ASC 270-740
Income Taxes
270 Interim Reporting
Source downloaded: .Record version 3a890e226128. Effective date must be checked in the source.
This subtopic governs how income tax expense (or benefit) is computed and presented in interim financial statements. The core rule is a hybrid model: tax on "ordinary income (or loss)" is measured by applying a best-estimate annual effective tax rate to year-to-date ordinary income, while items excluded from that rate — significant unusual or infrequently occurring items, discontinued operations, changes in tax law or rates on deferred taxes, changes in beginning-of-year valuation allowances, and certain share-based payment tax effects — are computed individually and recognized discretely in the interim period in which they occur (740-270-25-2; 740-270-30-11 through 30-13). Recognition of interim tax benefits from losses is limited to amounts expected to be realized during the year or recognizable as a deferred tax asset at year-end (740-270-25-9).
Key points (7)
- Tax on ordinary income (loss) is computed at an estimated annual effective tax rate applied to year-to-date ordinary income, with the interim period amount equal to the year-to-date amount less amounts reported in prior interim periods; all other items are computed individually and recognized when they occur (740-270-25-2; 740-270-30-5; 740-270-35-4).
- The annual effective rate must be re-estimated at the end of each successive interim period and reflects anticipated credits, foreign rates, depletion, capital gains rates, tax planning, and any valuation allowance for originating deductible temporary differences (740-270-30-6 through 30-8; 740-270-35-3).
- Excluded from the estimated annual effective tax rate: effects of changes in judgment about beginning-of-year valuation allowances, effects of tax law/rate changes on deferred taxes and on prior-year taxes payable/refundable, significant unusual or infrequently occurring items reported separately, items reported net of tax, and share-based payment tax effects where the tax deduction differs from cumulative book compensation cost (740-270-30-11 through 30-13; 740-270-25-7).
- New tax legislation may not be recognized before enactment; its effect on current-year taxes payable is reflected in the annual effective rate beginning in the interim period that includes the enactment date, while its effect on deferred taxes (and on prior-year taxes) is recognized discretely as of the enactment date (740-270-25-5; 25-6).
- Tax benefits of losses arising early in the year are recognized only if expected to be realized during the year or recognizable as a year-end deferred tax asset; an established seasonal pattern of early losses offset by later income is evidence that realization is more likely than not, and unrecognized early-period benefits absorb later-period income before any tax is provided (740-270-25-9 through 25-11; 740-270-35-5).
- Four year-to-date/full-year income-loss combinations drive the computation, with the year-to-date benefit and the estimated annual benefit each capped by the limitations in 740-270-30-30 through 30-33, which permit reversal of existing taxable temporary differences as a source of realization (740-270-30-22 through 30-28; 30-32).
- For multiple jurisdictions, one overall estimated annual effective rate is used, except that a jurisdiction with an unrecognizable loss benefit, or one for which a reliable estimate cannot be made, is excluded and computed separately or discretely (740-270-30-36; 30-19), and significant variations in the customary relationship between tax expense and pretax income must be disclosed (740-270-50-1).
For students. Interim tax provisions are a favorite exam and practice trap: the split between the annual-effective-rate approach for ordinary income and discrete recognition for everything else drives most errors. The most common misunderstanding is thinking a tax law change or a change in a beginning-of-year valuation allowance gets spread through the annual rate — it does not; only the effect on current-year taxes payable enters the rate, and only from the interim period containing the enactment date.
estimated annual effective tax rateordinary income or lossdiscrete itemsinterim tax benefit limitationvaluation allowanceintraperiod tax allocationenactment datemultiple jurisdictions
Machine-generated study aid for ASC 270-740. Check the source paragraphs below.
270-740-00Status
Source downloaded: .Record version 019a3a995150. Effective date must be checked in the source.
270-740-00-1
The following table identifies the changes made to this Subtopic.
270-740-05Overview and Background
Source downloaded: .Record version 38d2119f01b2. Effective date must be checked in the source.
270-740-05-1
This Subtopic addresses the accounting and disclosure for income taxes in interim periods. The accounting requirements established in this Subtopic build upon the general requirements for accounting for income taxes established in Subtopic 740-10 as well as the intraperiod tax allocation process established in Subtopic 740-20.
270-740-05-2
Subtopic 740-10 addresses the computation of total tax expense for an entity. Subtopic 740-20 addresses the process of allocating total income tax expense (or benefit) for a period to different components of comprehensive income and shareholders' equity.
270-740-05-3
Because an interim period is a subset of a longer period, typically a year, incremental requirements for recognition and measurement are established by this Subtopic.
270-740-05-4
This Subtopic describes:
- a The general computation of interim period income taxes (see paragraphs )
- b The application of the general computation to specific situations (see paragraphs )
- c The interim period income taxes requirements applicable to significant unusual or infrequently occurring items and discontinued operations (see Section 740-270-45)
- d Special computations applicable to operations taxable in multiple jurisdictions (see paragraph 740-270-30-36)
- e Guidelines for reflecting the effects of new tax legislation in interim period income tax provisions (see paragraphs )
- f Disclosure requirements (see paragraph 740-270-50-1).
270-740-15Scope and Scope Exceptions
Source downloaded: .Record version 216c3906b7f4. Effective date must be checked in the source.
Overall Guidance
270-740-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Subtopic 740-10-15.
270-740-25Recognition
Source downloaded: .Record version 906c54aea211. Effective date must be checked in the source.
General Recognition Approach
270-740-25-1
This guidance addresses the issue of how and when income tax expense (or benefit) is recognized in interim periods and distinguishes between elements that are recognized through the use of an estimated annual effective tax rate applied to measures of year-to-date operating results, referred to as ordinary income (or loss), and specific events that are discretely recognized as they occur.
270-740-25-2
The tax (or benefit) related to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and the tax (or benefit) related to all other items shall be individually computed and recognized when the items occur.
270-740-25-3
If an entity is unable to estimate a part of its ordinary income (or loss) or the related tax (or benefit) but is otherwise able to make a reliable estimate, the tax (or benefit) applicable to the item that cannot be estimated shall be reported in the interim period in which the item is reported.
270-740-25-4
The tax benefit of an operating loss carryforward from prior years shall be included in the effective tax rate computation if the tax benefit is expected to be realized as a result of ordinary income in the current year. Otherwise, the tax benefit shall be recognized in the manner described in paragraph 740-270-45-4 in each interim period to the extent that income in the period and for the year to date is available to offset the operating loss carryforward or, in the case of a change in judgment about realizability of the related deferred tax asset in future years, the effect shall be recognized in the interim period in which the change occurs.
270-740-25-5
The effects of new tax legislation shall not be recognized prior to enactment. The tax effect of a change in tax laws or rates on taxes currently payable or refundable for the current year shall be reflected in the computation of the annual effective tax rate beginning in the first interim period that includes the enactment date of the new legislation. The effect of a change in tax laws or rates on a deferred tax liability or asset shall not be apportioned among interim periods through an adjustment of the annual effective tax rate.
270-740-25-6
The tax effect of a change in tax laws or rates on taxes payable or refundable for a prior year shall be recognized as of the enactment date of the change as tax expense (benefit) for the current year. See Example 6 (paragraph 740-270-55-44) for illustrations of accounting for changes caused by new tax legislation.
270-740-25-7
The effect of a change in the beginning-of-the-year balance of a valuation allowance as a result of a change in judgment about the realizability of the related deferred tax asset in future years shall not be apportioned among interim periods through an adjustment of the effective tax rate but shall be recognized in the interim period in which the change occurs.
Recognition of the Tax Benefit of a Loss in Interim Periods
270-740-25-8
This guidance establishes requirements for considering whether the amount of income tax benefit recognized in an interim period shall be limited due to interim period losses.
270-740-25-9
The tax effects of losses that arise in the early portion of a fiscal year shall be recognized only when the tax benefits are expected to be either:
- a Realized during the year
- b Recognizable as a deferred tax asset at the end of the year in accordance with the provisions of Subtopic 740-10.
