Are changes in store for Statement 96, Accounting for Income Taxes?

• Author: Herdman, Robert K.
• Position: Financial Reporting

Are changes in store for Statement 96, Accounting for Income Taxes? Should the FASB reconsider fundamental aspects of Statement 96, Accounting for Income Taxes, as well as some narrower issues it raises? Since its issuance in December 1987, Statement 96 has generated approximately 140 requests that the Board do exactly that.

Following issuance of an implementation guide to the statement in March 1989, the FASB met with representatives of Financial Executives Institute's Committee on Corporate Reporting to discuss mounting concerns--about the results of applying the new rules and about the difficulties being encountered as companies attempt to implement the complex provisions of the statement.

In order to provide additional time to study the complex issues at its July 12, 1989 meeting, the Board agreed to propose a nine-month delay in the statement's application date. Thus, companies with calendar year ends still would be required to adopt the new rules in 1990, but not until the fourth quarter. Previously, application was required in the first quarter of 1990. The Board hopes to issue an exposure draft proposing the delay of Statement 96's application date sometime in October 1989.

This recent action is the result of a series of meetings that began in April during which the Board focused on the following principal objections to Statement 96:

* The rules relating to the recognition and measurement of deferred tax assets are too severe and should be amended to permit a probability approach.

* The definition of temporary differences is too encompassing and leads to deferred tax calculations that are neither understandable nor explainable.

* The Board's liability method is too complex, and the costs of compliance greatly outweigh the benefits derived.

A majority of the requests dealing with temporary differences and narrower implementation issues were rejected fairly quickly--mainly because the Board felt that the issues had been adequately considered before the statement was issued. Also, in the Board's view, no new information surfaced to substantiate any change. As a result, intercompany transactions--such as inventory transfers--and foreign operations with a U.S. dollar functional currency will continue to give rise to temporary differences for which tax effects must be provided.

The Board also reaffirmed prior conclusions regarding several purchase business combination issues. These include the special transition provisions and the...