# ASC 740-10-55: Income Taxes — Overall — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/740/10/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:aed1495752b37f33d76b8f959ef4ec7df9c71ce0e55a8555370157290da77a89 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 740-10-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/740/10/#55-implementation-guidance-and-illustrations) SEC content: no ##### [740-10-55-1](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:14f438ead95ac633ebdd4ded7e0d0b48f7d5916fb25588760e388a28e993d61e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Section is an integral part of the requirements of this Subtopic. This Section provides additional guidance and illustrations that address the application of accounting requirements to specific aspects of accounting for [income taxes](https://asc.understandingaccounting.org/glossary/i/#income-taxes "Domestic and foreign federal (national), state, and local (including franchise) taxes based on income."), including disclosures. The guidance and illustrations that follow, unless stated otherwise, assume that the tax law requires offsetting net deductions in a particular year against net taxable amounts in the 3 preceding years and then in the 15 succeeding years. These assumptions about the tax law are for illustrative purposes only. This Subtopic requires that the enacted tax law for a particular tax jurisdiction be used for recognition and measurement of deferred tax liabilities and assets. #### Implementation Guidance ##### [740-10-55-2](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:05166722d5af5a9dd1b4e4434d59e5996ee7d1f8ef79319c1586b71893b0c11f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance is organized as follows: 1. a Application of accounting requirements for income taxes to specific situations 2. b [Subparagraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). 3. c Income tax related disclosures. ##### [740-10-55-3](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f81b6a267018314642f06fc355410f33c54e01cc57e536a975095c722651b50e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The application of the requirements of this Subtopic related to tax positions requires a two-step process that separates recognition from measurement. The first step is determining whether a [tax position](https://asc.understandingaccounting.org/glossary/t/#tax-position "A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to: A decision not to file a tax return An allocation or a shift of income between jurisdictions The characterization of income or a decision to exclude reporting taxable income in a tax return A decision to classify a transaction, entity, or other position in a tax return as tax exempt An entity's status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.") has met the recognition threshold; the second step is measuring a tax position that meets the recognition threshold. The recognition threshold is met when the taxpayer (the reporting entity) concludes that, consistent with paragraphs [740-10-25-6 through 25-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6) and [740-10-25-13](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-13), it is more likely than not that the taxpayer will sustain the benefit taken or expected to be taken in the tax return in a dispute with taxing authorities if the taxpayer takes the dispute to the court of last resort. ##### [740-10-55-4](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:cfcc50eee86ad66b9ef4901af3c003181e727f43f57c9c9ebb3cc626b643706c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Relatively few disputes are resolved through litigation, and very few are taken to the court of last resort. Generally, the taxpayer and the taxing authority negotiate a settlement to avoid the costs and hazards of litigation. As a result, the measurement of the tax position is based on management's best judgment of the amount the taxpayer would ultimately accept in a settlement with taxing authorities. ##### [740-10-55-5](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:cdb55b6aee7fc5373f8e21b5da41b9fe6cab791f9ff86d306011ee1cbb2bdc87 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The recognition and measurement requirements of this Subtopic related to tax positions require that the entity recognize the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. ##### [740-10-55-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e1438bbe4113f0c59f1ca73e039a05de8f3685b6f0f46d81b2e8effb8fcac145 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See Examples 1 through 12 (paragraphs [740-10-55-81 through 55-123](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-81) ) for illustrations of this guidance. ##### [740-10-55-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:4dff267f2d13883a73272042abd4fa391e7d296512eb90d68f822801aec280db Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Subject to certain specific exceptions identified in paragraph [740-10-25-3](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-3), a [deferred tax liability](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-liability "The deferred tax consequences attributable to taxable temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the enacted tax law.") is recognized for all taxable temporary differences, and a [deferred tax asset](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-asset "The deferred tax consequences attributable to deductible temporary differences and carryforwards. A deferred tax asset is measured using the applicable enacted tax rate and provisions of the enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.") is recognized for all deductible temporary differences and operating loss and tax credit [carryforwards](https://asc.understandingaccounting.org/glossary/c/#carryforwards "Deductions or credits that cannot be utilized on the tax return during a year that may be carried forward to reduce taxable income or taxes payable in a future year. An operating loss carryforward is an excess of tax deductions over gross income in a year; a tax credit carryforward is the amount by which tax credits available for utilization exceed statutory limitations. Different tax jurisdictions have different rules about whether excess deductions or credits may be carried forward and the length of the carryforward period. The terms carryforward, operating loss carryforward, and tax credit carryforward refer to the amounts of those items, if any, reported in the tax return for the current year."). A [valuation allowance](https://asc.understandingaccounting.org/glossary/v/#valuation-allowance "The portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized.") is recognized if it is more likely than not that some portion or all of the deferred tax asset will not be realized. See Example 12 (paragraph [740-10-55-120](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-120)) for an illustration of this guidance. ##### [740-10-55-8](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f21952d4d20d1c39fb4517294a37f03b14d61e05ac205e7564a3e3d170fa0fcd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. To the extent that evidence about one or more sources of [taxable income](https://asc.understandingaccounting.org/glossary/t/#taxable-income "The excess of taxable revenues over tax deductible expenses and exemptions for the year as defined by the governmental taxing authority.") is sufficient to eliminate any need for a valuation allowance, other sources need not be considered. Detailed forecasts, projections, or other types of analyses are unnecessary if expected future taxable income is more than sufficient to realize a tax benefit. ##### [740-10-55-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:26ecc69383d7830b2c9e7f9270d31eb50043af31d0bc8d87889ac32d6f89ece0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The