270-740-25-10
An established seasonal pattern of loss in early interim periods offset by income in later interim periods shall constitute evidence that realization is more likely than not, unless other evidence indicates the established seasonal pattern will not prevail.
270-740-25-11
The tax effects of losses incurred in early interim periods may be recognized in a later interim period of a fiscal year if their realization, although initially uncertain, later becomes more likely than not. When the tax effects of losses that arise in the early portions of a fiscal year are not recognized in that interim period, no tax provision shall be made for income that arises in later interim periods until the tax effects of the previous interim losses are utilized.
270-740-25-12
If an entity has a significant unusual or infrequently occurring loss or a loss from discontinued operations, the tax benefit of that loss shall be recognized in an interim period when the tax benefit of the loss is expected to be either:
- a Realized during the year
- b Recognizable as a deferred tax asset at the end of the year in accordance with the provisions of Subtopic 740-10.
270-740-25-13
See Example 3, Cases A and B (paragraphs ) for example computations involving unusual or infrequently occurring losses.
270-740-25-14
If recognition of a deferred tax asset at the end of the fiscal year for all or a portion of the tax benefit of the loss depends on taxable income from the reversal of existing taxable temporary differences, see paragraphs for guidance. If all or a part of the tax benefit is not realized and future realization is not more likely than not in the interim period of occurrence but becomes more likely than not in a subsequent interim period of the same fiscal year, the previously unrecognized tax benefit shall be reported that subsequent interim period in the same manner that it would have been reported if realization had been more likely than not in the interim period of occurrence, that is, as a tax benefit relating to continuing operations or discontinued operations. See Subtopic 740-20 for the requirements to allocate total income tax expense (or benefit).
270-740-30Initial Measurement
Source downloaded: .Record version 42619c8857a6. Effective date must be checked in the source.
General Methodology and Use of Estimated Annual Effective Tax Rate
270-740-30-1
This guidance establishes the methodology, including the use of an estimated annual effective tax rate, to determine income tax expense (or benefit) in interim financial information.
270-740-30-2
In reporting interim financial information, income tax provisions shall be determined under the general requirements for accounting for income taxes set forth in Subtopic 740-10.
270-740-30-3
Income tax expense (or benefit) for an interim period is based on income taxes computed for ordinary income or loss and income taxes computed for items or events that are not part of ordinary income or loss.
270-740-30-4
Paragraph 740-270-25-2 requires that the tax (or benefit) related to ordinary income (or loss) be computed at an estimated annual effective tax rate and the tax (or benefit) related to all other items be individually computed and recognized when the items occur (for example, the tax effects resulting from an employee share-based payment award within the scope of Topic 718 when the deduction for the award for tax purposes does not equal the cumulative compensation costs of the award recognized for financial reporting purposes).
270-740-30-5
The estimated annual effective tax rate, described in paragraphs , shall be applied to the year-to-date ordinary income (or loss) at the end of each interim period to compute the year-to-date tax (or benefit) applicable to ordinary income (or loss).
270-740-30-6
At the end of each interim period the entity shall make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. In some cases, the estimated annual effective tax rate will be the statutory rate modified as may be appropriate in particular circumstances. In other cases, the rate will be the entity's estimate of the tax (or benefit) that will be provided for the fiscal year, stated as a percentage of its estimated ordinary income (or loss) for the fiscal year (see paragraphs if an ordinary loss is anticipated for the fiscal year).
270-740-30-7
The tax effect of a valuation allowance expected to be necessary for a deferred tax asset at the end of the year for originating deductible temporary differences and carryforwards during the year shall be included in the effective tax rate.
270-740-30-8
The estimated effective tax rate also shall reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives. However, in arriving at this estimated effective tax rate, no effect shall be included for the tax related to an employee share-based payment award within the scope of Topic 718 when the deduction for the award for tax purposes does not equal the cumulative compensation costs of the award recognized for financial reporting purposes, significant unusual or infrequently occurring items that will be reported separately, or for items that will be reported net of their related tax effect in reports for the interim period or for the fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis.
270-740-30-9
Examples 1 through 2 (see paragraphs ) contain illustrations of the computation of estimated annual effective tax rates beginning in paragraphs 740-270-55-3; 740-270-55-12; and .
Exclusion of Items from Estimated Annual Effective Tax Rate
270-740-30-10
This guidance identifies items that are always excluded from the determination of the estimated annual effective tax rate. This guidance also specifies the alternatives for including or excluding certain investment tax credits in the estimated annual effective tax rate.
270-740-30-11
The effects of changes in judgment about beginning-of-year valuation allowances and effects of changes in tax laws or rates on deferred tax assets or liabilities and taxes payable or refundable for prior years (in the case of a retroactive change) shall be excluded from the estimated annual effective tax rate calculation.
270-740-30-12
Taxes related to an employee share-based payment award within the scope of Topic 718 when the deduction for the award for tax purposes does not equal the cumulative compensation costs of the award recognized for financial reporting purposes, significant unusual or infrequently occurring items that will be reported separately or items that will be reported net of their related tax effect shall be excluded from the estimated annual effective tax rate calculation.
270-740-30-13
As these items are excluded from the estimated annual effective tax rate, Section 740-270-25 requires that the related tax effect be recognized in the interim period in which they occur. See Example 3 (paragraph 740-270-55-24) for illustrations of accounting for these items in the interim period which they occur.
270-740-30-14
Certain investment tax credits may be excluded from the estimated annual effective tax rate. If an entity includes allowable investment tax credits as part of its provision for income taxes over the productive life of acquired property and not entirely in the year the property is placed in service, amortization of deferred investment tax credits need not be taken into account in estimating the annual effective tax rate; however, if the investment tax credits are taken into account in the estimated annual effective tax rate, the amount taken into account shall be the amount of amortization that is anticipated to be included in income in the current year (see paragraphs 740-10-25-46 and 740-10-45-28).
270-740-30-15
Further, paragraphs 842-50-30-1 and require that investment tax credits related to leases that are accounted for as leveraged leases shall be deferred and accounted for as return on the net investment in the leveraged leases in the years in which the net investment is positive and explains that the use of the term years is not intended to preclude application of the accounting described to shorter periods. If an entity accounts for investment tax credits related to leveraged leases in accordance with those paragraphs for interim periods, those investment tax credits shall not be taken into account in estimating the annual effective tax rate.
Ability to Make Estimates
270-740-30-16
This guidance addresses the consequences of an entity's inability to reliably estimate some or all of the information that is ordinarily required to determine the annual effective tax rate in interim financial information.
270-740-30-17
Paragraph 740-270-25-3 requires that if an entity is unable to estimate a part of its ordinary income (or loss) or the related tax (or benefit) but is otherwise able to make a reliable estimate, the tax (or benefit) applicable to the item that cannot be estimated be reported in the interim period in which the item is reported.
270-740-30-18
Estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluations of possible future events and transactions and may be subject to subsequent refinement or revision. If a reliable estimate cannot be made, the actual effective tax rate for the year to date may be the best estimate of the annual effective tax rate.
270-740-30-19
The effect of translating foreign currency financial statements may make it difficult to estimate an annual effective foreign currency tax rate in dollars. For example, in some cases depreciation is translated at historical exchange rates, whereas many transactions included in income are translated at current period average exchange rates. If depreciation is large in relation to earnings, a change in the estimated ordinary income that does not change the effective foreign currency tax rate can change the effective tax rate in the dollar financial statements. This result can occur with no change in exchange rates during the current year if there have been exchange rate changes in past years. If the entity is unable to estimate its annual effective tax rate in dollars or is otherwise unable to make a reliable estimate of its ordinary income (or loss) or of the related tax (or benefit) for the fiscal year in a jurisdiction, the tax (or benefit) applicable to ordinary income (or loss) in that jurisdiction shall be recognized in the interim period in which the ordinary income (or loss) is reported.
Effect of Operating Losses
270-740-30-20
This guidance addresses changes to the general methodology to determine income tax expense (or benefit) in interim financial information as set forth in paragraph 740-270-30-5 when an entity has experienced or expects to experience operating losses.
