The FASB revisits Statement 96, Accounting for Income Taxes.

• Author: Herdman, Robert K.
• Position: Financial Accounting Standards Board

The FASB revisits Statement 96, Accounting for Income Taxes

The long road of Statement 96 isn't nearing its end yet, and roadblocks keep popping up. Is the FASB finally following the same map that Corporate America is? When initially adopted in December 1987, FASB Statement 96, Accounting for Income Taxes, was to have become effective in the first quarter of calendar 1989. After much controversy and two postponing "amendments" (mandatory adoption is now scheduled for 1992), the Board is still actively considering the two aspects of the standard that led two Board members to dissent to its issuance--the recognition of deferred tax assets and the complexity of the tax accounting model.

While it is too early to predict what changes, if any, might result, the Board now is considering whether a "presumptive" approach will increase the acceptance of the liability method of deferred tax accounting and at the same time stay within the confines of the Board's conceptual framework.

Previous alternatives considered

Throughout 1989, the Board deliberated on two alternative approaches to dealing with the Statement 96 controversy. The first alternative would eliminate the existing Statement 96 prohibition against considering the likelihood of future income to justify the recognition of deferred tax assets. This alternative came to be known as a "probability approach." Under it companies would recognize future tax benefits as assets if the ultimate realization met a suitably high threshold of probability, a fundamental change from Statement 96.

The second alternative considered was whether something could be done to reduce the computational complexities of the statement, especially its requirements for scheduling reversals of temporary differences and engaging in hypothetical tax planning strategies. This alternative, referred to as an "aggregate approach," would allow computations based on an overall netting of deferred tax debits and credits, but would not lead to significant change in the underlying theory of the statement.

For a while, it appeared that the probability approach would prevail. However, in October of 1989, when the Board voted on this issue (in conjunction with proposing a one-year delay in the effective date), four Board members opposed the probability approach because anticipating future income is incompatible with the Statement 96 model.

That model restricts the recognition of net deferred tax assets to the amount that would be...