terms _forecast_ and _projection_ refer to any process by which available evidence is accumulated and evaluated for purposes of estimating whether future taxable income will be sufficient to realize a deferred tax asset. Judgment is necessary to determine how detailed or formalized that evaluation process should be. Furthermore, information about expected future taxable income is necessary only to the extent positive evidence available from other sources (see paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) is not sufficient to support a conclusion that a valuation allowance is not needed. The requirements of this Subtopic do not require either a financial forecast or a financial projection within the meaning of those terms in the Statements on Standards for Attestation Engagements and Related Attest Engagements Interpretations \[AT\], AT section 301, _Financial Forecasts and Projections_ issued by the American Institute of Certified Public Accountants. ##### [740-10-55-10](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:67cf0bff28ce21bf9f0becabd71f831cb0769b6b628f2184510bfa329c2989ab Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See Example 12 (paragraph [740-10-55-120](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-120)) for an illustration of a situation where detailed analyses are not necessary. ##### [740-10-55-11](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2650927945fdc283aecdbe05b4fce0e88dead51364b884f9e74ec647a9485db2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See Example 13 (paragraph [740-10-55-124](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-124)) for an illustration of determining a valuation allowance for deferred tax assets. ##### [740-10-55-12](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e6c9b332250977d9f5859c9089039384f18bff787953945032cfcb8fdb396a23 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax law determines whether future reversals of temporary differences will result in taxable and deductible amounts that offset each other in future years. The tax law also determines the extent to which deductible temporary differences and carryforwards will offset the [tax consequences](https://asc.understandingaccounting.org/glossary/t/#tax-consequences "The effects on income taxes—current or deferred—of an event.") of income that is expected to be earned in future years. For example, the tax law may provide that capital losses are deductible only to the extent of capital gains. In that case, a tax benefit is not recognized for temporary differences that will result in future deductions in the form of capital losses unless those deductions will offset any of the following: 1. a Other existing temporary differences that will result in future capital gains 2. b Capital gains that are expected to occur in future years 3. c Capital gains of the current year or prior years if carryback (of those capital loss deductions from the future reversal years) is expected. ##### [740-10-55-13](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:25d3731c9a7b9c73739360b2bb288f821bfa65303482f87064b4053a82901c68 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The particular years in which temporary differences result in taxable or deductible amounts generally are determined by the timing of the recovery of the related asset or settlement of the related liability. However, there are exceptions to that general rule. For example, a [temporary difference](https://asc.understandingaccounting.org/glossary/t/#temporary-difference "A difference between the tax basis of an asset or liability computed pursuant to the requirements in Subtopic 740-10 for tax positions, and its reported amount in the financial statements that will result in taxable or deductible amounts in future years when the reported amount of the asset or liability is recovered or settled, respectively. Paragraph 740-10-25-20 cites examples of temporary differences. Some temporary differences cannot be identified with a particular asset or liability for financial reporting (see paragraphs 740-10-05-10 and 740-10-25-24740-10-25-25), but those temporary differences do meet both of the following conditions: Result from events that have been recognized in the financial statements Will result in taxable or deductible amounts in future years based on provisions of the tax law. Some events recognized in financial statements do not have tax consequences. Certain revenues are exempt from taxation and certain expenses are not deductible. Events that do not have tax consequences do not give rise to temporary differences.") between the tax basis and the reported amount of inventory for which cost is determined on a last-in, first-out (LIFO) basis does not reverse when present inventory is sold in future years if it is replaced by purchases or production of inventory in those same future years. A LIFO inventory temporary difference becomes taxable or deductible in the future year that inventory is liquidated and not replaced. ##### [740-10-55-14](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:cf8443ab09f7cb342c5be6bc10b697ab6d778e70aa56a50d77318daf95feff56 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For some assets or liabilities, temporary differences may accumulate over several years and then reverse over several years. That pattern is common for depreciable assets. Future originating differences for existing depreciable assets and their subsequent reversals are a factor to be considered when assessing the likelihood of future taxable income (see paragraph [740-10-30-18(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) for realization of a tax benefit for existing deductible temporary differences and carryforwards. ##### [740-10-55-15](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1635d17e7840278866f877620cea2ae3679a17b23b9774140604962e80c6bbc7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Reversal patterns of existing temporary differences may need to be scheduled under the requirements of this Subtopic as follows: 1. a [Subparagraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). 2. b Deferred tax assets are recognized without reference to offsetting, and then an assessment is made about the need for a valuation allowance. Paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18) lists four possible sources of taxable income that may be available to realize such deferred tax assets. In many cases it may be possible to determine without scheduling that expected future taxable income (see paragraph [740-10-30-18(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) will be adequate to eliminate the need for a valuation allowance. Disclosure of the amounts and expiration dates (or a reasonable aggregation of expiration dates) of operating loss and tax credit carryforwards is required only on a tax basis and does not require scheduling. 