BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.

BC2. The Board is issuing the amendments in this Update as part of its Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification were submitted by stakeholders as part of the Simplification Initiative.

BC3. The FASB issued proposed Accounting Standards Update, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, for public comment on May 14, 2019, with comments due on June 28, 2019. The Board received 24 comment letters on that proposed Update. Respondents were largely supportive of the Board’s efforts to reduce complexity in accounting for income taxes. Those respondents commented that most of the proposed amendments would simplify the accounting for income taxes in a meaningful way without sacrificing the usefulness of information provided to users of financial statements. Most respondents agreed that the proposed amendments were operable and auditable and would not impose significant costs. The Board considered respondents’ comments and concerns in reaching the conclusions in this Update, as discussed further in the remainder of this basis for conclusions.

BC4. The areas for simplification in this Update involve several aspects of the accounting for income taxes. First, the amendments in this Update simplify the accounting for income taxes by removing certain exceptions in Topic 740, including the exceptions to:

BC5. The amendments in this Update also simplify the accounting for income taxes by:

BC6. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, donors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, donors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.

BC7. The amendments in this Update will reduce cost and complexity by removing certain exceptions from and clarifying other areas of Topic 740. The amendments eliminate the need for an entity to analyze whether the exceptions for intraperiod tax allocation, ownership changes in investments, and year-to-date losses that exceed anticipated losses apply in a given period. The amendments also promote consistent application of and simplify GAAP for franchise taxes that are partially based on income, transactions that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods by clarifying and amending guidance that already exists within GAAP. The amendments do not create new accounting requirements not previously included in Topic 740.

BC8. Franchise taxes in certain jurisdictions are calculated using the greater of two calculations—one based on income and one based on items other than income (for example, capital, capital expenditures, and gross revenue). Paragraph 740-10-15-4(a) currently states that Topic 740 does not apply to franchise taxes based on capital when there is no additional tax based on income. That paragraph further states that if there is a tax based on income that is in excess of the tax based on capital, then that excess is subject to the guidance in Topic 740. That guidance results in an entity separating the component of the tax based on items other than income from the component of the tax based on income when the income tax is greater than the tax on items other than income. Taxes based on items other than income generally should not be included in the income tax line on the financial statements.

BC9. Stakeholders indicated that the guidance for these types of franchise taxes increases the cost and complexity of applying Topic 740, particularly when the amount related to the non-income-based tax is not significant, and that the guidance does not result in increased usefulness to users of financial statements. In many cases, the tax amount based on amounts other than income (for example, capital) generally is only significant if that amount is greater than the income tax amount. That is because an entity is likely operating at a loss or near the break-even point in those situations. Stakeholders also indicated that this guidance introduces complexity in determining which rate to use when recording deferred taxes on temporary differences. For example, in cases in which the state tax is an income tax only to the extent that it exceeds the capital-based tax in a given year, deferred taxes would be recognized for temporary differences that reverse in future years for which annual taxable income is expected to exceed the capital tax.

BC10. The Board decided to amend paragraph 740-10-15-4(a) to require that if a franchise tax (or similar tax) is partially based on income (for example, the entity pays the greater of an income-based tax and a non-income-based tax), deferred tax assets and liabilities should be recognized and accounted for in accordance with Topic 740. The amount of current tax expense that is based on income should be accounted for in accordance with Topic 740, with any incremental amount incurred recorded as a non-income-based tax. The Board observed that this amendment simplifies Topic 740 and reduces the cost of applying the guidance in that Topic when the amounts for those types of franchise taxes are not significant because an entity would need to separate the tax on amounts other than income only if that amount is greater than the income tax amount.

BC11. Additionally, in response to a respondent’s request, the Board included specific guidance in paragraph 740-10-15-4(a) that states that an entity would not need to consider the effect of potentially paying a non-income-based tax in future years when evaluating the realizability of its deferred tax assets. The Board noted that this clarification is consistent with the accounting for other incremental taxes (for example, the base erosion and anti-abuse tax).