270-740-30-21
An entity may have experienced year-to-date ordinary income (or loss) at the end of any interim period. These year-to-date actual results of either ordinary income (or loss) may differ from the results expected by the entity for either ordinary income (or loss) for the full fiscal year. This guidance identifies the required methodology for recording interim period income taxes for each of the four possible relationships of year-to-date ordinary income (or loss) and expected full fiscal year ordinary income (or loss).See Examples 1 through 2 (paragraphs ) for example computations in these different situations. This guidance also establishes income tax benefit limitations when ordinary losses exist.
270-740-30-22
If an entity has ordinary income for the year to date at the end of an interim period and anticipates ordinary income for the fiscal year, the interim period tax shall be computed in accordance with paragraph 740-270-30-5.
270-740-30-23
See Example 1, Cases A and B1 (paragraphs ) for illustrations of the application of these requirements.
270-740-30-24
If an entity has an ordinary loss for the year to date at the end of an interim period and anticipates ordinary income for the fiscal year, the interim period tax benefit shall be computed in accordance with paragraph 740-270-30-5, except that the year-to-date tax benefit recognized shall be limited to the amount determined in accordance with paragraphs .
270-740-30-25
See Example 1, Cases B2 and B3 (paragraphs ) for illustrations of the application of these requirements.
270-740-30-26
If an entity has ordinary income for the year to date at the end of an interim period and anticipates an ordinary loss for the fiscal year, the interim period tax shall be computed in accordance with paragraph 740-270-30-5. The estimated tax benefit for the fiscal year, used to determine the estimated annual effective tax rate described in paragraphs , shall not exceed the tax benefit determined in accordance with paragraphs .
270-740-30-27
See Example 2, Cases A2 and C2 (paragraphs 740-270-55-16 and 740-270-55-20) for illustrations of the application of these requirements.
270-740-30-28
If an entity has an ordinary loss for the year to date at the end of an interim period and anticipates an ordinary loss for the fiscal year, the interim period tax benefit shall be computed in accordance with paragraph 740-270-30-5. The estimated tax benefit for the fiscal year, used to determine the estimated annual effective tax rate described in paragraphs , shall not exceed the tax benefit determined in accordance with paragraphs .
270-740-30-29
See Example 2, Cases A1, B, and C1 (paragraphs 740-270-55-15, 740-270-55-17, and 740-270-55-19) for illustrations of the application of these requirements.
Determining Income Tax Benefit Limitations
270-740-30-30
Paragraph 740-270-25-9 provides that a tax benefit shall be recognized for a loss that arises early in a fiscal year if the tax benefits are expected to be either of the following:
- aRealized during the year
- bRecognizable as a deferred tax asset at the end of the year in accordance with the requirements established in Subtopic 740-10. Paragraph 740-10-30-5(e) requires that a valuation allowance be recognized if it is more likely than not that the tax benefit of some portion or all of a deferred tax asset will not be realized.
270-740-30-31
The limitations described in the preceding paragraph shall be applied in determining the estimated tax benefit of an ordinary loss for the fiscal year, used to determine the estimated annual effective tax rate and the year-to-date tax benefit of a loss.
270-740-30-32
The reversal of existing taxable temporary differences may be a source of evidence in determining whether a tax benefit requires limitation. A deferred tax liability related to existing taxable temporary differences is a source of evidence for recognition of a tax benefit when all of the following conditions exist:
- aAn entity anticipates an ordinary loss for the fiscal year or has a year-to-date ordinary loss in excess of the anticipated ordinary loss for the fiscal year.
- bThe tax benefit of that loss is not expected to be realized during the year.
- cRecognition of a deferred tax asset for that loss at the end of the fiscal year is expected to depend on taxable income from the reversal of existing taxable temporary differences (that is, a higher deferred tax asset valuation allowance would be necessary absent the existing taxable temporary differences).
270-740-30-33
If the tax benefit relates to an estimated ordinary loss for the fiscal year, it shall be considered in determining the estimated annual effective tax rate described in paragraphs . If the tax benefit relates to a year-to-date ordinary loss, it shall be considered in computing the maximum tax benefit that shall be recognized for the year to date.
270-740-30-34
See Example 2, Cases A1 and A2; B; and C1 and C2 (paragraphs and ) for illustrations of computations involving operating losses, and Example 1, Cases B2 and B3 (see paragraphs ) for illustrations of special year-to-date limitation computations.
Multiple Tax Jurisdictions
270-740-30-35
This guidance addresses possible changes to the general interim period income tax expense methodology when an entity is subject to tax in multiple jurisdictions.
270-740-30-36
If an entity that is subject to tax in multiple jurisdictions pays taxes based on identified income in one or more individual jurisdictions, interim period tax (or benefit) related to consolidated ordinary income (or loss) for the year to date shall be computed in accordance with the requirements of this Subtopic using one overall estimated annual effective tax rate with the following exceptions:
- aIf in a separate jurisdiction an entity anticipates an ordinary loss for the fiscal year or has an ordinary loss for the year to date for which, in accordance with paragraphs , no tax benefit can be recognized, the entity shall exclude ordinary income (or loss) in that jurisdiction and the related tax (or benefit) from the overall computations of the estimated annual effective tax rate and interim period tax (or benefit). A separate estimated annual effective tax rate shall be computed for that jurisdiction and applied to ordinary income (or loss) in that jurisdiction in accordance with the methodology otherwise required by this Subtopic.
- bIf an entity is unable to estimate an annual effective tax rate in a foreign jurisdiction in dollars or is otherwise unable to make a reliable estimate of its ordinary income (or loss) or of the related tax (or benefit) for the fiscal year in a jurisdiction, the entity shall exclude ordinary income (or loss) in that jurisdiction and the related tax (or benefit) from the overall computations of the estimated annual effective tax rate and interim period tax (or benefit). The tax (or benefit) related to ordinary income (or loss) in that jurisdiction shall be recognized in the interim period in which the ordinary income (or loss) is reported. The tax (or benefit) related to ordinary income (or loss) in a jurisdiction may not be limited to tax (or benefit) in that jurisdiction. It might also include tax (or benefit) in another jurisdiction that results from providing taxes on unremitted earnings, foreign tax credits, and so forth.
Accounting for Income Taxes Applicable to the Cumulative Effect of a Change in Accounting Principle
270-740-30-37
Topic 250 establishes the accounting requirements related to recording the effect of a change in accounting principle. The guidance in this Subtopic addresses issues related to the measurement of the tax effect in interim periods associated with those changes.
270-740-30-38
The tax (or benefit) applicable to the cumulative effect of the change on retained earnings at the beginning of the fiscal year shall be computed the same as for the annual financial statements.
270-740-30-39
When an entity makes an accounting change in other than the first interim period of the entity's fiscal year, paragraph 250-10-45-14, requires that financial information for the prechange interim periods of the fiscal year shall be reported by retrospectively applying the newly adopted accounting principle to those prechange interim periods. The tax (or benefit) applicable to those prechange interim periods shall be recomputed. The revised tax (or benefit) shall reflect the year-to-date amounts and annual estimates originally used for the prechange interim periods, modified only for the effect of the change in accounting principle on those year-to-date and estimated annual amounts.
270-740-35Subsequent Measurement
Source downloaded: .Record version 024ceefa0e6e. Effective date must be checked in the source.
270-740-35-1
This guidance addresses the accounting for interim period income tax expense (or benefit) in periods subsequent to an entity's first interim period within a fiscal year. See Section 740-270-30 for a description of and requirements related to the determination of the estimated annual effective tax rate.
270-740-35-2
The estimated annual effective tax rate is described in paragraphs . As indicated in paragraph 740-270-30-18, estimates of the annual effective tax rate at the end of interim periods are, of necessity, based on evaluations of possible future events and transactions and may be subject to subsequent refinement or revision. If a reliable estimate cannot be made, the actual effective tax rate for the year to date may be the best estimate of the annual effective tax rate.