3. c The adoption of a tax rate convention for measuring deferred taxes when graduated tax rates are a significant factor will, in many cases, eliminate the need for the scheduling. In addition, [alternative minimum tax](https://asc.understandingaccounting.org/glossary/a/#alternative-minimum-tax "A tax that results from the use of an alternate determination of a corporation's federal income tax liability under provisions of the U.S. Internal Revenue Code.") rates and laws are a factor only in considering the need for a valuation allowance for a deferred tax asset for alternative minimum tax credit carryforwards. When there is a phased-in change in tax rates, however, scheduling will often be necessary. See paragraphs [740-10-55-24](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-24); [740-10-55-31 through 55-33](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-31) ; and Examples 14 through 16 (paragraphs [740-10-55-129 through 55-138](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-129) ). ##### [740-10-55-16](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1b1fa7b85e3a6b71f7102f40e65615b6818a6683b0edef4ea7f94a6398c39085 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18) lists four possible sources of taxable income that may be available to realize a future tax benefit for deductible temporary differences and carryforwards. One source is future taxable income exclusive of reversing temporary differences and carryforwards. Future originating temporary differences and their subsequent reversal are implicit in estimates of future taxable income. Where it can be easily demonstrated that future taxable income will more likely than not be adequate to realize future tax benefits of existing deferred tax assets, scheduling of reversals of existing taxable temporary differences would be unnecessary. ##### [740-10-55-17](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:bebea88739a7278f929c9fee11e12086042244fd577440296a3f14a43e7464e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In other cases it may be easier to demonstrate that no valuation allowance is needed by considering the reversal of existing taxable temporary differences. Even in that case, the extent of scheduling will depend on the relative magnitudes involved. For example, if existing taxable temporary differences that will reverse over a long number of future years greatly exceed deductible differences that are expected to reverse over a short number of future years, it may be appropriate to conclude, in view of a long (for example, 15 years) carryforward period for net operating losses, that realization of future tax benefits for the deductible differences is thereby more likely than not without the need for scheduling. ##### [740-10-55-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:eda9f1f6cc33de3ab1984452bac70e26c49dad5472156e3aa9d5d64c7574c644 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A general understanding of reversal patterns is, in many cases, relevant in assessing the need for a valuation allowance. Judgment is crucial in making that assessment. The amount of scheduling, if any, that will be required will depend on the facts and circumstances of each situation. ##### [740-10-55-19](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:3145988ab4d41fad928a9473e542226c77716c119202cf6976333a746dd98dc9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following concepts however, underlie the determination of reversal patterns for existing temporary differences: 1. a The particular years in which temporary differences result in taxable or deductible amounts generally are determined by the timing of the recovery of the related asset or settlement of the related liability (see paragraph [740-10-55-13](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-13)). 2. b The tax law determines whether future reversals of temporary differences will result in taxable and deductible amounts that offset each other in future years (see paragraph [740-10-55-14](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-14)). ##### [740-10-55-20](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:75059bda9dfd0d197e5a34e38a83f71ad410cbe2f80ee57c7d2617b8e7ba70a8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. State income taxes are deductible for U.S. federal income tax purposes and therefore a deferred state income tax liability or asset gives rise to a temporary difference for purposes of determining a deferred U.S. federal income tax asset or liability, respectively. The pattern of deductible or taxable amounts in future years for temporary differences related to deferred state income tax liabilities or assets should be determined by estimates of the amount of those state income taxes that are expected to become payable or recoverable for particular future years and, therefore, deductible or taxable for U.S. federal tax purposes in those particular future years. ##### [740-10-55-21](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e86b50aca58910b0ec86cfa5ca10763bab2f1d85863c03097eea1a2651e9bc6c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may have claimed certain deductions, such as repair expenses, on its income tax returns. However, the entity may have recognized a liability (including interest) for the [unrecognized tax benefit](https://asc.understandingaccounting.org/glossary/u/#unrecognized-tax-benefit "The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to Subtopic 740-10.") of those tax positions. If scheduling of future taxable or deductible differences is necessary, liabilities for unrecognized tax benefits should be considered. Accrual of a liability for unrecognized tax benefits of expenses, such as repairs, has the effect of capitalizing those expenses for tax purposes. Those capitalized expenses are considered to result in deductible amounts in the later years, for example, as depreciation expense. If the liability for unrecognized tax benefits is based on an overall evaluation of the technical merits of the tax position, scheduling should reflect the evaluations made in determining the liability for unrecognized tax benefits that was recognized. The effect of those evaluations may indicate a source of taxable income (see paragraph [740-10-30-18(c)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) for purposes of assessing the need for a valuation allowance for deductible temporary differences. Those evaluations may also indicate lower amounts of taxable income in other years. A deductible amount for any accrued interest related to unrecognized tax benefits would be scheduled for the future year in which that interest is expected to become deductible. ##### [740-10-55-22](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:59e02ae9cf190a67d2329a9df39dba9a67c99553e092d3ef352df828b10558b1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Minimizing complexity is an appropriate consideration in selecting a method for determining reversal patterns. The methods used for determining reversal patterns should be systematic and logical. The same method should be used for all temporary differences within a particular category of temporary differences for a particular tax jurisdiction. Different methods may be used for different categories of temporary differences. If the same temporary difference exists in two tax jurisdictions (for example, U.S. federal and a state tax jurisdiction), the same method should be used for that temporary difference in both tax jurisdictions. The same method for a particular category in a particular tax jurisdiction should be used consistently from year to year. A change in method is a change in accounting principle under the requirements of Topic 250. Two examples of a category of temporary differences are those related to liabilities for deferred compensation and investments in direct financing and sales-type leases. ##### [740-10-55-23](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:79bee913067e96c10dc47163f17a1bf5f5e98343e643d1a195bee8135fada6c4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax rate or rates that are used to measure deferred tax liabilities and deferred tax assets are the enacted tax rates expected to apply to taxable income in the years that the liability is expected to be settled or the asset recovered. Measurements are based on elections (for example, an election for loss carryforward instead of carryback) that are expected to be made for tax purposes in future years. Presently enacted changes in tax laws and rates that become effective for a particular future year or years must be considered when determining the tax rate to apply to temporary differences reversing in that year or years. Tax laws and rates for the current year are used if no changes have been enacted for future years. An asset for deductible temporary