IT2013_1069_ExecSum_v1_P1_6-13

Executive Summary


Change: The one constant

Benjamin Franklin once said that nothing in this world is certain but death and taxes. Had he been able to anticipate this century’s standard-setting activity, he might have phrased things somewhat differently. Nowadays, the only certainty about taxes is that things will change.

Complexity

Already complex, accounting for income taxes will become even more so as a result of new and forthcoming guidance here in the United States. The accounting model for income taxes has been around for some time—a fact that suggests companies have had sufficient time to fully acclimate themselves to the standard’s provisions. In the intervening years, however, the overall business environment has grown decidedly more complex. So too has accounting under U.S. generally accepted accounting principles (GAAP). The way that governments (local, federal and foreign) levy taxes is also more complex now. These factors have made the interpretation of the accounting model for income taxes particularly challenging.

Complications

Where there is complexity, there is the greater likelihood of complications. In recent years, controls around the accounting for income taxes have been a critical source of material weakness in companies’ internal controls over financial reporting. Accounting for income taxes has also been a primary reason for restating financial statements.

Further complications may arise as U.S. GAAP begins to converge with International Financial Reporting Standards (IFRS). While the Securities and Exchange Commission (SEC) ponders whether it will allow U.S. companies to file financial statements prepared under IFRS, many practitioners will want to become familiar with the similarities and differences between the two frameworks.

How this guide helps

We have kept these factors very much in mind while writing this guide. Intended as a practice aid for PwC engagement teams and other parties, this guide serves as a central location for the following information:

  • A comprehensive summary of ASC 740
  • PwC’s interpretation of that literature
  • PwC’s insights on accounting matters related to income taxes

In reading this guide, it is important to remember that under ASC 740, as under any principles-based standard, facts and circumstances particular to a given situation must be considered in reaching an accounting conclusion (or might lead to more than one supportable conclusion). We hope it is with this understanding that our readers will use this guide.

How this guide is organized

The beginning chapters address the following matters:

  • The basic model of ASC 740 (e.g., the scope, objectives, and basic principles)
  • Identification of temporary differences
  • Recognition and measurement of deferred tax assets and liabilities
  • The guide then moves on to some of the more complex areas of tax accounting:
  • Establishment of a valuation allowance
  • Accounting for changes in tax laws and tax status
  • Business combinations
  • Temporary differences on outside basis
  • Intraperiod allocation

The final chapters of the guide deal with the following issues:

  • Disclosure
  • Separate financial statements of a subsidiary
  • Interim reporting
  • Tax accounting for stock-based compensation
  • Accounting for uncertainty in income taxes
  • Summary of differences in accounting for income taxes between U.S. GAAP and IFRS

As noted, this guide includes chapters on business combinations and stock-based compensation. The income tax aspects of those topics are included in our guide because they apply to most companies. Please also refer to PwC’s A Global Guide to Accounting for Business Combinations and Noncontrolling Interests and PwC’s Guide to Stock-based Compensation for broader information on those topics. The income tax aspects for regulated entities and bankruptcies are simply cross-referenced to PwC’s Guide to Accounting by Utilities and Power Companies and PwC’s Guide to Accounting for Bankruptcies and Liquidations, as those topics are applicable to a much more limited group of companies.

As the environment continues to change, so will the content in this guide. This guide considers existing guidance as of May 31, 2013. Future editions will be released to keep pace with significant developments. Subsequent editions will also provide practitioners with guidance on navigating the many complexities of accounting for income taxes, which we believe (with the same conviction that Franklin had about death and taxes) will only keep proliferating.