It takes time to implement new accounting policies and procedures and supporting controls and systems. Below is a select list of new accounting standard updates (“ASU” or “Update”) effective for nonpublic entities in calendar year 2022.

Warning… accounting complexities may prove challenging! Now is the time to evaluate the implications these may have on your financial reporting framework.

Click below on any of the topics not covered in this article to read our individual blogs.

  • ASU 2016-02 Leases (Topic 842)
  • ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes
  • ASU 2020-01 Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (A Consensus of the Emerging Issues Task Force)
  • ASU 2021-07 Stock Compensation – Stock Compensation (Topic 718) Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards (A Consensus of the Private Company Council)

Below is a summary of ASU 2019-12.

ASU 2019-12 Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes (“ASU 2019-12”):

The intent of ASU 2019-12 is to reduce the cost and complexity of accounting for income taxes.

The guidance dictates the transition approaches that must be used to implement each of the individual provisions within the ASU, specifying which of the methodologies – retrospective, modified-retrospective, or prospective – is required for each.

As stated in the amendment of the FASB Codification to Income Taxes (Topic 740), the amendments remove “… the following exceptions:

  1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)
  2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment
  3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary
  4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The amendments in this Update also simplify the accounting for income taxes by doing the following:

  1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.
  2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
  3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.
  4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
  5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.”

Below is a summary of certain of the provisions:

Intra-period Tax Allocation Exception:

Note that the ASU may impact the amount of income tax benefit allocated to continuing operations versus discontinued operations and other comprehensive income, as income from these other categories is no longer considered when allocating tax benefits to continuing operations. Companies may not be able to realize a tax benefit from loss on continuing operations, as a result.

This change for intra-period tax allocation is required to be adopted prospectively. Consideration should be given to whether additional disclosure is required to address the impact of this change.

Calculating Income Taxes on Year-to-Date Loss:

The new guidance eliminates needing to limit tax benefits recorded for interim periods when the expected tax loss for the year is less than the year-to-date loss for the interim period. This change should be adopted prospectively and therefore may affect comparability of interim periods, possibly necessitating additional disclosure.

Recognizing Deferred Tax Liability when there is a Change in Ownership Structure from/to Equity Method Investment to/from Subsidiary:

ASU 2019-12 changes the accounting for tax basis differences when ownership in a foreign investment changes from a subsidiary to equity method investment or from an equity method investment to a subsidiary. In the first instance, if there is a resulting basis difference, a deferred tax liability should be recorded on the entire outside basis differences, versus only on the post-ownership change per previous guidance. In the second scenario, when the book basis exceeds the tax basis, if the entity asserts that earnings are indefinitely reinvested or will be remitted in a tax-free liquidation after the investment becomes a subsidiary, no deferred tax liability is recognized. Under the previous guidance, the entity would have recognized a deferred tax liability for the basis differences pre-ownership change.

This change is required to be adopted on a modified retrospective approach, whereby the entity must recognize or remove the associated deferred tax liability in the beginning of the year of adoption. Consideration should be given to whether additional disclosure is required to address the impact of this change.

Allocation of Tax Expense to Disregarded Entities:

The new guidance states that an entity may elect, but is not required, to allocate current and deferred tax expense to disregarded entities, such as single-member limited liability companies. The guidance also states that an entity is not to allocate current and deferred tax expense for non-wholly owned partnerships or other pass-through entities.
This change must be adopted on a retrospective basis. A disregarded entity that elects to recognize allocation of tax expense must disclose such election and provide other required disclosures.

Recognition Period for Tax Law Changes:

ASU 2019-12 changes the period in which tax law changes are recognized. Changes in tax law should be reflected in the estimated annual rate in the period of enactment, as opposed to the period which includes the effective date.

This change impacts interim reporting of tax law changes and is to be adopted on a prospective basis, and therefore may affect comparability, possibly necessitating additional disclosure.

Tax Benefits from Tax-Deductible Dividends on Employee Stock Ownership Plan Shares:

The new guidance specifies that tax benefits generated from tax-deductible dividends on employee stock ownership plan shares should be included in income or loss from continuing operations.

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Please refer to the Codification in its entirety for the complete guidance and a full understanding of the implications.

Please also refer to our earlier posting regarding ASU-2016-02. Stay tuned for subsequent postings which will summarize the significant aspects of ASU 2020-01 and ASU 2021-07.

The adoption of a new accounting standard can consume a significant amount of a company’s valuable time and resources. Sarbey, Lexow & Kaufman’s Audit & Assurance professionals are available to assist your organization in navigating and implementing these, as well as all other accounting standards. Please contact us at [email protected] so we may assist you with specific advice and/or implementation support.