differences that are expected to be realized in future years through carryback of a future loss to the current or a prior year (or a liability for taxable temporary differences that are expected to reduce the refund claimed for the carryback of a future loss to the current or a prior year) is measured using tax laws and rates for the current or a prior year, that is, the year for which a refund is expected to be realized based on loss carryback provisions of the tax law. See Examples 14 through 16 (paragraphs [740-10-55-129 through 55-138](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-129) ) for illustrations of this guidance. ##### [740-10-55-24](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:866c557c092d3b36ed3c84163e7d70fab9865abeb7bc155112b7a30a61279ccb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Deferred tax liabilities and assets are measured using enacted tax rates applicable to capital gains, ordinary income, and so forth, based on the expected type of taxable or deductible amounts in future years. For example, evidence based on all facts and circumstances should determine whether an investor's liability for the tax consequences of temporary differences related to its equity in the earnings of an investee should be measured using enacted tax rates applicable to a capital gain or a dividend. Computation of a deferred tax liability for undistributed earnings based on dividends should also reflect any related dividends received deductions or foreign tax credits, and taxes that would be withheld from the dividend. ##### [740-10-55-25](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:644f1d1ba821e15ef0ab383f1b2435c71595043626618fee61ee6e6915ef1472 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If deferred tax assets or liabilities for a state or local tax jurisdiction are significant, this Subtopic requires a separate deferred tax computation when there are significant differences between the tax laws of that and other tax jurisdictions that apply to the entity. In the United States, however, many state or local income taxes are based on U.S. federal taxable income, and aggregate computations of deferred tax assets and liabilities for at least some of those state or local tax jurisdictions might be acceptable. In assessing whether an aggregate calculation is appropriate, matters such as differences in tax rates or the loss carryback and carryforward periods in those state or local tax jurisdictions should be considered. Also, the provisions of paragraph [740-10-45-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-45-6) about offset of deferred tax liabilities and assets of different tax jurisdictions should be considered. In assessing the significance of deferred tax expense for a state or local tax jurisdiction, it is appropriate to consider the [deferred tax consequences](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-consequences "The future effects on income taxes as measured by the applicable enacted tax rate and provisions of the enacted tax law resulting from temporary differences and carryforwards at the end of the current year.") that those deferred state or local tax assets or liabilities have on other tax jurisdictions, for example, on deferred federal income taxes. ##### [740-10-55-26](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:53e172d66557800a970e044ba20c03c44dfdd2e8e4e091de6266f17bb7406350 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Local (including franchise) taxes based on income are within the scope of this Topic. A tax, to the extent it is based on capital, is a non-income-based tax. As indicated in paragraph [740-10-15-4(a)](https://asc.understandingaccounting.org/asc/740/10/#740-10-15-4), if there is an amount of a franchise tax based on income, that amount is considered an income tax. Any additional amount incurred is considered a non-income-based tax. An example that illustrates this guidance is presented in Example 17 (see paragraph [740-10-55-139](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-139)). ##### [740-10-55-27](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d4e44540978c1137fb6b8016aadad29504eca914c0491d6422544df7e7d17c04 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following discussion and Example 18 (see paragraph [740-10-55-145](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-145)) refer to and describe a provision within the American Jobs Creation Act of 2004; however, they shall not be considered a definitive interpretation of any provision of the Act for any purpose. ##### [740-10-55-28](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2e856021c090202a2ccb6a69700c150363121fe425d9472d844350791cbd680b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On October 22, 2004, the Act was signed into law by the president. This Act includes a tax deduction of up to 9 percent (when fully phased-in) of the lesser of qualified production activities income, as defined in the Act, or taxable income (after the deduction for the utilization of any net operating loss carryforwards). This tax deduction is limited to 50 percent of W-2 wages paid by the taxpayer. ##### [740-10-55-29](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:261c62cc89c2db900b24d1f6a10dbe227d098a2fca01ee6d02d678acb21962c2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The qualified production activities deduction's characteristics are similar to special deductions discussed in paragraph [740-10-25-37](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-37) because the qualified production activities deduction is contingent upon the future performance of specific activities, including the level of wages. Accordingly, the deduction should be accounted for as a special deduction in accordance with that paragraph. ##### [740-10-55-30](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:108e79c7bd657e7750ab7f7c329163a4607a5cb1da08e12133c1e75c1e394a81 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The special deduction should be considered by an entity in measuring deferred taxes when graduated tax rates are a significant factor and assessing whether a valuation allowance is necessary as required by paragraph [740-10-25-37](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-37). Example 18 (see paragraph [740-10-55-145](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-145)) illustrates the application of the requirements of this Subtopic for the impact of the qualified production activities deduction upon enactment of the Act in 2004. ##### [740-10-55-31](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:cf41838ea1c499ff4f2c260550112925e95137fccef177bc868549a3dbda52d1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Temporary differences such as depreciation differences are one reason why [tentative minimum tax](https://asc.understandingaccounting.org/glossary/t/#tentative-minimum-tax "An intermediate calculation used in the determination of a corporation's federal income tax liability under the alternative minimum tax system in the United States. See Alternative Minimum Tax.") may exceed regular tax. Temporary differences, however, ultimately reverse and, absent a significant amount of preference items, total taxes paid over the entire life of the entity will be based on the regular tax system. Preference items are another reason why tentative minimum tax may exceed regular tax. If preference items are large enough, an entity could be subject, over its lifetime, to the alternative minimum tax system; and the cumulative amount of alternative minimum tax credit carryforwards would expire unused. No one can know beforehand which scenario will prevail because that determination can only be made after the fact. In the meantime, this Subtopic requires procedures that provide a practical solution to that