BC12. The Board concluded that the amendment to franchise taxes that are partially based on income, at a minimum, maintains the decision-useful information provided to users and may increase that information. Additionally, applying the disclosure requirements in Topic 740 to these amounts will result in greater transparency of franchise tax amounts.

BC13. The Board considered feedback suggesting that it provide a scope exception for pass-through entities because bifurcation of the income and non-income-based components of franchise taxes would be an unnecessary burden in scenarios in which pass-through entities are subject to state franchise taxes for the right to do business in a state and those franchise taxes are not significant. The Board decided not to provide a scope exception for pass-through entities that are subject to state franchise taxes because it would contradict the entity’s status as a taxable entity in the jurisdiction imposing the franchise tax. The Board also noted that this outcome is not a consequence of the amendments; rather, pass-through entities apply the current guidance when the franchise tax based on income is greater than the franchise tax based on amounts other than income. Lastly, the Board observed that adding an exception for pass-through entities would be contrary to the objectives of simplifying the accounting for income taxes and removing exceptions in Topic 740.

BC14. An entity may enter into a transaction with a government in its capacity as a taxing authority that results in an increase in the tax basis of assets of the entity. For example, tax laws in a foreign country may allow an entity to elect to step up the tax basis of certain fixed assets to fair value in exchange for a current payment to the government. This step up also could be acquired by sacrificing existing tax attributes (for example, a net operating loss carryforward or tax basis in another asset). In certain situations, the step up in the tax basis as a result of the transaction with the government results in a step up to the tax basis of goodwill.

BC15. If the step up in the tax basis of goodwill relates to the portion of goodwill from a prior business combination for which a deferred tax liability was not recognized, then current paragraph 740-10-25-54 prohibits the entity from recognizing a deferred tax asset for the increase in tax basis, except to the extent that the tax-deductible goodwill exceeds the remaining book balance of goodwill. Therefore, an entity would not record a deferred tax asset for the step up in basis of goodwill unless it would have recorded a deferred tax asset when the business combination had occurred.

BC16. Stakeholders indicated that the guidance in paragraph 740-10-25-54 that prohibits an entity from recognizing a deferred tax asset for the acquisition of a step up in the tax basis of goodwill may result in an outcome that does not represent the economics of the transaction. That is because an asset on the entity’s statement of financial position (for example, cash or deferred tax assets for other tax attributes) would be sacrificed to obtain that benefit but the asset would be immediately expensed. For example, if an entity exchanges a net operating loss carryforward for the step up in tax basis of goodwill, it would reduce the balance of its deferred tax assets and recognize a corresponding expense. Those stakeholders indicated that, in this case, economically, the entity has exchanged one deferred tax asset (the net operating loss carryforward) for another deferred tax asset (the step up in tax basis of goodwill). Accordingly, the entire amount of the transaction should not be recognized in the income statement.

BC17. Those stakeholders noted that these transactions often are separate transactions even though they affect the goodwill recognized in the business combination. However, those stakeholders also acknowledged that in certain cases the step up in tax basis of goodwill relates to the business combination in which the book goodwill was originally recognized, in which case prohibiting the recognition of a deferred tax asset would be consistent with the guidance in Topic 805, Business Combinations. That is because the entity has actually exchanged one deferred tax asset (for example, a net operating loss carryforward) for a reduction in a deferred tax liability related to goodwill that was not recognized upon the acquisition of the business. Nonetheless, stakeholders indicated that it can be difficult to determine whether new tax-deductible goodwill relates to the business combination in which the goodwill was initially recognized in the financial statements because there often is a significant amount of time between the two transactions or because a realignment of the original book goodwill between reporting units may have occurred.

BC18. The Board decided that clarifying the guidance about whether a step up in the tax basis of goodwill relates to the business combination in which the book goodwill was originally recognized would reduce the cost of applying Topic 740 and indicate that a separate transaction may affect goodwill. Therefore, the Board decided to remove the prescriptive guidance in paragraph 740-10-25-54 and require that an entity determine whether the tax basis step-up transaction relates to the business combination in which the book goodwill was originally recognized (in which case a deferred tax asset would not be recognized unless the newly deductible goodwill exceeds the remaining balance of book goodwill) or to a separate transaction (in which case a deferred tax asset would be recognized) on the basis of certain indicators.

