ASC 740 is Topic 740, Income Taxes, of the FASB Accounting Standards Codification, the US generally accepted accounting principles standard for how an entity accounts for and reports the effects of taxes based on income (FASB Accounting Standards Update 2023-09, Income Taxes (Topic 740)). It runs on an asset and liability approach, and it has two objectives: recognize the amount of taxes payable or refundable for the current year, and recognize deferred tax liabilities and assets for the future tax consequences of events that have already been recognized in the financial statements or tax returns (FASB Statement No. 109).
Those objectives were written into FASB Statement No. 109, issued in February 1992 (FASB Statement No. 109). The Codification superseded it, along with all other then-existing non-SEC accounting and reporting standards, when the Codification became the source of authoritative US generally accepted accounting principles (FASB Statement No. 168). An asset and liability approach means the tax effects of those events are carried in the statement of financial position as tax assets and liabilities, rather than as the deferred charges and credits an earlier approach produced (FASB Statement No. 109).
What Counts as an Income Tax
The scope test is the base of the levy, not who charges it. Income taxes, for this standard, are domestic and foreign federal (national), state, and local (including franchise) taxes based on income (FASB Statement No. 109). A levy your client pays that is not computed on income is not an income tax for reporting purposes, whatever it is called.
The principles also reach an entity’s domestic and foreign operations that are consolidated, combined, or accounted for by the equity method, and foreign enterprises preparing financial statements in accordance with US generally accepted accounting principles (FASB Statement No. 109). A state levy that is only partly based on income is a harder scope call, and the income tax provision works that one through.
Income Tax Expense Is Current Plus Deferred
One reported number, built from two. Income tax expense or benefit is the sum of current tax expense or benefit and deferred tax expense or benefit (FASB Statement No. 109).
Current tax expense or benefit is the amount of income taxes paid or payable, or refundable, for a year, determined by applying the provisions of the enacted tax law to the taxable income or the excess of deductions over revenues for that year (FASB Statement No. 109).
Deferred tax expense or benefit is the change during the year in the entity’s deferred tax liabilities and assets (FASB Statement No. 109). What creates a deferred tax asset and how it is measured at the enacted rate are set out in deferred tax assets, and the valuation allowance that can reduce it is covered there and in valuation.
Measurement Follows Enacted Law
Only law already on the books counts. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of future changes in tax laws or rates are not anticipated (FASB Statement No. 109).
When a law or a rate does change, deferred tax liabilities and assets are adjusted for the effect, and that effect is included in income from continuing operations for the period that includes the enactment date (FASB Statement No. 109). Enactment is the trigger, not the effective date, so a rate legislated now for a later year moves the balances in the period the legislation is enacted.
Where ASC 740 Sits in a Firm’s Work
What ASC 740 produces is income tax expense in the income statement and the deferred balances carried on the balance sheet. Building that estimate is a separate body of work, and the ASC 740 income tax provision covers the difference schedules, the judgment calls, and the disclosures.
What ASC 740 Is Not
It Is Not the Tax Return
A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year (FASB Statement No. 109). Estimated is the load-bearing word, because the figure is struck at the financial statement date rather than at filing.
The Board’s reason for accepting estimates is set out as three constraints: the tax payment or refund that results from a particular return is a joint result of all the items included in that return, taxes that will be paid or refunded in future years are the joint result of events of the current or prior years and events of future years, and information available about the future is limited. Its conclusion was that attribution of taxes to individual items and events is arbitrary and, except in the simplest situations, requires estimates and approximations (FASB Statement No. 109).
It Is Not the Loss Contingency Guidance
Uncertainty in income taxes is excluded from the scope of the loss contingencies subtopic because it is addressed elsewhere in the Codification, at Section 740-10-25, and that exclusion is written into paragraph 450-20-15-2 (FASB Accounting Standards Update 2016-13).
So the probable and reasonably estimable accrual test, set out in accruals, is not the test a tax position answers to. A firm that reaches for the contingency habit on a tax reserve is applying the wrong standard.
Common Questions
FIN 48 was FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, a pronouncement in its own right and a narrower one, because it dealt with uncertainty in income taxes rather than with income tax accounting as a whole. It was named alongside FASB Statement No. 109, Accounting for Income Taxes, in the transition guidance that created the Codification (FASB Statement No. 168).
What that transition changed was the address, not the accounting. In the Board’s view the Statement and the Codification would not change generally accepted accounting principles, apart from one item of AICPA revenue recognition guidance that some nonpublic entities then had to apply (FASB Statement No. 168), and the wider supersession it triggered is set out in accruals.
So the uncertain tax position rules are cited today by their Codification address rather than by the interpretation’s number. Uncertainty in income taxes is discussed in Section 740-10-25 (FASB Accounting Standards Update 2016-13), and the disclosures for unrecognized tax benefits, the amounts a return claims that the statements have not recognized, sit at paragraph 740-10-50-15 (FASB Accounting Standards Update 2023-09). How a position is recognized and measured, and how it travels from the footnote to the return, sits with the provision work.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can run a real block of its own book-to-tax and provision support work through a trial task before anything client facing depends on it.
