Tax Rates
    • Deferred Tax Expense – Intraperiod Tax Allocation
  • Steps to Allocate Total Tax Expense
  • Summary
  • Case Studies
    • Case 8-1
    • Case 8-2
• Chapter 9 - Latest Developments

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Chapter 1 Theoretical Concepts of FASB ASC 740 (SFAS No. 109)

Learning Objectives

• Understand the scope, objectives, and basic principles of FASB ASC 740 (SFAS No. 109).

• Review recognition and measurement of deferred taxes under FASB ASC 740 (SFAS No. 109 and FIN 48).

• Be aware of sources of future taxable income for recognition of a deferred tax asset.

• Be aware of tax-planning strategies.

• Review provisions of FASB ASC 740 (SFAS No. 109) – Summary Chart.

Overview

In today’s reporting environment, it is important for the professional accountant to accurately and efficiently report the results of a company’s operation. A practical application worksheet approach is utilized that will aid in this process. There is no other area in accounting that is as far reaching, and requires knowledge of as vast a number of topics in financial and tax accounting, as accounting for deferred taxes. This course addresses the application of this complex standard to many common differences between financial accounting and tax compliance.

The Sarbanes-Oxley Act requires senior executives to attest to the extent and effectiveness of internal controls for financial reporting. The controls surrounding the tax function are a critical component of this compliance. Controls should be in place to provide timely and accurate information for all required data that is the basis for properly measuring a firm’s deferred tax asset or liability and properly reporting this information in the financial statements.

A lack of controls surrounding the tax function and specifically the tax provision determination process has resulted in this area being one of the top control deficiencies reported by auditors of public companies. In response to this situation and recent tax shelter abuses and other aggressive tax positions, the FASB issued FIN 48 requiring specific recognition, measurement, and discloses with regard to uncertain tax positions. Those requirements will very likely substantially change the tax provision calculation and documentation process and the audit work performed by external auditors, including members of the firms’ tax teams. Tax team members will also now need a thorough understanding of FASB ASC 740 (SFAS No. 109 and FIN 48).

A participant taking this course will gain a sound knowledge of the theory of deferred taxes and how this theory can then be applied to practical situations. Many practical examples are included to illustrate the theory and the information is presented in such a way that participants will be able to apply this theory to any other situation that they may encounter, even though it may not be specifically covered by an example in the materials.

FASB ASC 740 (SFAS No. 109)

This statement addresses financial accounting and reporting for the effects of income taxes that result from a company's activities during the current and preceding year.

• Provides a balance sheet approach to computation of deferred tax assets and liabilities.

• Superseded SFAS No. 96, Accounting for Income Taxes, which superseded APB Opinion No. 11, Accounting for Income Taxes.

Prior to implementation of FASB ASC 740 (SFAS No. 109), a company had two choices to account for deferred income taxes. They could have followed APB Opinion No. 11, which was based on a comprehensive deferred approach from an income statement viewpoint. As an alternative, some firms were early adopters of SFAS No. 96, which was a balance sheet approach.

Scope of FASB ASC 740 (SFAS No. 109)

FASB ASC 740 (SFAS No. 109) established standards of financial accounting and reporting for income taxes that are currently payable and for the tax consequences of

• Reporting of gains, revenues, losses, and expenses in taxable income in an earlier or later accounting period than recognized in financial income.

• Events other than differences in income that create differences in tax accounting and financial accounting bases of assets and liabilities.

• Operating loss or tax credit carrybacks for refunds of taxes paid in prior years and carryforwards to reduce taxes payable in future years.

The principles and requirements of FASB ASC 740 (SFAS No. 109) are applicable to

• Domestic federal (national) income taxes and foreign, state, and local (including franchise) taxes based on income.

– For example, Texas has a Margin Tax that is based on the lower of (a) total revenue less cost of goods sold, (b) total revenue less employee compensation and benefits (not including payroll taxes), or (c) 70% of revenue. While this may not be an income tax under State law, it is an income tax for purposes of FASB ASC 740 (SFAS No. 109). Also, Michigan has a Michigan Business Tax that specifically states that it is not an income tax, but is still considered an income tax under FASB ASC 740 (SFAS No. 109).

• A company's domestic and foreign operations that are consolidated, combined, or accounted for by the equity method.

• Foreign enterprises in preparing financial statements in accordance with U.S. generally accepted accounting principles.

FASB ASC 740 (SFAS No. 109) does not address

• Basic methods of accounting for any investment tax credits.

• Discounting.

• Accounting for income taxes in interim periods, except for

– Criteria for recognition of tax benefits.

– Effect of changes in tax laws or rates.

– Changes in valuation allowances.

The purpose of this standard was to

• Change the criteria for recognition and measurement of deferred tax assets and various other requirements of SFAS No. 96 and

• Reduce complexity.

Objectives and Basic Principles

The objectives of this Statement are to

• Recognize the amount of taxes payable or refundable for the current year.

• Recognize deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns.

The basic principles are as follows:

• A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year.

• A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The currently enacted marginal tax rate will be used to estimate the tax effects unless graduated tax rates are a significant factor. If graduated tax rates are a significant factor, then the average tax rate will be used.

• The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.

• The measurement of deferred tax assets is adjusted to the amount that is expected to be realized based on available evidence at the measurement date.

Exceptions to the basic principles above are as follows:

• Some special areas addressed by APB Opinion No. 23; these will be discussed later.

• Special transitional procedures for temporary differences related to deposits in statutory reserve funds by U.S. steamship enterprises.

• Does not address accounting for leveraged leases.

• Prohibits recognition of a deferred tax liability or asset related to goodwill for which amortization is not deductible for tax purposes.

• Does not address accounting for income taxes paid on intercompany profits on assets remaining within the group and prohibits recognition of a deferred tax asset for the difference between the tax basis of the assets in the buyer's tax jurisdiction and their cost as reported in the consolidated financial statements (FASB ASC 810 – ARB No. 51, Consolidated Financial Statements).

• Prohibits recognition of a deferred tax liability or asset for differences related to assets and liabilities that are remeasured from the local currency into the functional currency using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes (FASB ASC 830 – SFAS No. 52, Foreign Currency Translation).

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