problem. ##### [740-10-55-32](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1b2e3047ed034f479c3812e18958e1ddf209d4b8ae4ad6d3ca13b640cc375869 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Under the requirements of this Subtopic, an entity shall: 1. a Measure the total deferred tax liability and asset for regular tax temporary differences and carryforwards using the regular tax rate 2. b Measure the total deferred tax asset for all alternative minimum tax credit carryforward 3. c Reduce the deferred tax asset for alternative minimum tax credit carryforward by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of that deferred tax asset will not be realized. ##### [740-10-55-33](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2ec1e31add56e59ba96f0db89523715e2bd0a0e3614aae3fb796072b87cb49a8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18) identifies four sources of taxable income that shall be considered in determining the need for and amount of a valuation allowance. No valuation allowance is necessary if the deferred tax asset for alternative minimum tax credit carryforward can be realized in any of the following ways: 1. a Under paragraph [740-10-30-18(a)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18), by reducing a deferred tax liability from the amount of regular tax on regular tax temporary differences to not less than the amount of tentative minimum tax on alternative minimum taxable temporary differences 2. b Under paragraph [740-10-30-18(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18), by reducing taxes on future income from the amount of regular tax on regular taxable income to not less than the amount of tentative minimum tax on alternative minimum taxable income 3. c Under paragraph [740-10-30-18(c)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18), by loss carryback 4. d Under paragraph [740-10-30-18(d)](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18), by a [tax-planning strategy](https://asc.understandingaccounting.org/glossary/t/#tax-planning-strategy "An action (including elections for tax purposes) that meets certain criteria (see paragraph 740-10-30-19) and that would be implemented to realize a tax benefit for an operating loss or tax credit carryforward before it expires. Tax-planning strategies are considered when assessing the need for and amount of a valuation allowance for deferred tax assets.") such as switching from tax-exempt to taxable interest income. ##### [740-10-55-34](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:779f59746bcfe0085cb95c734b45c3e393c25482c44b2b2abf21fd3911f1d299 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An operating loss, certain deductible items that are subject to limitations, and some tax credits arising but not utilized in the current year may be carried back for refund of taxes paid in prior years or carried forward to reduce taxes payable in future years. A receivable, to the extent it meets the recognition requirements of this Subtopic for tax positions, is recognized for the amount of taxes paid in prior years that is refundable by carryback of an operating loss or unused tax credits of the current year. ##### [740-10-55-35](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a267154440870a39083a0747aab165519f5f6ddbac22f6ed17f7cb4108f18953 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A deferred tax asset, to the extent it meets the recognition requirements of this Subtopic for tax positions, is recognized for an operating loss or tax credit carryforward. This requirement pertains to all investment tax credit carryforwards regardless of whether the flow-through or deferral method is used to account for investment tax credits. ##### [740-10-55-36](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b75df02ab8db431ccf0be44d0e52cdac2217ee3a172db1ec85287685e970c605 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In assessing the need for a valuation allowance, provisions in the tax law that limit utilization of an operating loss or tax credit carryforward are applied in determining whether it is more likely than not that some portion or all of the deferred tax asset will not be realized by reduction of taxes payable on taxable income during the carryforward period. Example 19 (see paragraph [740-10-55-149](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-149)) illustrates recognition of the tax benefit of an operating loss in the loss year and in subsequent carryforward years when a valuation allowance is necessary in the loss year. ##### [740-10-55-37](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:631766b8fa24264eef80e3f1be0138b78740bd698921f34aa60c4dfa6cb752c4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An operating loss or tax credit carryforward from a prior year (for which the deferred tax asset was offset by a valuation allowance) may sometimes reduce taxable income and taxes payable that are attributable to certain revenues or gains that the tax law requires be included in taxable income for the year that cash is received. For financial reporting, however, there may have been no revenue or gain and a liability is recognized for the cash received. Future sacrifices to settle the liability will result in deductible amounts in future years. Under those circumstances, the reduction in taxable income and taxes payable from utilization of the operating loss or tax credit carryforward gives no cause for recognition of a tax benefit because, in effect, the operating loss or tax credit carryforward has been replaced by temporary differences that will result in deductible amounts when a nontax liability is settled in future years. The requirements for recognition of a tax benefit for deductible temporary differences and for operating loss carryforwards are the same, and the manner of reporting the eventual tax benefit recognized (that is, in income or as required by paragraph [740-20-45-3](https://asc.understandingaccounting.org/asc/740/20/#740-20-45-3)) is not affected by the intervening transaction reported for tax purposes. Example 20 (see paragraph [740-10-55-156](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-156)) illustrates recognition of the tax benefit of an operating loss in the loss year and in subsequent carryforward years when a valuation allowance is necessary in the loss year. ##### [740-10-55-38](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-38) Pending content: yes Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:09e4c442d539a6524222bb523b5d493bd5e3cbc54e90ec8e1f24ba3a4c4dcb57 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Except as noted in paragraph [740-20-45-3](https://asc.understandingaccounting.org/asc/740/20/#740-20-45-3), the manner of reporting the tax benefit of an operating loss carryforward or carryback is determined by the source of the income or loss in the current year and not by the source of the operating loss carryforward or taxes paid in a prior year or the source of expected future income that will result in realization of a deferred tax asset for an operating loss carryforward from the current year. [Deferred tax expense (or benefit)](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-expense-or-benefit "The change during the year in an entity's deferred tax liabilities and assets. For deferred tax liabilities and assets acquired in a purchase business combination during the year, it is the change since the combination date. Income tax expense (or benefit) for the year is allocated among continuing operations, discontinued operations, and items charged or credited directly to shareholders' equity.") that results because a change in circumstances causes a change in judgment about the future realization of the tax benefit of an operating loss carryforward is allocated to continuing operations (see paragraph [740-10-45-20](https://asc.understandingaccounting.org/asc/740/10/#740-10-45-20)). Thus, for example: 1. a The tax benefit of an operating loss carryforward that resulted from a loss on discontinued operations in a prior year and that is first recognized in the financial statements for the current year: 1. 