Simplifying the accounting for income taxes.

• Author: Aberle, Theresa

As part of its initiative to reduce complexity in accounting standards, FASB issued Accounting Standards Update (ASU) No. 2019-12 in late 2019 for the purpose of simplifying accounting for income taxes. The amendments involve removing certain exceptions to the general principles in FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes, and making certain other modifications.

This item summarizes key aspects of these simplifying amendments, but first it briefly discusses the effective date.

Effective date

The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after Dec. 15, 2020. For all other business entities, the amendments are effective for fiscal years beginning after Dec. 15, 2021.

Early adoption of the amendments is permitted, including adoption in any interim or annual period for which financial statements have not yet been issued or made available for issuance. An entity that elects to early-adopt the amendments in the interim period should reflect any adjustments as of the beginning of the annual period that includes the interim period. In addition, an entity that early-adopts ASU 2019-12 is required to adopt all the amendments in the same period.

Entities are required to disclose the nature of and reason for the change in accounting principle, the transition method, and a qualitative description of the financial statement line items affected by the change. An entity shall disclose these in the first fiscal year after the entity's adoption date and in the interim periods within the first fiscal year.

Key changes

As noted above, FASB released ASU 2019-12 as part of its initiative to reduce complexity in accounting standards. Some of the key changes adopted to simplify accounting for income taxes are summarized here.

Intraperiod tax allocations: Intraperiod tax allocation is the process of allocating total tax expense or benefit to components of the income statement (such as continuing operations, discontinued operations, and other comprehensive income). An entity generally allocates total income tax expense or benefit by first determining the amount attributable to continuing operations and then allocating the remaining tax expense or benefit to items other than continuing operations.

However, there is an exception when an entity incurs a loss from continuing operations and gain from another component that often results in allocating a tax benefit to continuing operations...