BC19. The Board acknowledged that judgment still would be needed to determine whether the transaction relates to the business combination in which the goodwill was originally recognized or whether it relates to a separate transaction. Therefore, the Board decided to provide indicators for making that determination. The Board noted that the indicators included in the amendment to paragraph 740-10-25-54 will distinguish transactions that were contemplated as part of the business combination from separate transactions that are entered into significantly after the business combination and that have economic consequences. The Board decided that the amendment better reflects the economic consequences of separate transactions because it results in the recognition of an asset instead of expense when the step up in tax basis results in a future tax benefit.

BC20. The Board considered feedback indicating that the types of transactions that result in a step up in the tax basis of goodwill are not limited to those directly between a taxpayer and a government. Feedback also indicated that, in practice, entities apply the current guidance (and would apply the amended guidance) in paragraph 740-10-25-54 to any transaction that results in a step up in the tax basis of goodwill. Therefore, those respondents recommended that the Board expand the scope of the proposed amendments to any transaction that results in a step up in the tax basis of goodwill by either removing or amending the heading above paragraph 740-10-25-54, “Transactions Directly between a Taxpayer and a Government.” That heading was added in Accounting Standards Update No. 2018-09, Codification Improvements, and not as a result of the amendments in this Update. While the Board decided not to remove or amend that heading, it acknowledged that entities apply the guidance by analogy to any transaction that results in a step up in the tax basis of goodwill and that it did not intend to change that practice.

BC21. Topic 740 requires that the consolidated amount of current and deferred tax expense for a group that files a consolidated tax return be allocated among the members of the group when those members issue separate financial statements. Unlike a member of a group that files a consolidated tax return, a single-member limited liability company that is disregarded for tax purposes generally is not severally liable for the taxes of its taxable owner. Therefore, stakeholders indicated that some entities do not allocate the consolidated amount of current and deferred taxes to single-member limited liability companies that are disregarded entities in their separate financial statements, while other entities do.

BC22. The Board noted that allocating income taxes to single-member limited liability companies that are disregarded entities in separate financial statements adds to the cost and complexity of applying Topic 740. The Board noted that a single-member limited liability company is a separate legal entity that is not severally liable for the taxes of its owner, so the Board decided that the entity should not be required to include allocated income taxes in its separate financial statements. However, the Board also noted that some entities that are not subject to tax and are disregarded by the taxing authority (for example, certain rate-regulated entities or entities with cost-plus revenue arrangements) may want to include income taxes in their separate financial statements to reflect an allocation of the tax costs incurred by the consolidating parent entity. Therefore, the Board decided to clarify that an entity is not required to allocate amounts of consolidated current and deferred taxes to a legal entity that is not subject to tax (including a single-member limited liability company) in its separate financial statements, but an entity may elect to do so for a legal entity that is both not subject to tax and disregarded by the taxing authority.

BC23. The Board noted that this will clarify how all pass-through entities that are subsidiaries of taxable entities are treated under Topic 740. The Board noted that the separate financial statements of an entity that is not subject to tax that does not include allocated income taxes will provide financial statement users with information that is consistent with the economics of the entity because the income of a single-member limited liability company flows through to the owner of the entity (that is, the parent entity) for tax purposes and would not be taxed at the entity level. Additionally, a liability for income taxes for which the single-member limited liability company is not liable does not meet the conceptual definition of a liability.

BC24. The Board observed that paragraph 740-10-50-16 requires that an entity disclose that it is not subject to income taxes, which would provide financial statement users with information about the tax status of the entity. The Board also decided to require additional disclosures for an entity that is not subject to tax and that is disregarded by the taxing authority but elects to include the allocated amount of current and deferred tax expense in its separately issued financial statements by requiring that the entity disclose that election and provide the disclosures required by paragraph 740-10-50-17.

