Indefinite-lived assets in tax provision.

• Author: Castellon, Mario

One of the basic principles of Statement of Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes, is the recognition of deferred tax liabilities for the estimated future tax liability of events recorded in a company's financial statements or tax returns (FAS 109, ~6; Accounting Standards Codification (ASC) ~740-10-10-1 (note that the Financial Accounting Standards have been codifed by FASB; FAS 109 has mostly been codified in ASC topic 740)). Deferred tax liabilities typically consist of installment payments, accelerated depreciation, and other temporary book-to-tax differences resulting in future taxable income. Such deferred tax liabilities typically have measurable and defined periods of time in which the company will or could incur future taxable income and a related tax liability. The assumption that liabilities will be settled is an inherent assumption of financial statements prepared in accordance with generally accepted accounting principles (FAS 109, [paragraph] 11; ASC [paragraph] 740-10-25-20).

Deferred tax liabilities are a consideration in the analysis of whether to apply a valuation allowance because taxable temporary differences may be used as a source of taxable income to support the realization of deferred tax assets. The taxable temporary differences and future taxable income from operations provide a primary basis for support in determining whether to maintain a full or partial valuation allowance (FAS 109, [paragraph] 21; ASC [paragraph] 740-10-30-18).

Although taxable temporary differences are typically used to support realization of deferred tax assets, an anomaly may occur when the source of the taxable temporary difference is an asset with an indefinite useful life--for example, goodwill, trademarks, logos, and other indefinite-lived intangibles. Unlike temporary taxable differences, indefinite useful life intangible assets have no measurable or defined periods of time in which the asset will expire. At some indefinite future time, these assets will be sold or perhaps written off. Until such an event occurs, the asset remains on the books of the company with a related deferred tax liability resulting from book over tax basis or amortization expense. This is commonly referred to as a "naked credit."

These naked credits create a problem because a primary characteristic of a liability is that it represents a present responsibility to an entity that entails settlement at a specific or determinable...