270-740-35-3
As indicated in paragraph 740-270-30-6, at the end of each successive interim period the entity shall make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. As indicated in paragraph 740-270-30-8, the rate so determined shall be used in providing for income taxes on a current year-to-date basis. The rate shall be revised, if necessary, as of the end of each successive interim period during the fiscal year to the entity's best current estimate of its annual effective tax rate.
270-740-35-4
As indicated in paragraph 740-270-30-5, the estimated annual effective tax rate shall be applied to the year-to-date ordinary income (or loss) at the end of each interim period to compute the year-to-date tax (or benefit) applicable to ordinary income (or loss). The interim period tax (or benefit) related to ordinary income (or loss) shall be the difference between the amount so computed and the amounts reported for previous interim periods of the fiscal year.
270-740-35-5
One result of the year-to-date computation is that, if the tax benefit of an ordinary loss that occurs in the early portions of the fiscal year is not recognized because it is more likely than not that the tax benefit will not be realized, tax is not provided for subsequent ordinary income until the unrecognized tax benefit of the earlier ordinary loss is offset (see paragraphs ). As indicated in paragraph 740-270-30-31, the limitations described in paragraph 740-270-25-9 shall be applied in determining the estimated tax benefit of an ordinary loss for the fiscal year, used to determine the estimated annual effective tax rate, and the year-to-date tax benefit of a loss. As indicated in paragraph 740-270-30-33, if the tax benefit relates to an estimated ordinary loss for the fiscal year, it shall be considered in determining the estimated annual effective tax rate described in paragraphs . If the tax benefit relates to a year-to-date ordinary loss, it shall be considered in computing the maximum tax benefit that shall be recognized for the year to date.
270-740-35-6
A change in judgment that results in subsequent recognition, derecognition, or change in measurement of a tax position taken in a prior interim period within the same fiscal year is an integral part of an annual period and, consequently, shall be reflected as such under the requirements of this Subtopic. This requirement differs from the requirement in paragraph 740-10-25-15 applicable to a change in judgment that results in subsequent recognition, derecognition, or a change in measurement of a tax position taken in a prior annual period, which requires that the change (including any related interest and penalties) be recognized as a discrete item in the period in which the change occurs.
270-740-35-7
See Example 1, Case C (paragraph 740-270-55-9) for an illustration of how changes in estimates impact quarterly income tax computations.
270-740-45Other Presentation Matters
Source downloaded: .Record version 7387dbff7173. Effective date must be checked in the source.
270-740-45-1
Subtopic 740-20 establishes requirements to allocate total income tax expense (or benefit) of an entity for a period to different components of comprehensive income and shareholders' equity. That process is referred to as intraperiod tax allocation. This Section addresses that required allocation of income tax expense (or benefit) in interim periods.
270-740-45-2
Section 740-20-45 describes the method of applying tax allocation within a period. The tax allocation computation shall be made using the estimated fiscal year ordinary income together with unusual items, infrequently occurring items, and discontinued operations for the year-to-date period.
270-740-45-3
Discontinued operations that will be presented net of related tax effects in the financial statements for the fiscal year shall be presented net of related tax effects in interim financial statements. Unusual or infrequently occurring items that will be separately disclosed in the financial statements for the fiscal year shall be separately disclosed as a component of pretax income from continuing operations, and the tax (or benefit) related to those items shall be included in the tax (or benefit) related to continuing operations. See paragraphs for interim period recognition guidance when an entity has a significant unusual or infrequently occurring loss or a loss from discontinued operations. See paragraphs for the application of interim period allocation requirements to recognized income tax expense (or benefit) and discontinued operations. See Example 7 (paragraph 740-270-55-52) for an illustration of the income statement display of these items.
270-740-45-4
Paragraph 740-20-45-3 requires that the manner of reporting the tax benefit of an operating loss carryforward recognized in a subsequent year generally is determined by the source of the income in that year and not by the source of the operating loss carryforward or the source of expected future income that will result in realization of a deferred tax asset for the operating loss carryforward. The tax benefit is allocated first to reduce tax expense from continuing operations to zero with any excess allocated to the other source(s) of income that provides the means of realization, for example, discontinued operations, other comprehensive income, and so forth. That requirement also pertains to reporting the tax benefit of an operating loss carryforward in interim periods.
270-740-45-5
Paragraph 740-270-25-11 establishes the requirement that when the tax effects of losses that arise in the early portions of a fiscal year are not recognized in that interim period, no tax provision shall be made for income that arises in later interim periods until the tax effects of the previous interim losses are utilized.
Specific Requirements Applicable to Discontinued Operations
270-740-45-6
This guidance addresses specific requirements for the intraperiod allocation of income taxes in interim periods when there are discontinued operations.
270-740-45-7
When an entity reports discontinued operations, the computations described in paragraphs , , and shall be the basis for the tax (or benefit) related to the income (or loss) from operations of the discontinued operation before the date on which the criteria in paragraph 205-20-45-1E are met.
270-740-45-8
Income (or loss) from operations of the discontinued operation, prior to the interim period in which the date on which the criteria in paragraph 205-20-45-1E are met occurs, will have been included in ordinary income (or loss) of prior periods and thus will have been included in the estimated annual effective tax rate and tax (or benefit) calculations described in Sections 740-270-30 and 740-270-35 applicable to ordinary income. The total tax (or benefit) provided in the prior interim periods shall not be recomputed but shall be divided into two components, applicable to the remaining ordinary income (or loss) and to the income (or loss) from operations of the discontinued operation as follows. A revised estimated annual effective tax rate and resulting tax (or benefit) shall be computed, in accordance with Sections 740-270-30 and 740-270-35 applicable to ordinary income, for the remaining ordinary income (or loss), on the basis of the estimates applicable to such operations used in the original calculations for each prior interim period. The tax (or benefit) related to the operations of the discontinued operation shall be the total of:
- a The difference between the tax (or benefit) originally computed for ordinary income (or loss) and the recomputed amount for the remaining ordinary income (or loss)
- b The tax computed in accordance with paragraphs ; ; and for any unusual or infrequently occurring items of the discontinued operation.
270-740-50Disclosure
Source downloaded: .Record version 0d812bc71a97. Effective date must be checked in the source.
Variations in Customary Income Tax Expense Relationships
270-740-50-1
Application of the requirements for accounting for income taxes in interim periods may result in a significant variation in the customary relationship between income tax expense and pretax accounting income. The reasons for significant variations in the customary relationship between income tax expense and pretax accounting income shall be disclosed in the interim period financial statements if they are not otherwise apparent from the financial statements or from the nature of the entity's business.
270-740-55Implementation Guidance and Illustrations
Source downloaded: .Record version 4080864efab7. Effective date must be checked in the source.
270-740-55-1
This Section, which is an integral part of the requirements of this Subtopic, provides Examples of applying the required accounting for interim period income taxes to some specific situations. In general, the Examples illustrate matters unique to accounting for income taxes at interim dates. The Examples do not include consideration of the nature of tax credits and events that do not have tax consequences or illustrate all possible combinations of circumstances.
Illustrations
270-740-55-2
The following Cases illustrate the guidance in Sections 740-270-30 and 740-270-35 for accounting for income taxes applicable to ordinary income (or loss) at an interim date if ordinary income is anticipated for the fiscal year:
- aOrdinary income in all interim periods (Case A)
- bOrdinary income and losses in interim periods (Case B)
- cChanges in estimates (Case C).
270-740-55-3
Cases A and B share all of the following assumptions:
- aFor the full fiscal year, an entity anticipates ordinary income of $100,000. All income is taxable in one jurisdiction at a 50 percent rate. Anticipated tax credits for the fiscal year total $10,000. No events that do not have tax consequences are anticipated. No changes in estimated ordinary income, tax rates, or tax credits occur during the year.
- bComputation of the estimated annual effective tax rate applicable to ordinary income is as follows.