BC25. The Board considered feedback suggesting that it clarify whether the election to allocate amounts of consolidated current and deferred taxes to a legal entity that is not subject to tax and is disregarded by the taxing authority (including a single-member limited liability company) in its separate financial statements should be made on an entity-by-entity basis or whether it should apply to all entities in the consolidated tax return once the election is made. The Board decided that it is appropriate to make the election on an entity-by-entity basis because the existing guidance already acknowledges that the sum of the amounts allocated to individual members of the group may not equal the consolidated amount. Additionally, the Board noted that entities often would not be required to produce separate financial statements for each member of a consolidated tax return and that, therefore, it is not necessary for the election to be made for all entities to gain an understanding of consolidated income tax expense.

BC26. Intraperiod tax allocation is the process of allocating total tax expense or benefit to components of the income statement (such as continuing operations and discontinued operations) and directly to shareholders’ equity and other comprehensive income. Total tax expense generally is allocated by first determining the amount of tax expense or benefit allocated to continuing operations and then proportionally allocating the remaining tax expense or benefit to items other than continuing operations. Generally, the tax effect of income from continuing operations should be determined without considering the tax effect of items that are not included in continuing operations.

BC27. Paragraph 740-20-45-7 provides an exception to this general approach by requiring that all components, including discontinued operations and items charged or credited directly to equity, be considered when determining the tax benefit from a loss from continuing operations. This exception applies only when there is a current-period loss from continuing operations. Application of this exception makes it appropriate to consider gain or income outside continuing operations (for example, one recognized in other comprehensive income) in the current year for purposes of allocating a tax benefit to a current-year loss from continuing operations. For example, an entity may consider the gain or income outside continuing operations to determine whether a valuation allowance needs to be recognized for purposes of allocating the tax benefit to continuing operations.

BC28. The Financial Accounting Foundation’s Post-Implementation Review Report on FASB Statement No. 109, Accounting for Income Taxes, indicated that some preparers and auditors have difficulty applying certain aspects of the requirements in Topic 740 about intraperiod tax allocation. Stakeholders indicated that the exception to the incremental approach for intraperiod tax allocation (see paragraph 740-20-45-7) creates counterintuitive outcomes because it results in a benefit being allocated to continuing operations and an offsetting tax expense in another component, even when total tax expense is zero. Stakeholders also indicated that this exception is difficult to apply, is often overlooked, and does not provide any perceived benefit to users. Additionally, stakeholders observed that there is diversity in practice in how the guidance in paragraph 740-20-45-7 is interpreted. Some entities have interpreted the guidance to apply if there is a loss from continuing operations and any one category below continuing operations is in a gain position, whereas others have interpreted it to apply only when the sum of all categories below continuing operations is in an overall gain position. For those reasons, the Board decided that removing the exception to the incremental approach for intraperiod tax allocation will reduce the cost of applying Topic 740, while not significantly altering the information provided to users of financial statements.

BC29. While respondents broadly supported removing the exception to the incremental approach for intraperiod tax allocation, some respondents disagreed and noted that the removal might eliminate useful information and decrease comparability in certain circumstances. For example, the respondents asserted that removing the exception would result in a distorted presentation of tax benefits in circumstances in which an entity has a pretax gain outside of continuing operations that would serve as a source of taxable income to support the realization of losses that are part of continuing operations. The Board acknowledged that removing the exception could increase costs for entities in certain scenarios. However, for the reasons stated in paragraph BC28, the Board noted that, overall, the scenarios in which removing the exception would decrease the cost of applying Topic 740 are likely more common than those scenarios in which removing the exception would increase costs.