1 Is allocated to continuing operations if it offsets the current or deferred tax consequences of income from continuing operations 2. 2 Is allocated to a gain on discontinued operations if it offsets the current or deferred tax consequences of that gain 3. 3 Is allocated to continuing operations if it results from a change in circumstances that causes a change in judgment about future realization of a tax benefit. 2. b The current or deferred tax benefit of a loss from continuing operations in the current year is allocated to continuing operations regardless of whether that loss offsets the current or deferred tax consequences of a gain on discontinued operations that: 1. 1 Occurred in the current year 2. 2 Occurred in a prior year (that is, if realization of the tax benefit will be by carryback refund) 3. 3 Is expected to occur in a future year. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [105-10-65-10](https://asc.understandingaccounting.org/asc/105/10/#105-10-65-10)Except as noted in paragraph [740-20-45-3](https://asc.understandingaccounting.org/asc/740/20/#740-20-45-3), the manner of reporting the tax benefit of an operating loss carryforward or carryback is determined by the source of the income or loss in the current year and not by the source of the operating loss carryforward or taxes paid in a prior year or the source of expected future income that will result in realization of a deferred tax asset for an operating loss carryforward from the current year. [Deferred tax expense (or benefit)](https://asc.understandingaccounting.org/glossary/d/#deferred-tax-expense-or-benefit "The change during the year in an entity's deferred tax liabilities and assets. For deferred tax liabilities and assets acquired in a purchase business combination during the year, it is the change since the combination date. Income tax expense (or benefit) for the year is allocated among continuing operations, discontinued operations, and items charged or credited directly to shareholders' equity.") that results because a change in circumstances causes a change in judgment about the future realization of the tax benefit of an operating loss carryforward is allocated to continuing operations (see paragraph [740-10-45-20](https://asc.understandingaccounting.org/asc/740/10/#740-10-45-20)). Thus, for example: 1. a The tax benefit of an operating loss carryforward that resulted from a loss on discontinued operations in a prior year and that is first recognized in the financial statements for the current year: 1. 1 Is allocated to continuing operations if it offsets the current or deferred tax consequences of income from continuing operations 2. 2 Is allocated to a gain on discontinued operations if it offsets the current or deferred tax consequences of that gain 3. 3 Is allocated to continuing operations if it results from a change in circumstances that causes a change in judgment about future realization of a tax benefit. 2. b The current or deferred tax benefit of a loss from continuing operations in the current year is allocated to continuing operations regardless of whether that loss offsets the current or deferred tax consequences of a gain on discontinued operations that: 1. 1 Occurred in the current year, provided that any tax benefit related to the continuing operations loss would have been realizable absent the gain on discontinued operations 2. 2 Occurred in a prior year (that is, if realization of the tax benefit will be by carryback refund) 3. 3 Is expected to occur in a future year. ##### [740-10-55-39](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-39) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c801570689725ecef105bf6df97d83b7e154db77d96af5a080885ff98869e880 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Expectations about future taxable income incorporate numerous assumptions about actions, elections, and strategies to minimize income taxes in future years. For example, an entity may have a practice of deferring taxable income whenever possible by structuring sales to qualify as installment sales for tax purposes. Actions such as that are not tax-planning strategies, as that term is used in this Topic because they are actions that management takes in the normal course of business. For purposes of applying the requirements of this Subtopic, a tax-planning strategy is an action that management ordinarily might not take but would take, if necessary, to realize a tax benefit for a carryforward before it expires. For example, a strategy to sell property and lease it back for the expressed purpose of generating taxable income to utilize a carryforward before it expires is not an action that management takes in the normal course of business. A qualifying tax-planning strategy is an action that: 1. a Is prudent and feasible. Management must have the ability to implement the strategy and expect to do so unless the need is eliminated in future years. For example, management would not have to apply the strategy if income earned in a later year uses the entire amount of carryforward from the current year. 2. b An entity ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused. All of the various strategies that are expected to be employed for business or tax purposes other than utilization of carryforwards that would otherwise expire unused are, for purposes of this Subtopic, implicit in management's estimate of future taxable income and, therefore, are not tax-planning strategies as that term is used in this Topic. 3. c Would result in realization of deferred tax assets. The effect of qualifying tax-planning strategies must be recognized in the determination of the amount of a valuation allowance. Tax-planning strategies need not be considered, however, if positive evidence available from other sources (see paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) is sufficient to support a conclusion that a valuation allowance is not necessary. ##### [740-10-55-40](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-40) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e6cbf7d5a3882a6f7362ea61c7a468b8121a8e66e4c5c7f092112c8996c4e5e2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-30-19](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-19) indicates that tax-planning strategies include elections for tax purposes. The following are some examples of elections under current U.S. federal tax law that, if they meet the criteria for tax-planning strategies, should be considered in determining the amount, if any, of valuation allowance required for deferred tax assets: 1. a The election to file a consolidated tax return 2. b The election to claim either a deduction or a tax credit for foreign taxes paid 3. c The election to forgo carryback and only carry forward a net operating loss. ##### [740-10-55-41](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-41) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1dccc4ad11035a77d7aa2e9a78e6140f8177e60242fd5bcbac7a2c45ee0e0911 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because the effects of known qualifying tax-planning strategies must be recognized (see Example 22 \[paragraph [740-10-55-163](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-163)\]), management should make a reasonable effort to identify those qualifying tax-planning strategies that are significant. Management's obligation to apply qualifying tax-planning strategies in determining the amount of valuation allowance required is the same as its obligation to apply the requirements of other Topics for financial accounting and reporting. However, if there is sufficient evidence that taxable