"Tax at statutory rate ($100,000 at 50%)" " $50,000 " Less anticipated tax credits " (10,000)" Net tax to be provided " $40,000 " "Estimated annual effective tax rate ($40,000 ÷ $100,000)" 40%
- cTax credits are generally subject to limitations, usually based on the amount of tax payable before the credits. In computing the estimated annual effective tax rate, anticipated tax credits are limited to the amounts that are expected to be realized or are expected to be recognizable at the end of the current year in accordance with the provisions of Subtopic 740-10. If an entity is unable to estimate the amount of its tax credits for the year, see paragraphs .
270-740-55-4
The entity has ordinary income in all interim periods. Quarterly tax computations are as follows.
Ordinary Income Tax Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $20,000 " " $20,000 " 40% " $8,000 " $- " $8,000 " Second quarter " 20,000 " " 40,000 " 40% " 16,000 " " 8,000 " " 8,000 " Third quarter " 20,000 " " 60,000 " 40% " 24,000 " " 16,000 " " 8,000 " Fourth quarter " 40,000 " " 100,000 " 40% " 40,000 " " 24,000 " " 16,000 " Fiscal year " $100,000 " " $40,000 "
270-740-55-5
The following Cases illustrate ordinary income and losses in interim periods:
- aYear-to-date ordinary income (Case B1)
- bYear-to-date ordinary losses, realization more likely than not (Case B2)
- cYear-to-date ordinary losses, realization not more likely than not (Case B3).
270-740-55-6
The entity has ordinary income and losses in interim periods; there is not an ordinary loss for the fiscal year to date at the end of any interim period. Quarterly tax computations are as follows.
Ordinary Income (Loss) Tax (or Benefit) Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $40,000 " " $40,000 " 40% " $16,000 " $- " $16,000 " Second quarter " 40,000 " " 80,000 " 40% " 32,000 " " 16,000 " " 16,000 " Third quarter " (20,000)" " 60,000 " 40% " 24,000 " " 32,000 " " (8,000)" Fourth quarter " 40,000 " " 100,000 " 40% " 40,000 " " 24,000 " " 16,000 " Fiscal year " $100,000 " " $40,000 "
270-740-55-7
The entity has ordinary income and losses in interim periods, and there is an ordinary loss for the year to date at the end of an interim period. Established seasonal patterns provide evidence that realization in the current year of the tax benefit of the year-to-date loss and of anticipated tax credits is more likely than not. Quarterly tax computations are as follows.
Ordinary Income (Loss) Tax (or Benefit) Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $(20,000)" " $(20,000)" 40% " $(8,000)" $- " $(8,000)" Second quarter " 10,000 " " (10,000)" 40% " (4,000)" " (8,000)" " 4,000 " Third quarter " 15,000 " " 5,000 " 40% " 2,000 " " (4,000)" " 6,000 " Fourth quarter " 95,000 " " 100,000 " 40% " 40,000 " " 2,000 " " 38,000 " Fiscal year " $100,000 " " $40,000 "
270-740-55-8
The entity has ordinary income and losses in interim periods, and there is a year-to-date ordinary loss during the year. There is no established seasonal pattern and it is more likely than not that the tax benefit of the year-to-date loss and the anticipated tax credits will not be realized in the current or future years. Quarterly tax computations are as follows.
Ordinary Income (Loss) Tax Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $(20,000)" " $(20,000)" — (a) $- $- $- Second quarter " 10,000 " " (10,000)" — (a) - - - Third quarter " 15,000 " " 5,000 " 40% " 2,000 " - " 2,000 " Fourth quarter " 95,000 " " 100,000 " 40% " 40,000 " " 2,000 " " 38,000 " Fiscal year " $100,000 " " $40,000 " (a) No benefit is recognized because the tax benefit of the year-to-date loss is not expected to be realized during the current year or recognizable as a deferred tax asset at the end of the current year in accordance with the provisions of Subtopic 740-10.
270-740-55-9
During the fiscal year, all of an entity's operations are taxable in one jurisdiction at a 50 percent rate. No events that do not have tax consequences are anticipated. Estimates of ordinary income for the year and of anticipated credits at the end of each interim period are as shown below. Changes in the estimated annual effective tax rate result from changes in the ratio of anticipated tax credits to tax computed at the statutory rate. Changes consist of an unanticipated strike that reduced income in the second quarter, an increase in the capital budget resulting in an increase in anticipated investment tax credit in the third quarter, and better than anticipated sales and income in the fourth quarter. The entity has ordinary income in all interim periods. Computations of the estimated annual effective tax rate based on the estimate made at the end of each quarter are as follows.
+ "Estimated, end of" First Quarter Second Quarter Third Quarter Actual Fiscal Year Estimated ordinary income for the fiscal year " $100,000 " " $80,000 " " $80,000 " " $100,000 " Tax at 50% statutory rate " $50,000 " " $40,000 " " $40,000 " " $50,000 " Less anticipated credits " (5,000)" " (5,000)" " (10,000)" " (10,000)" Net tax to be provided " $45,000 " " $35,000 " " $30,000 " " $40,000 " Estimated annual effective tax rate 45% 43.75% 37.5% 40%
270-740-55-10
Quarterly tax computations are as follows.
Ordinary Income Tax Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $25,000 " " $25,000 " 45% " $11,250 " $- " $11,250 " Second quarter " 5,000 " " 30,000 " 43.75% " 13,125 " " 11,250 " " 1,875 " Third quarter " 25,000 " " 55,000 " 37.5% " 20,625 " " 13,125 " " 7,500 " Fourth quarter " 45,000 " " 100,000 " 40% " 40,000 " " 20,625 " " 19,375 " Fiscal year " $100,000 " " $40,000 "
270-740-55-11
The following Cases illustrate the guidance in Section 740-270-30 for accounting for income taxes applicable to ordinary income (or loss) at an interim date if an ordinary loss is anticipated for the fiscal year:
- aRealization of the tax benefit of the loss is more likely than not (Case A)
- bRealization of the tax benefit of the loss is not more likely than not (Case B)
- cPartial realization of the tax benefit of the loss is more likely than not (Case C)
- dReversal of net deferred tax credits (Case D).
270-740-55-12
Cases A, B, and C share the following assumptions.
- aFor the full fiscal year, an entity anticipates an ordinary loss of $100,000. The entity operates entirely in one jurisdiction where the tax rate is 50 percent. Anticipated tax credits for the fiscal year total $10,000. No events that do not have tax consequences are anticipated.
- bIf there is a recognizable tax benefit for the loss and the tax credits pursuant to the requirements of Subtopic 740-10, computation of the estimated annual effective tax rate applicable to the ordinary loss would be as follows.
"Tax benefit at statutory rate ($100,000 at 50%)" " $(50,000)" Tax credits " (10,000)" Net tax benefit " $(60,000)" "Estimated annual effective tax rate ($60,000 ÷ $100,000)" 60%
270-740-55-13
Cases A, B, and C state varying assumptions with respect to assurance of realization of the components of the net tax benefit. When the realization of a component of the benefit is not expected to be realized during the current year or recognizable as a deferred tax asset at the end of the current year in accordance with the provisions of Subtopic 740-10, that component is not included in the computation of the estimated annual effective tax rate.
270-740-55-14
The following Cases illustrate when realization of the tax benefit of the loss is more likely than not:
- aOrdinary losses in all interim periods (Case A1)
- bOrdinary income and losses in interim periods (Case A2).
270-740-55-15
The entity has ordinary losses in all interim periods. The full tax benefit of the anticipated ordinary loss and the anticipated tax credits will be realized by carryback. Quarterly tax computations are as follows.
Ordinary Loss Tax Benefit Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $(20,000)" " $(20,000)" 60% " $(12,000)" $- " $(12,000)" Second quarter " (20,000)" " (40,000)" 60% " (24,000)" " (12,000)" " (12,000)" Third quarter " (20,000)" " (60,000)" 60% " (36,000)" " (24,000)" " (12,000)" Fourth quarter " (40,000)" " (100,000)" 60% " (60,000)" " (36,000)" " (24,000)" Fiscal year " $(100,000)" " $(60,000)"
270-740-55-16
The entity has ordinary income and losses in interim periods and for the year to date. The full tax benefit of the anticipated ordinary loss and the anticipated tax credits will be realized by carryback. The full tax benefit of the maximum year-to-date ordinary loss can also be realized by carryback. Quarterly tax computations are as follows.
