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8.14 Taxes – intraperiod allocation
Publication date: 30 Nov 2020
us IFRS & US GAAP guide 8.14
Changes to deferred taxes could result in less volatility in the statement of operations under IFRS.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU eliminates an exception in US GAAP to the normal intraperiod allocation rules. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. For all other entities, it is effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early adoption is permitted in any interim or annual period. If an entity chooses to early adopt, it must adopt all changes as a result of the ASU.
US GAAP
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The tax expense or benefit is allocated between the financial statement components (such as continuing operations, discontinued operations, other comprehensive income, and equity) following a “with and without” approach:
Prior to adoption of ASU 2019-12, an exception to that model requires that all components be considered to determine the amount of tax benefit that is allocated to a loss from continuing operations. After adoption of ASU 2019-12, this exception will no longer exist.
Subsequent changes in deferred tax balances due to enacted tax rate and tax law changes are taken through profit or loss regardless of whether the deferred tax was initially created through profit or loss or other comprehensive income, through equity, or in acquisition accounting. The same principle applies to changes in assertion with respect to unremitted earnings of foreign subsidiaries; deferred taxes are recognized in continuing operations even if some of the temporary difference arose as a result of foreign exchange recognized in OCI (with the exception of current-year foreign exchange that is recognized in CTA).
Changes in the amount of valuation allowance due to changes in assessment about realization in future periods are generally taken through the income statement, with limited exceptions for certain equity-related items.
| Tax follows the pre-tax item. Current and deferred tax on items recognized in other comprehensive income or directly in equity should be similarly recognized in other comprehensive income or directly in equity. When an entity pays tax on all of its profits, including elements recognized outside of profit or loss, it can be difficult to determine the share attributable to individual components. Under such circumstances, tax should be allocated on a pro rata basis or other basis that is more appropriate in the circumstances.
Subsequent changes in deferred tax are recognized in profit or loss, OCI, or equity depending on where the transaction(s) giving rise to the deferred tax were recorded. Entities must “backwards trace” based upon how the deferred tax balance arose to determine where the change in deferred tax is recorded.
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