BC30. Topic 740 provides income tax guidance for situations in which an investment in common stock of a subsidiary changes so that it is no longer a subsidiary. If a parent entity did not recognize income taxes on its undistributed earnings because of the assertion that earnings were indefinitely reinvested or would be remitted in a tax-free liquidation, paragraph 740-30-25-15 requires that the outside basis difference be frozen (and that no deferred tax liability be recognized on the basis difference that exists as of that date) until the period when it becomes apparent that any of the undistributed earnings will be remitted. That guidance states that transitioning from a subsidiary to an equity method investment would not by itself mean that remittance of the undistributed earnings must be considered apparent. The entity recognizes deferred tax assets or liabilities and income tax expense (or benefit) on any basis differences that occur after the subsidiary becomes an equity method investment.

BC31. The Board noted that the current guidance that requires an entity to freeze the outside basis difference of a subsidiary that becomes an equity method investment represents an exception to the general principle for accounting for outside basis differences of equity method investments. The Board decided that this exception increases the cost and complexity of applying Topic 740 because the exception applies to only a portion of the outside basis difference of the equity method investment, so an entity is required to track the frozen amount and any subsequent changes to the outside basis separately. The Board also noted that the exception reduces the comparability of the accounting for income tax effects of equity method investments for financial statement users because the income tax effects of equity method investments are recognized only for certain equity method investments (or portions of certain equity method investments). Therefore, the Board decided to align the accounting for income tax effects of equity method investments by removing the exception in paragraph 740-30-25-15.

BC32. Topic 740 also provides income tax guidance for situations in which a foreign equity method investment becomes a subsidiary. Under current guidance in paragraph 740-30-25-16, the deferred tax liability previously recognized for a foreign equity method investment cannot be derecognized when the investment becomes a subsidiary—even if the entity asserts that earnings are indefinitely reinvested or will be remitted in a tax-free liquidation—unless dividends received from the subsidiary exceed earnings from the subsidiary after the date it became a subsidiary.

BC33. The Board noted that the current guidance that requires an entity to freeze the outside basis difference of a foreign equity method investment that becomes a subsidiary represents an exception to the general principle for accounting for outside basis differences of foreign subsidiaries. The Board decided that this exception increases the cost and complexity of applying Topic 740 because the exception applies to only a portion of the outside basis difference of the foreign subsidiary, so an entity is required to track the frozen amount and any subsequent changes to the outside basis separately. The Board also noted that the exception reduces the comparability across entities of the accounting for income tax effects of foreign subsidiaries for which the earnings are indefinitely reinvested because the income tax effects of a portion of a foreign subsidiary are recorded, while those of another portion are not. This lack of comparability reduces the usefulness of the information for financial statement users. Therefore, the Board decided to align the accounting for income tax effects of foreign subsidiaries by removing the exception in paragraph 740-30-25-16.

BC34. The Board considered feedback from a respondent who disagreed with removing the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment. The respondent explained that, in some circumstances, the investor still retains control or influence over whether or when the income tax consequences would occur and that removing the exception would force an entity to recognize a deferred tax liability even when the facts and circumstances support nonrecognition. The Board noted that the same facts and circumstances may exist when accounting for the outside basis differences for equity method investments that were not previously foreign subsidiaries. Given that the observation is not unique to differences created as a result of a change from consolidation to the equity method of accounting, the Board could see no basis to retain the exception and, therefore, affirmed its previous decision to remove the exception.

BC35. Topic 740 requires that an entity recognize the income tax effects of an enacted change in tax law on deferred tax assets or liabilities on the date of enactment. However, under the interim-period income tax model, the tax effect of a change in tax law on taxes payable or refundable for the current year should be recorded after the effective date of the tax law. Because of the use of the term effective date, a tax law enacted at the beginning of the year with an effective date in the middle of the year would result in an entity recognizing the effect of the enacted tax law in the period of enactment for deferred tax assets and liabilities, but the enacted tax law would not affect the annual effective tax rate (used in the interim-period income tax model) until the period that includes the effective date of the tax law.