Ordinary Income (Loss) Tax (or Benefit) Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $20,000 " " $20,000 " 60% " $12,000 " $- " $12,000 " Second quarter " (80,000)" " (60,000)" 60% " (36,000)" " 12,000 " " (48,000)" Third quarter " (80,000)" " (140,000)" 60% " (84,000)" " (36,000)" "(48,000)" Fourth quarter " 40,000 " " (100,000)" 60% " (60,000)" "(84,000)" "24,000" Fiscal year " $(100,000)" " $(60,000)" (a) Footnote superseded by Accounting Standards Update No. 2019-12.
270-740-55-17
In Cases A1 and A2, if neither the tax benefit of the anticipated loss for the fiscal year nor anticipated tax credits were recognizable pursuant to Subtopic 740-10, the estimated annual effective tax rate for the year would be zero and no tax (or benefit) would be recognized in any quarter. That conclusion is not affected by changes in the mix of income and loss in interim periods during a fiscal year. However, see paragraph 740-270-30-18.
270-740-55-18
The following Cases illustrate when partial realization of the tax benefit of the loss is more likely than not:
- aOrdinary losses in all interim periods (Case C1)
- bOrdinary income and losses in interim periods (Case C2).
270-740-55-19
The entity has an ordinary loss in all interim periods. It is more likely than not that the tax benefit of the loss in excess of $40,000 of prior income available to be offset by carryback ($20,000 of tax at the 50 percent statutory rate) will not be realized. Therefore the estimated annual effective tax rate is 20 percent ($20,000 benefit more likely than not to be realized divided by $100,000 estimated fiscal year ordinary loss). Quarterly tax computations are as follows.
Ordinary Loss Tax Benefit Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $(20,000)" " $(20,000)" 20% " $(4,000)" $- " $(4,000)" Second quarter " (20,000)" " (40,000)" 20% " (8,000)" " (4,000)" " (4,000)" Third quarter " (20,000)" " (60,000)" 20% " (12,000)" " (8,000)" " (4,000)" Fourth quarter " (40,000)" " (100,000)" 20% " (20,000)" " (12,000)" " (8,000)" Fiscal year " $(100,000)" " $(20,000)"
270-740-55-20
The entity has ordinary income and losses in interim periods and for the year to date. It is more likely than not that the tax benefit of the anticipated ordinary loss in excess of $40,000 of prior income available to be offset by carryback ($20,000 of tax at the 50 percent statutory rate) will not be realized. Therefore the estimated annual effective tax rate is 20 percent ($20,000 benefit more likely than not to be realized divided by $100,000 estimated fiscal year ordinary loss), and the benefit that can be recognized for the year to date is limited to $20,000 (the benefit that is more likely than not to be realized). Quarterly tax computations are as follows.
Ordinary Income (Loss) Tax (or benefit) Year-to-Date Reporting Period Ordinary Income (Loss) Year-to-Date Estimated Annual Effective Tax Rate Computed Limited to Less Previously Provided Reporting Period First quarter " $20,000 " " $20,000 " 20% " $4,000 " $- " $4,000 " Second quarter " (80,000)" " (60,000)" 20% " (12,000)" " 4,000 " " (16,000)" Third quarter " (80,000)" " (140,000)" 20% " (28,000)" " $(20,000)" " (12,000)" " (8,000)" Fourth quarter " 40,000 " " (100,000)" 20% " (20,000)" " (20,000)" - Fiscal year " $(100,000)" " $(20,000)"
270-740-55-21
The entity anticipates a fiscal year ordinary loss. The loss cannot be carried back, and future profits exclusive of reversing temporary differences are unlikely. Net deferred tax liabilities arising from existing net taxable temporary differences are present. A portion of the existing net taxable temporary differences relating to those liabilities will reverse within the loss carryforward period. Computation of the estimated annual effective tax rate to be used (see paragraphs ) is as follows.
Estimated fiscal year ordinary loss " $(100,000)" The tax benefit to be recognized is the lesser of: "Tax effect of the loss carryforward ($100,000 at 50% statutory rate)" " $50,000 " Amount of the net deferred tax liabilities that would otherwise have been settled during the carry-forward period " $24,000 " "Estimated annual effective tax rate ($24,000 ÷ $100,000)" 24%
270-740-55-22
Quarterly tax computations are as follows.
Ordinary Loss Tax Benefit Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $(20,000)" " $(20,000)" 24% " $(4,800)" $- " $(4,800)" Second quarter " (20,000)" " (40,000)" 24% " (9,600)" " (4,800)" " (4,800)" Third quarter " (20,000)" " (60,000)" 24% " (14,400)" " (9,600)" " (4,800)" Fourth quarter " (40,000)" " (100,000)" 24% " (24,000)" " (14,400)" " (9,600)" Fiscal year " $(100,000)" " $(24,000)"
270-740-55-23
Note that changes in the timing of the loss by quarter would not change this computation.
270-740-55-24
The following Cases illustrate accounting for income taxes applicable to unusual or infrequently occurring items when ordinary income is expected for the fiscal year:
- aRealization of the tax benefit is more likely than not at date of occurrence (Case A)
- bRealization of the tax benefit not more likely than not at date of occurrence (Case B).
270-740-55-25
Cases A and B illustrate the computation of the tax (or benefit) applicable to unusual or infrequently occurring items when ordinary income is anticipated for the fiscal year. These Cases are based on the assumptions and computations presented in paragraph 740-270-55-3 and Example 1, Cases A and B (see paragraphs ), plus additional information supplied in Cases A and B of this Example. The computation of the tax (or benefit) applicable to the ordinary income is not affected by the occurrence of an unusual or infrequently occurring item; therefore, each Case refers to one or more of the illustrations of that computation in Example 1, Cases A and B (see paragraphs ), and does not reproduce the computation and the assumptions. The income statement display for tax (or benefit) applicable to unusual or infrequently occurring items is illustrated in Example 7 (see paragraph 740-270-55-52).
270-740-55-26
As explained in paragraph 740-270-55-25, this Case is based on the computations of tax applicable to ordinary income that are illustrated in Example 1, Case A (see paragraph 740-270-55-4). In addition, the entity experiences a tax-deductible unusual or infrequently occurring loss of $50,000 (tax benefit $25,000) in the second quarter. Because the loss can be carried back, it is more likely than not that the tax benefit will be realized at the time of occurrence. Quarterly tax provisions are as follows.
Tax (or Benefit) Applicable to Reporting Period Ordinary Income "Unusual, Infrequently Occurring, or Extraordinary Loss" Ordinary Income "Unusual, Infrequently Occurring, or Extraordinary Loss" First quarter " $20,000 " " $8,000 " Second quarter " 20,000 " " $(50,000)" " 8,000 " " $(25,000)" Third quarter " 20,000 " " 8,000 " Fourth quarter " 40,000 " " 16,000 " Fiscal year " $100,000 " " $(50,000)" " $40,000 " " $(25,000)"
270-740-55-27
Note that changes in assumptions would not change the timing of the recognition of the tax benefit applicable to the unusual or infrequently occurring item as long as realization is more likely than not.
270-740-55-28
As explained in paragraph 740-270-55-25, this Case is based on the computations of tax applicable to ordinary income that are illustrated in Example 1, Cases A and B1 (see paragraphs ). In addition, the entity experiences a tax-deductible unusual or infrequently occurring loss of $50,000 (potential benefit $25,000) in the second quarter. The loss cannot be carried back, and available evidence indicates that a valuation allowance is needed for all of the deferred tax asset. As a result, the tax benefit of the unusual or infrequently occurring loss is recognized only to the extent of offsetting ordinary income for the year to date. Quarterly tax provisions under two different assumptions for the occurrence of ordinary income are as follows.
