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Amendments to Subtopic 740-20
Publication date: 18 Dec 2019
us FASB ASU 2019-12
9. Amend paragraph 740-20-45-7, with a link to transition paragraph 740-1065-8, as follows:
Income Taxes—Intraperiod Tax Allocation
Other Presentation Matters
> Allocation to Continuing Operations
740-20-45-7 The tax effect of pretax income or loss from continuing operations
generally
should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. The exception to that incremental approach is that all items (for example, discontinued operations, other comprehensive income, and so forth) be considered in determining the amount of tax benefit that results from a loss from continuing operations and that shall be allocated to continuing operations. That modification of the incremental approach is to be consistent with the approach in Subtopic 740-10 to consider the
tax consequences
of
taxable income
expected in future years in assessing the realizability of deferred tax assets. Application of this modification makes it appropriate to consider a gain on discontinued operations in the current year for purposes of allocating a tax benefit to a current-year loss from continuing operations.
10. Amend paragraphs 740-20-55-10 through 55-12 and their related heading and 740-20-55-14 and add paragraphs 740-20-55-12A through 55-12C and their related heading, with a link to transition paragraph 740-10-65-8, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 2: Allocations of Income Taxes to Continuing Operations and One Other Item
> > > Case A: Loss from Continuing Operations with a Gain on Discontinued Operations (Tax Benefit Realizable)
740-20-55-10 This Case illustrates allocation of income tax expense if there is only one item other than income from continuing operations. The assumptions are as follows:
- The entity’s pretax financial income and taxable income are the same.
- The entity’s ordinary loss from continuing operations is $500.
- The entity also has a gain on discontinued operations of $900 that is a capital gain for tax purposes.
- The tax rate is 40 percent on ordinary income and 30 percent on capital gains. Income taxes currently payable are $120 ($400 at 30 percent).
- The entity has determined that the deferred tax asset that would have resulted from the loss from continuing operations if the gain on discontinued operations had not occurred would be expected to be realized (that is, a valuation allowance would not have been needed).
740-20-55-11 Income tax expense is allocated between the pretax loss from operations and the gain on discontinued operations as follows.
Total income tax expense
| $ 120
| |
Tax benefit allocated to the loss from operations
| (150) | (200)
|
Incremental tax expense allocated to the gain on discontinued operations
| $270 | $ 320
|
740-20-55-12 The effect of the $500 loss from continuing operations was to offset an equal amount of capital gains that otherwise would be taxed at a 30 percent tax rate. However, the guidance in paragraph 740-20-45-7 requires that an entity determine the tax effects of pretax income from continuing operations by a computation that does not consider the tax effects of items that are not included in continuing operations. The entity has determined that, absent the capital gain from discontinued operations, a valuation allowance would not have been needed on the deferred tax asset resulting from the $500 loss from continuing operations.Thus, $200 ($500 at 40 percent)
$ 150 ($500 at 30 percent)
of tax benefit is allocated to continuing operations. The $270
$320 incremental effect of the gain on discontinued operations is the difference between $120 of total tax expense and the $150
$200 tax benefit from
allocated to continuing operations.> > > Case A1: Loss from Continuing Operations with a Gain on Discontinued Operations (Tax Benefit Not Realizable)
740-20-55-12A This Case illustrates allocation of income tax expense if there is only one item other than income from continuing operations. The assumptions are the same as in Case A except that the entity has determined that the deferred tax asset that would have resulted from the loss from continuing operations if the gain on discontinued operations had not occurred would not be expected to be realized (that is, a valuation allowance would have been needed).
740-20-55-12B Income tax expense is allocated between the pretax loss from operations and the gain on discontinued operations as follows.
Total income tax expense
| $ 120
|
Tax benefit allocated to the loss from operations
| –
|
Incremental tax expense allocated to the gain on discontinued operations
| $ 120
|
740-20-55-12C The effect of the $500 loss from continuing operations was to offset an equal amount of capital gains that otherwise would be taxed at a 30 percent tax rate. However, the guidance in paragraph 740-20-45-7 requires that an entity determine the tax effects of pretax income from continuing operations by a computation that does not consider the tax effects of items that are not included in continuing operations. The entity has determined that, absent the capital gain from discontinued operations, a valuation allowance would have been needed on the deferred tax asset resulting from the $500 loss from continuing operations. Thus, zero tax benefit is allocated to continuing operations. The $120 incremental income tax expense related to the gain on discontinued operations is the difference between $120 of total tax expense and the zero tax benefit allocated to continuing operations.
> > > Case B: Income from Continuing Operations with a Loss from Discontinued Operations
740-20-55-13 This Case further illustrates the general requirement to determine the tax effects of pretax income from continuing operations by a computation that does not consider the tax effects of items that are not included in continuing operations.
740-20-55-14 To illustrate, assume that in the current year an entity has $1,000 of income from continuing operations and a $1,000 loss from discontinued operations. At the beginning of the year, the entity has a $2,000 net operating loss carryforward for which the deferred tax asset, net of its {remove glossary link}valuation allowance{remove glossary link}, is zero, and the entity did not reduce that valuation allowance during the year. No tax expense should be allocated to income from continuing operations because the $2,000 loss carryforward is sufficient to offset that income. Thus, no tax benefit is allocated to the loss from discontinued operations.
See paragraph 740-20-45-7 for the exception to the general requirement when an entity has a loss from continuing operations.
Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.
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