BC36. Stakeholders indicated that applying the guidance on the effect of an enacted change in tax law is difficult in practice because of how income taxes in interim financial statements are calculated. The interim reporting guidance in Subtopic 740-270 does not require that an entity separately recognize current tax expense and deferred tax expense in interim periods. An entity generally estimates the annual effective tax rate on the basis of an annual forecast of its income and an estimation of expected permanent differences. The entity then applies the annual effective tax rate to the year-to-date income and makes a reasonable allocation of the expense to current taxes payable and deferred taxes. An entity generally does not estimate temporary differences for the purpose of income tax accounting in an interim period.

BC37. Stakeholders noted that the requirement to wait until the effective date to recognize the effects of the enacted change in tax law on current taxes payable requires that the entity make a more precise estimate of the allocation between current taxes and deferred taxes because the entity is required to wait until the effective date to recognize the effects of the enacted change in tax law on current taxes payable while recognizing the effects of the change on deferred taxes on the enactment date.

BC38. The Board observed that this results in increased costs for preparers. Therefore, the Board decided to amend paragraph 740-270-25-5 to require that the effects of an enacted change in tax law be reflected in the computation of the annual effective tax rate in the first interim period that includes the enactment date to both reduce the costs of applying the guidance and simplifying it. The Board also noted that this change would align the guidance for changes in tax law in interim periods with the general principle that the effects of enacted changes in tax laws should be recorded on the enactment date.

BC39. The Board acknowledged that recognizing the effects of the enacted change in tax law on current taxes payable on the enactment date could result in recognizing a portion of the effect of a change in tax law in periods before the tax law takes effect. However, that phenomenon also occurs under current guidance because an entity must estimate deferred tax assets and liabilities (that are remeasured at the enactment date) that are expected to reverse in the current year and include that estimate when determining the annual effective tax rate. This is a general consequence of the interim-period income tax model. The Board also noted that financial statement users should benefit from an entity recognizing the effects of the enacted change in tax law on current taxes payable on the enactment date because it will provide more timely information that could be used in users’ financial statement analyses.

BC40. Under the interim-period income tax model in Subtopic 740-270, an entity is required to make its best estimate of the annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate income taxes on a year-to-date basis. Subtopic 740-270 includes general guidance for calculating income tax expense or benefit when there is a loss for the year-to-date period and anticipated income for the full year and vice versa. That guidance specifies that an entity should apply the annual effective tax rate to the year-to-date income or loss as long as the tax benefits for any losses are expected to be realized during the year or would be recognizable as a deferred tax asset at the end of the year (that is, a valuation allowance would not be necessary).

BC41. Paragraph 740-270-30-28 provides specific guidance for circumstances in which an entity incurs a loss on a year-to-date basis that exceeds the anticipated ordinary loss for the year, which is an exception to the general guidance in Subtopic 740-270. If an entity has an ordinary loss for the year-to-date period at the end of an interim period that exceeds the anticipated ordinary loss for the year, the income tax benefit recognized for the year-to-date period is limited to the income tax benefit determined on the basis of the year-to-date ordinary loss.

BC42. The Board decided that removing the exception to the general principle in Subtopic 740-270 would reduce the costs and complexity of applying Topic 740 in interim periods. The Board observed that the exception is easily overlooked by preparers and is, thus, prone to errors. Removing the exception would remove that propensity for error. Additionally, the Board decided that eliminating the exception should not significantly change the information provided to users of financial statements because removing the exception is consistent with the general principle in Subtopic 740-270 and results in more neutral recognition of tax benefits compared with tax expense. The Board acknowledged that removing the exception may result in recognizing tax benefits in a given period that exceed the tax benefits that would be received on the basis of the year-to-date loss, but the Board decided that the benefit of limiting the tax benefits would not outweigh the costs of the limitation.

BC43. The Board decided to make two minor improvements to the Codification. Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, amended paragraph 718-740-45-7 to state that “the tax benefit of tax-deductible dividends on allocated and unallocated employee stock ownership plan shares shall be recognized in the income statement” (emphasis added).