income from one of the other sources of taxable income listed in paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18) will be adequate to eliminate the need for any valuation allowance, a search for tax-planning strategies is not necessary. ##### [740-10-55-42](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-42) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f3dbc5168b338f6c6ac6ec405e1f634450a42116832a52a64e983b2c7e86c459 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Tax-planning strategies may shift estimated future taxable income between future years. For example, assume that an entity has a $1,500 operating loss carryforward that expires at the end of next year and that its estimate of taxable income exclusive of the future reversal of existing temporary differences and carryforwards is approximately $1,000 per year for each of the next several years. That estimate is based, in part, on the entity's present practice of making sales on the installment basis and on provisions in the tax law that result in temporary deferral of gains on installment sales. A tax-planning strategy to increase taxable income next year and realize the full tax benefit of that operating loss carryforward might be to structure next year's sales in a manner that does not meet the tax rules to qualify as installment sales. Another strategy might be to change next year's depreciation procedures for tax purposes. ##### [740-10-55-43](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-43) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ea8ebd218d3e34264e8092e173ecb36393073941a5651aff37017a033a3fd37c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Tax-planning strategies also may shift the estimated pattern and timing of future reversals of temporary differences. For example, if an operating loss carryforward otherwise would expire unused at the end of next year, a tax-planning strategy to sell the entity's installment sale receivables next year would accelerate the future reversal of taxable temporary differences for the gains on those installment sales. In other circumstances, a tax-planning strategy to accelerate the future reversal of deductible temporary differences in time to offset taxable income that is expected in an early future year might be the only means to realize a tax benefit for those deductible temporary differences if they otherwise would reverse and provide no tax benefit in some later future year(s). Examples of actions that would accelerate the future reversal of deductible temporary differences include the following: 1. a An annual payment that is larger than an entity's usual annual payment to reduce a long-term pension obligation (recognized as a liability in the financial statements) might accelerate a tax deduction for pension expense to an earlier year than would otherwise have occurred. 2. b Disposal of obsolete inventory that is reported at net realizable value in the financial statements would accelerate a tax deduction for the amount by which the tax basis exceeds the net realizable value of the inventory. 3. c Sale of loans at their reported amount (that is, net of an allowance for bad debts) would accelerate a tax deduction for the allowance for bad debts. ##### [740-10-55-44](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-44) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:639e3a2514d2a8a0442497e0d73d954039b846ecad044d4284105f9ce872c9b5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A significant expense might need to be incurred to implement a particular tax-planning strategy, or a significant loss might need to be recognized as a result of implementing a particular tax-planning strategy. In either case, that expense or loss (net of any future tax benefit that would result from that expense or loss) reduces the amount of tax benefit that is recognized for the expected effect of a qualifying tax-planning strategy. For that purpose, the future effect of a differential in interest rates (for example, between the rate that would be earned on installment sale receivables and the rate that could be earned on an alternative investment if the tax-planning strategy is to sell those receivables to accelerate the future reversal of related taxable temporary differences) is not considered. ##### [740-10-55-45](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-45) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:35a8ebd5b57b5a4b22697178018a872bc588e387d7986a32a90a36055dbdee81 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Example 21 (see paragraph [740-10-55-159](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-159)) illustrates recognition of a deferred tax asset based on the expected effect of a qualifying tax-planning strategy when a significant expense would be incurred to implement the strategy. ##### [740-10-55-46](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-46) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2edecfbfa4eecf58d185e2e8caf66179d80e25371721513267114b14fdbe22da Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Under this Subtopic, the requirements for consideration of tax-planning strategies pertain only to the determination of a valuation allowance for a deferred tax asset. A deferred tax liability ordinarily is recognized for all taxable temporary differences. The only exceptions are identified in paragraph [740-10-25-3](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-3). Certain seemingly taxable temporary differences, however, may or may not result in taxable amounts when those differences reverse in future years. One example is an excess of cash surrender value of life insurance over premiums paid (see paragraph [740-10-25-30](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-30)). Another example is an excess of the book over the tax basis of an investment in a domestic subsidiary (see paragraph [740-30-25-7](https://asc.understandingaccounting.org/asc/740/30/#740-30-25-7)). The determination of whether those differences are taxable temporary differences does not involve a tax-planning strategy as that term is used in this Topic. ##### [740-10-55-47](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-47) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b30d456ad1f0f4399044e9ad35c6eec4facd6e717caab32e06fecc0f98e728eb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Example 22 (see paragraph [740-10-55-163](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-163)) provides an example where an entity has identified multiple tax-planning strategies. ##### [740-10-55-48](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-48) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e1e009d8c1aa250ec192c434177a571c008d90cef92a12e2efc38df645232913 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Under current U.S. federal tax law, approval of an entity's change from taxable C corporation status to nontaxable S corporation status is automatic if the criteria for S corporation status are met. If an entity meets those criteria but has not changed to S corporation status, a strategy to change to nontaxable S corporation status would not permit an entity to not recognize deferred taxes because a change in tax status is a discrete [event](https://asc.understandingaccounting.org/glossary/e/#event "A happening of consequence to an entity. The term encompasses both transactions and other events affecting an entity."). Paragraph [740-10-25-32](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-32) requires that the effect of a change in tax status be recognized at the date that the change in tax status occurs, that is, at the date that the change is approved by the taxing authority (or on the date of filing the change if approval is not necessary). For example, as required by paragraph [740-10-25-34](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-34), if