Tax (or Benefit) Applicable to Assumptions and Reporting Period Ordinary Income (Loss) "Unusual, Infrequently Occurring, or Extraordinary Loss" Ordinary Income (Loss) "Unusual, Infrequently Occurring, or Extraordinary Loss" Reporting Period Year-to-Date Year-to-Date Less Previously Provided Reporting Period Income in all quarters: First quarter " $20,000 " " $8,000 " " $8,000 " Second quarter " 20,000 " " $(50,000)" " 8,000 " " 16,000 " " $(16,000)" $- " $(16,000)" Third quarter " 20,000 " " 8,000 " " 24,000 " " (24,000)" " (16,000)" " (8,000)" Fourth quarter " 40,000 " " 16,000 " " 40,000 " " (25,000)" " (24,000)" " (1,000)" Fiscal year " $100,000 " " $(50,000)" " $40,000 " " $(25,000)" Income and loss quarters: First quarter " $40,000 " " $16,000 " " $16,000 " Second quarter " 40,000 " " $(50,000)" " 16,000 " " 32,000 " " $(25,000)" $- " $(25,000)" Third quarter " (20,000)" " (8,000)" " 24,000 " " (24,000)" " (25,000)" " 1,000 " Fourth quarter " 40,000 " " 16,000 " " 40,000 " " (25,000)" " (24,000)" " (1,000)" Fiscal year " $100,000 " " $(50,000)" " $40,000 " " $(25,000)"
270-740-55-29
This Example illustrates the guidance in paragraph 740-270-45-7. An entity anticipates ordinary income for the year of $100,000 and tax credits of $10,000. The entity has ordinary income in all interim periods. The estimated annual effective tax rate is 40 percent, computed as follows.
Estimated pretax income " $100,000 " Tax at 50% statutory rate " $50,000 " Less anticipated credits " (10,000)" Net tax to be provided " $40,000 " Estimated annual effective tax rate 40%
270-740-55-30
Quarterly tax computations for the first two quarters are as follows.
Ordinary Income Tax Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $20,000 " " $20,000 " 40% " $8,000 " $- " $8,000 " Second quarter " 25,000 " " 45,000 " 40% " 18,000 " " 8,000 " " 10,000 "
270-740-55-31
In the third quarter a decision is made to discontinue the operations of Division X, a segment of the business that has recently operated at a loss (before income taxes). The pretax income (and losses) of the continuing operations of the entity and of Division X through the third quarter and the estimated fourth quarter results are as follows.
Division X Reporting Period Revised Ordinary Income from Continuing Operations Loss from Operations Provision for Loss on Disposal First quarter " $25,000 " " $(5,000)" Second quarter " 35,000 " " (10,000)" Third quarter " 50,000 " " (10,000)" " $(55,000)" Fourth quarter " 50,000 " (a) - - Fiscal year " $160,000 " " $(25,000)" " $(55,000)" (a) Estimated.
270-740-55-32
No changes have occurred in continuing operations that would affect the estimated annual effective tax rate. Anticipated annual tax credits of $10,000 included $2,000 of credits related to the operations of Division X. The revised estimated annual effective tax rate applicable to ordinary income from continuing operations is 45 percent, computed as follows.
Estimated ordinary income from continuing operations " $160,000 " Tax at 50% statutory rate " 80,000 " Less anticipated tax credits applicable to continuing operations " (8,000)" Net tax to be provided " $72,000 " Estimated annual effective tax rate 45%
270-740-55-33
Quarterly computations of tax applicable to ordinary income from continuing operations are as follows.
Ordinary Income Tax Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $25,000 " " $25,000 " 45% " $11,250 " $- " $11,250 " Second quarter " 35,000 " " 60,000 " 45% " 27,000 " " 11,250 " " 15,750 " Third quarter " 50,000 " " 110,000 " 45% " 49,500 " " 27,000 " " 22,500 " Fourth quarter " 50,000 " " 160,000 " 45% " 72,000 " " 49,500 " " 22,500 " Fiscal year " $160,000 " " $72,000 "
270-740-55-34
Tax benefit applicable to Division X for the first two quarters is computed as follows.
Tax Applicable to Ordinary Income Previously Reported Recomputed (Above) Tax Benefit Applicable to Division X Reporting Period (A) (B) (A-B) First quarter " $8,000 " " $11,250 " " $(3,250)" Second quarter " 10,000 " " 15,750 " " (5,750)" " $(9,000)"
270-740-55-35
The third quarter tax benefits applicable to both the loss from operations and the provision for loss on disposal of Division X are computed based on estimated annual income with and without the effects of the Division X losses. Current year tax credits related to the operations of Division X have not been recognized. It is assumed that the tax benefit of those credits will not be realized because of the discontinuance of Division X operations. Any reduction in tax benefits resulting from recapture of previously recognized tax credits resulting from discontinuance or current year tax credits applicable to the discontinued operations would be reflected in the tax benefit recognized for the loss on disposal or loss from operations as appropriate. If, because of capital gains and losses, and so forth, the individually computed tax effects of the items do not equal the aggregate tax effects of the items, the aggregate tax effects are allocated to the individual items in the same manner that they will be allocated in the annual financial statements. The computations are as follows.
Loss from Operations Division X Provision for Loss on Disposal Estimated annual income from continuing operations " $160,000 " " $160,000 " Loss from Division X operations " (25,000)" Provision for loss on disposal of Division X " (55,000)" Total " $135,000 " " $105,000 " Tax at 50% statutory rate " $67,500 " " $52,500 " Anticipated credits from continuing operations " (8,000)" " (8,000)" Tax credits of Division X and recapture of previously recognized tax credits resulting from discontinuance - - Taxes on income after effect of Division X losses " 59,500 " " 44,500 " Taxes on income before effect of Division X losses—see computation above " 72,000 " " 72,000 " Tax benefit applicable to the losses of Division X " (12,500)" " (27,500)" Amounts previously recognized—see computation above " (9,000)" - Tax benefit recognized in third quarter " $(3,500)" " $(27,500)"
270-740-55-36
The resulting revised quarterly tax provisions are summarized as follows.
Pretax Income (Loss) Tax (or Benefit) Applicable to Reporting Period Continuing Operations Operations of Division X Provisions for Loss on Disposal Continuing Operations Operations of Division X Provisions for Loss on Disposal First quarter " $25,000 " " $(5,000)" " $11,250 " " $(3,250)" Second quarter " 35,000 " " (10,000)" " 15,750 " " (5,750)" Third quarter " 50,000 " " (10,000)" " $(55,000)" " 22,500 " " (3,500)" " $(27,500)" Fourth quarter " 50,000 " " 22,500 " Fiscal year " $160,000 " " $(25,000)" " $(55,000)" " $72,000 " " $(12,500)" " $(27,500)"
270-740-55-37
The following Cases illustrate the guidance in paragraph 740-270-30-36 for accounting for income taxes applicable to ordinary income if an entity is subject to tax in multiple jurisdictions:
- aOrdinary income in all jurisdictions (Case A)
- bOrdinary loss in a jurisdiction; realization of the tax benefit not more likely than not (Case B)
- cOrdinary income or tax cannot be estimated in one jurisdiction (Case C).
270-740-55-38
Cases A, B, and C assume that an entity operates through separate corporate entities in two countries. Applicable tax rates are 50 percent in the United States and 20 percent in Country A. The entity has no unusual or infrequently occurring items during the fiscal year and anticipates no tax credits or events that do not have tax consequences. (The effect of foreign tax credits and the necessity of providing tax on undistributed earnings are ignored because of the wide range of tax planning alternatives available.) For the full fiscal year the entity anticipates ordinary income of $60,000 in the United States and $40,000 in Country A. The entity is able to make a reliable estimate of its Country A ordinary income and tax for the fiscal year in dollars. Computation of the overall estimated annual effective tax rate in Cases B and C is based on additional assumptions stated in those Cases.
270-740-55-39
Computation of the overall estimated annual effective tax rate is as follows.