BC44. Before Update 2016-09 was issued, paragraph 718-740-45-7 stated that the tax benefit of tax-deductible dividends for allocated shares should be recognized in income taxes allocated to continuing operations. Other references to the tax effects of tax-deductible dividends throughout the Codification (for example, paragraphs 740-20-45-8(d) and 740-20-55-2(d)) still indicate that the tax benefit of tax-deductible dividends should be recognized in income taxes allocated to continuing operations. Therefore, the Board decided to change the phrase the income statement in paragraph 718-740-45-7 to income taxes allocated to continuing operations to specify where the tax benefit of tax-deductible dividends should be presented in the income statement.

BC45. The Board proposed to supersede paragraph 323-740-55-8 to remove an error in the calculation of when an impairment should be recognized under the equity method of accounting. The Board noted that Subtopic 323-740, Investments—Equity Method and Joint Ventures—Income Taxes, is focused on the application of the proportional amortization method and not the general equity method. Section 323-740-55 includes an example that illustrates the application of the proportional amortization method to an investment in qualified affordable housing projects, so the Board decided that the example in paragraph 323-740-55-8 is not needed.

BC46. Some respondents raised concerns about superseding the example in paragraph 323-740-55-8, noting that entities apply that guidance as a basis to measure an identified impairment on an undiscounted basis. Therefore, those respondents noted that removing the example would result in the elimination of guidance that is used in the accounting for subsequent measurement of qualified affordable housing property investments under the equity method. On the basis of respondents’ feedback, the Board reversed its decision to supersede the example in paragraph 323-740-55-8 and instead decided to correct the error in the calculation of when an impairment should occur under the equity method.

BC47. The Board decided that for public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The effective date for public business entities is consistent with comments from respondents who noted that the amendments would not take a significant amount of time to implement. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The effective date for all other entities is responsive to input from most respondents that other than public business entities should be provided additional time to adopt the amendments.

BC48. The Board considered whether to apply its philosophy from Accounting Standards Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, in determining the effective dates for the amendments in this Update. The philosophy in Update 2019-10 extends and simplifies how effective dates are staggered between larger public companies and all other entities for major Updates. The Board concluded that it would not apply that philosophy in determining the effective dates for the amendments in this Update for several reasons:

BC49. Early adoption of the amendments in this Update is permitted, including adoption in an interim period (a) for public business entities for periods for which financial statements have not yet been issued and (b) for all other entities for periods for which financial statements have not yet been made available for issuance. If an entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all the amendments in the same period.

BC50. The Board decided that different transition approaches should apply to each income tax simplification because each has a different effect on the financial statements. Respondents generally agreed with the transition methods in the proposed Update on Topic 740 except for the proposed transition method for the amendments on franchise taxes that are partially based on income; those respondents’ concerns are discussed in paragraph BC53.

BC51. The Board decided to require a retrospective transition approach for the income tax simplification that would clarify that a legal entity that is not subject to tax is not required to be allocated amounts of consolidated current and deferred taxes in its separate financial statements. The Board concluded that it could be misleading to present no deferred taxes or income tax expense in the period of adoption and then present current and deferred tax expense (and deferred tax assets or liabilities, if allocated) in prior periods. The Board noted that retrospective transition for this simplification would result in increased comparability and would not be costly in situations in which the entity previously allocated income taxes to an entity that is not subject to tax because the entity only would need to remove deferred taxes and income tax expense in the comparative periods from the separate financial statements of the entity not subject to tax. The Board acknowledged that retrospective transition would result in increased costs if an entity decides to allocate income taxes upon adoption to an entity that is not subject to tax and that is a disregarded entity. However, on the basis of stakeholder feedback, the Board noted that allocating income taxes upon adoption to these types of entities is expected to be uncommon. The Board clarified that retrospective transition applies only to the separate financial statements of those entities that elected to allocate current and deferred taxes.

