Because ASC 740 prescribes criteria that an intra-entity tax-allocation policy must meet to be considered acceptable under US GAAP, a change in tax-allocation policy is considered a change in accounting principle. Therefore, the change must be preferable. Companies need to follow the guidance in ASC 250, Accounting Changes and Error Corrections, which requires a retrospective application of changes in accounting policies. Question TX 14-1 addresses whether a change in a company’s tax-sharing agreement requires a change in its tax-allocation policy.

No. The tax-sharing arrangement is a legal agreement among the members of the consolidated return group. While this agreement typically reflects how cash is to be settled among the parties, it does not necessarily impact the amount of tax expense or benefit that would be reported in a subsidiary's separate company financial statements. Allocating taxes in separate company financial statements is an accounting policy. While there may be a relationship between the tax allocation method selected and the tax-sharing agreement, the two are independent of one another. Therefore, a company can change its tax-sharing arrangement without requiring a change to its tax-allocation policy.