Anticipated ordinary income for the fiscal year: In the United States " $60,000 " In Country A " 40,000 " Total " $100,000 " Anticipated tax for the fiscal year: "In the United States ($60,000 at 50% statutory rate)" " $30,000 " "In Country A ($40,000 at 20% statutory rate)" " 8,000 " Total " $38,000 " "Overall estimated annual effective tax rate ($38,000 ÷ $100,000)" 38%
270-740-55-40
Quarterly tax computations are as follows.
Ordinary Income Tax Reporting Period United States Country A Total Year-to-Date Overall Estimated Annual Effective Tax Rate Year-to-Date Less Previously Reported Reporting Period First quarter " $5,000 " " $15,000 " " $20,000 " " $20,000 " 38% " $7,600 " $- " $7,600 " Second quarter " 10,000 " " 10,000 " " 20,000 " " 40,000 " 38% " 15,200 " " 7,600 " " 7,600 " Third quarter " 10,000 " " 10,000 " " 20,000 " " 60,000 " 38% " 22,800 " " 15,200 " " 7,600 " Fourth quarter " 35,000 " " 5,000 " " 40,000 " " 100,000 " 38% " 38,000 " " 22,800 " " 15,200 " Fiscal year " $60,000 " " $40,000 " " $100,000 " " $38,000 "
270-740-55-41
In this Case, the entity operates through a separate corporate entity in Country B. Applicable tax rates in Country B are 40 percent. Operations in Country B have resulted in losses in recent years and an ordinary loss is anticipated for the current fiscal year in Country B. It is expected that the tax benefit of those losses will not be recognizable as a deferred tax asset at the end of the current year pursuant to Subtopic 740-10; accordingly, no tax benefit is recognized for losses in Country B, and interim period tax (or benefit) is separately computed for the ordinary loss in Country B and for the overall ordinary income in the United States and Country A. The tax applicable to the overall ordinary income in the United States and Country A is computed as in Case A of this Example. Quarterly tax provisions are as follows.
Ordinary Income (or Loss) Tax (or Benefit) Reporting Period United States Country A Combined Excluding Country B Country B Total Combined Excluding Country B Country B Total First quarter " $5,000 " " $15,000 " " $20,000 " " $(5,000)" " $15,000 " " $7,600 " $- " $7,600 " Second quarter " 10,000 " " 10,000 " " 20,000 " " (25,000)" " (5,000)" " 7,600 " - " 7,600 " Third quarter " 10,000 " " 10,000 " " 20,000 " " (5,000)" " 15,000 " " 7,600 " - " 7,600 " Fourth quarter " 35,000 " " 5,000 " " 40,000 " " (5,000)" " 35,000 " " 15,200 " - " 15,200 " Fiscal year " $60,000 " " $40,000 " " $100,000 " " $(40,000)" " $60,000 " " $38,000 " $- " $38,000 "
270-740-55-42
In this Case, the entity operates through a separate corporate entity in Country C. Applicable tax rates in Country C are 40 percent in foreign currency. Depreciation in that country is large and exchange rates have changed in prior years. The entity is unable to make a reasonable estimate of its ordinary income for the year in Country C and thus is unable to reasonably estimate its annual effective tax rate in Country C in dollars. Accordingly, tax (or benefit) in Country C is separately computed as ordinary income (or loss) occurs in Country C. The tax applicable to the overall ordinary income in the United States and Country A is computed as in Case A of this Example. Quarterly computations of tax applicable to Country C are as follows.
Foreign Currency (FC) Amounts Translated Amounts in Dollars Reporting Period Ordinary Income in Reporting Period Tax (at 40% rate) Ordinary Income in Reporting Period Tax First quarter " FC 10,000 " " FC 4,000 " " $12,500 " " $3,000 " Second quarter " 5,000 " " 2,000 " " 8,750 " " 1,500 " Third quarter " 30,000 " " 12,000 " " 27,500 " " 9,000 " Fourth quarter " 15,000 " " 6,000 " " 16,250 " " 4,500 " Fiscal year " FC 60,000 " " FC 24,000 " " $65,000 " " $18,000 "
270-740-55-43
Quarterly tax provisions are as follows.
Ordinary Income Tax Reporting Period United States Country A Combined Excluding Country C Country C Total Combined Excluding Country C Country C Total First quarter " $5,000 " " $15,000 " " $20,000 " " $12,500 " " $32,500 " " $7,600 " " $3,000 " " $10,600 " Second quarter " 10,000 " " 10,000 " " 20,000 " " 8,750 " " 28,750 " " 7,600 " " 1,500 " " 9,100 " Third quarter " 10,000 " " 10,000 " " 20,000 " " 27,500 " " 47,500 " " 7,600 " " 9,000 " " 16,600 " Fourth quarter " 35,000 " " 5,000 " " 40,000 " " 16,250 " " 56,250 " " 15,200 " " 4,500 " " 19,700 " Fiscal year " $60,000 " " $40,000 " " $100,000 " " $65,000 " " $165,000 " " $38,000 " " $18,000 " " $56,000 "
270-740-55-44
The following Cases illustrate the guidance in paragraphs for accounting in interim periods for the effect of new tax legislation on income taxes when legislation is effective in a future interim period.
- a
- b
270-740-55-45
The assumed facts applicable to this Example follow.
270-740-55-46
For the full fiscal year, an entity anticipates ordinary income of $100,000. All income is taxable in one jurisdiction at a 50 percent rate. Anticipated tax credits for the fiscal year total $10,000. No events that do not have tax consequences are anticipated.
270-740-55-47
Computation of the estimated annual effective tax rate applicable to ordinary income is as follows.
"Tax at statutory rate ($100,000 at 50%)" " $50,000 " Less anticipated tax credits " (10,000)" Net tax to be provided " $40,000 " "Estimated annual effective tax rate ($40,000 ÷ $100,000)" 40%
270-740-55-48
Further, assume that new legislation creating additional tax credits is enacted during the second quarter of the entity's fiscal year. The new legislation is effective on the first day of the third quarter. As a result of the estimated effect of the new legislation, the entity revises its estimate of its annual effective tax rate to the following.
"Tax at statutory rate ($100,000 at 50%)" " $50,000 " Less anticipated tax credits " (12,000)" Net tax to be provided " $38,000 " "Estimated annual effective tax rate ($38,000 ÷ $100,000)" 38%
270-740-55-49
The effect of the new legislation shall be reflected in the computation of the annual effective tax rate beginning in the first interim period that includes the enactment date of the new legislation. Accordingly, quarterly tax computations are as follows.
Ordinary Income Tax Reporting Period Reporting Period Year-to-Date Estimated Annual Effective Tax Rate Year-to-Date Less Previously Provided Reporting Period First quarter " $20,000 " " $20,000 " 40% "$ 8,000" $- "$ 8,000" Second quarter " 20,000 " " 40,000 " 38% "15,200" "8,000" "7,200" Third quarter " 20,000 " " 60,000 " 38% "22,800" "15,200" "7,600" Fourth quarter " 40,000 " " 100,000 " 38% "38,000" "22,800" "15,200" Fiscal year " $100,000 " "$ 38,000"
270-740-55-52
The following illustrates the location in an income statement display of the various tax amounts computed under this Subtopic.
Net sales (a) $XXXX Other income (a) XXX XXXX Costs and expenses: Cost of sales (a) $XXXX "Selling, general, and administrative expenses (a)" XXXX Interest expense (a) XXX Other deductions (a) XX Unusual items XXX Infrequently occurring items XXX XXXX Income (loss) from continuing operations before income taxes and other items listed below XXXX Provision for income taxes (benefit) (b) XXXX Income (loss) from continuing operations before other items listed below XXXX Discontinued operations: "Income (loss) from operations of discontinued Component X (less applicable income taxes of $XXXX)" XXXX XXXX Income (loss) before extraordinary items XXXX Extraordinary items (less applicable income taxes of $XXXX) XXXX Net income (loss) $XXXX (a) Components of ordinary income (loss). (b) "Consists of the total of income taxes (or benefit) applicable to ordinary income, unusual items, and infrequently occurring items."