Tax considerations: the use of fair-value accounting in the U.S. has accelerated in recent years as a means of enhancing financial statement quality, transparency and relevance. With the trend toward global convergence--where fair-value measurement is even more prevalent--here are highlights of certain tax considerations.

• Author: Abahoonie, Edward
• Position: FAIR-VALUE ACCOUNTING

Elements of fair-value accounting have been used for decades in United States generally accepted accounting principles. While the growth of fair-value accounting has been incremental in the U.S., its use has accelerated in recent years as a means of enhancing financial statement quality, transparency and relevance.

An increasing variety of assets and liabilities are subject either to required or elective fair-value accounting. This trend aligns with global accounting convergence, as the use of fair-value measurement is even more prevalent in International Financial Reporting Standards.

The following highlights certain tax considerations associated with the evolution toward fair-value accounting. (A partial timeline of recent U.S. GAAP pronouncements begins on page 50.)

Effects of Tax Considerations on Fair-Value Measurements

Tax considerations can have a direct effect on the use of the income- (or discounted cash flows) valuation approach for fair-value measurements used in financial accounting.

For example, tax amortization benefits--which are the cash flows expected from tax depreciation or amortization deductions--are generally included in the assigned value of an asset acquired in a business combination and may be considered when performing tests for impairment under FAS 142 and FAS 144. Tax benefits associated with assumed liabilities are likewise to be considered.

Fair-value measurement should reflect tax amortization benefits irrespective of whether the particular owner acquired the asset in a manner that provides amortizable tax basis, or whether the owner is a tax-paying entity, and regardless of an owner's loss or credit carryforwards.

That is, the benefits are included from the viewpoint of a neutral "market participant" (or third party). Consideration may also be given to tax-planning strategies that would typically be available to a market participant.

At the same time, the tax benefits should reflect the tax laws of the jurisdiction(s) that applies to the assets or liabilities. If there are no tax benefits possible (in any circumstance) under the relevant jurisdiction's tax laws, the fair-value measurement should not include tax benefits. When the relevant tax laws provide for tax benefits, the timing and amount of tax benefit cash flow should be considered.

Also important to consider: tax laws governing purchase-price allocations in taxable business acquisitions or in certain asset exchanges may not follow applicable book principles.

There may be different valuation approaches or models that are permitted or required under the tax laws. In addition, for financial reporting purposes, goodwill impairment testing is performed on a reporting-unit basis, which typically reflects an assignment of assets and liabilities across legal entities.

An assessment of potential fair-value measurement may be needed for contingencies relating to taxes that are not based on income...