BC52. The Board decided to require a modified retrospective transition approach for the income tax simplifications related to changes in ownership of investments. Those simplifications result in an entity recognizing a deferred tax liability for a foreign subsidiary that became an equity method investment and removing a deferred tax liability for a foreign equity method investment that became a subsidiary. The Board decided that a retrospective transition approach would result in adjusting deferred tax amounts (and potentially income tax expense) related to these investments in each period, which could be costly and complex. The Board noted that a modified retrospective transition (that is, recognizing or removing a deferred tax liability at the beginning of the fiscal year of adoption with a cumulative-effect adjustment to retained earnings) not only reduces the comparability of income tax amounts in comparative periods but also reduces the cost and complexity of transition. The Board decided that the transition disclosures required should provide investors with information about the change and the reason for the change, which would provide disclosure about the lack of comparability. The Board decided that a prospective transition would not be appropriate for these simplifications because they affect deferred taxes that are recognized on the statement of financial position.

BC53. The Board originally proposed to require a retrospective transition approach for the income tax simplification for franchise taxes that are partially based on income because that approach would improve comparability without requiring an entity to incur significant costs. The Board decided that prospective transition would not be appropriate because changes in the deferred tax assets and liabilities under a prospective transition would be recognized in expense during the period of adoption. Respondents expressed concerns about requiring retrospective transition and noted that it would require entities to recognize or remeasure deferred tax assets and liabilities and to assess or reassess the need for a valuation allowance in each prior period presented. Those respondents suggested that the Board either (a) require modified retrospective transition or (b) allow either retrospective transition or modified retrospective transition. On the basis of feedback received from respondents, the Board decided to allow an entity to apply the amendments on either a retrospective basis or a modified retrospective basis. The Board concluded that providing an option for transition methods (rather than requiring modified retrospective transition) addresses respondents’ concerns while not precluding an entity from applying the amendments on a retrospective basis.

BC54. The Board decided to require a prospective transition approach for the other income tax simplifications. Specifically, the Board decided to require prospective transition for the exception to the incremental approach for intraperiod tax allocation to reduce the cost of transition without significantly affecting the comparability of information. This income tax simplification does not affect the amount of deferred taxes or total income tax expense. Therefore, the Board noted that retrospective transition would not affect the statement of financial position but that it would provide comparative information for income tax expense in years in which there is a loss from continuing operations and a gain or income from other components. However, the Board noted that restating comparative periods under retrospective transition would be costly because it would require that an entity recalculate the income tax expense from continuing operations. Additionally, the Board noted that this simplification would apply only when there is a loss from continuing operations and a gain or income from other components, which might not occur in comparative periods. Therefore, investors often see income tax expense presented under these circumstances in some periods and not in others.

BC55. The Board also decided to require a prospective transition approach for the two simplifications that relate to interim reporting (interim-period accounting for enacted changes in tax law and year-to-date loss limitation in interim-period tax accounting) to reduce the cost of transition without significantly affecting the comparability of information. The Board noted that interim reporting does not affect the amount of deferred taxes or income tax expense at the end of a year, so these simplifications should not affect the amount of deferred taxes recognized at the beginning of the period of adoption. Therefore, the Board noted that retrospective transition will not affect the statement of financial position but that it will provide comparative information for income tax expense in interim periods. However, the Board noted that calculating income tax expense in interim periods is complex and relies upon estimates of anticipated income for the full year. Restating comparative periods under retrospective transition would be costly and complex and would raise questions about whether the estimate of anticipated income for the full year as of the interim date should be updated. Additionally, the Board noted that each of these simplifications applies only in limited circumstances and those circumstances might not occur in comparative periods, so investors often see income tax expense presented under those circumstances in some periods and not in others.

BC56. Additionally, the Board decided to require a prospective transition approach for the income tax simplification for the step up in tax basis of goodwill. The Board noted that this type of transaction often is a one-time transaction for entities; therefore, requiring a prospective transition approach should not affect comparability. The Board also decided to require a prospective transition approach for the Codification improvements because they are minor clarifications and likely should not need transition guidance.

BC57. The Board decided to require that an entity 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. The Board decided that it would not be cost beneficial to require quantitative disclosures that would effectively require an entity to maintain two sets of accounting records solely to meet disclosure requirements that would not be required when preparing the entity’s basic financial statements.