an election to change an entity's tax status is approved by the taxing authority (or filed, if approval is not necessary) early in Year 2 and before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) for Year 1, the effect of that change in tax status shall not be recognized in the financial statements for Year 1. ##### [740-10-55-49](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-49) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:3a9fa992993e5e26b9ac590eadb476235c1561174fc948a8bce69809778fa0b4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance presents examples of temporary differences. These examples are intended to be illustrative and not all-inclusive. Any references to various tax laws shall not be considered definitive interpretations of such laws for any purpose. ##### [740-10-55-50](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-50) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e33890cfe259e6db2f4a929ee89d55d78e91703e5c436a0ac1c1202c09d5d8d6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Differences between the recognition for financial accounting purposes and income tax purposes of discount or premium resulting from determination of the present value of a note should be treated as temporary differences in accordance with this Topic. ##### [740-10-55-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-51) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2ae498fecd33258eb1c9bacddd28e25f1fabce9b42ef5936cf8359edd9cab0fb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2020-06](https://asc.understandingaccounting.org/updates/asu-2020-06/). ##### [740-10-55-52](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-52) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f0c5dd3c98a9b62510148fc04fb56080ce4b5a89e49697063f4bf8dc5a7da3af Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may use the LIFO method to value inventories for tax purposes which may result in LIFO inventory temporary differences, that is, for the excess of the amount of LIFO inventory for financial reporting over its tax basis. ##### [740-10-55-53](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-53) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f177bf0e5752da6a3cd4d227b6f04b3c42e04297bc0e3ad2e3556f50c538da22 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Even though a deferred tax liability for the LIFO inventory of a subsidiary will not be settled if that subsidiary is sold before the LIFO inventory temporary difference reverses, recognition of a deferred tax liability is required regardless of whether the LIFO inventory happens to belong to the parent entity or one of its subsidiaries. ##### [740-10-55-54](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-54) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:651ce19422ac9cfc820a62603f426a563443e0233a6b43e5908e55815d5154a3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance and Example 23 (see paragraph [740-10-55-165](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-165)) refer to provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003; however, they shall not be considered definitive interpretations of the Act for any purpose. That Example provides a simple illustration of this guidance. ##### [740-10-55-55](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-55) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2e67bafc88c914ac3a3e0ab16aa98798d267c6ed0ed682fc423fb6f2e338cedc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As indicated in paragraph [715-60-05-9](https://asc.understandingaccounting.org/asc/715/60/#715-60-05-9), on December 8, 2003, the president signed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. An employer's eligibility for the 28 percent subsidy depends on whether the prescription drug benefit available under its plan is at least actuarially equivalent to the Medicare Part D benefit. ##### [740-10-55-56](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-56) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2acf788227b425e28035573b47fe6f3f2c4cbe08cc62a100cf12c05670ac42e1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Act excludes receipt of the subsidy from the taxable income of the employer for federal income tax purposes. That provision affects the accounting for the temporary difference related to the employer's accrued postretirement benefit cost under the requirements of this Topic. ##### [740-10-55-57](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-57) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:10526015af0413912b3be372a4aa6b65ea40864ae982515626ca35aa450f26ed Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In the periods in which the subsidy affects the employer's accounting for the plan, it shall have no effect on any plan-related temporary difference accounted for under this Topic because the subsidy is exempt from federal taxation. That is, the measure of any temporary difference shall continue to be determined as if the subsidy did not exist. Example 23 (see paragraph [740-10-55-165](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-165)) provides a simple illustration of this guidance. ##### [740-10-55-58](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-58) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:97dc440ca48bedd754d8e4b6928919faf1a58d201af5d9e02f168e1476502df1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance refers to provisions of the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1987; however, it shall not be considered a definitive interpretation of the Acts for any purpose. ##### [740-10-55-59](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-59) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b4dd14f579ddc3b43534f8b41b369c1ea14be7952aaddd9514c9a3ddf6912ac9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A change in tax law may require a change in accounting method for tax purposes, for example, the uniform cost capitalization rules required by the Tax Reform Act of 1986. For calendar-year taxpayers, inventories on hand at the beginning of 1987 are revalued as though the new rules had been in effect in prior years. That initial catch-up adjustment is deferred and taken into taxable income over not more than four years. This deferral of the initial catch-up adjustment for a change in accounting method for tax purposes gives rise to two temporary differences. ##### [740-10-55-60](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-60) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:19221b057e5ef858f47c1a6cec4327ba157e2e9ede880302d1cb7f874b142278 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. One temporary difference is related to the additional amounts initially capitalized into inventory for tax purposes. As a result of those additional amounts, the tax basis of the inventory exceeds the amount of the inventory for financial reporting. That temporary difference is considered to result in a deductible amount when the inventory is expected to be sold. Therefore, the excess of the tax basis of the inventory over the amount of the inventory for financial reporting as of December 31, 1986, is considered to result in a deductible amount in 1987 when the inventory turns over. As of subsequent year-ends, the [deductible temporary difference](https://asc.understandingaccounting.org/glossary/d/#deductible-temporary-difference "Temporary differences that result in deductible amounts in future years when the related asset or liability is recovered or settled, respectively. See Temporary Difference.") to be considered would be the amount capitalized for tax purposes and not for financial reporting as of those year-ends. The expected timing of the deduction for the additional amounts capitalized in this example assumes that the inventory is not measured on a LIFO basis; temporary differences related to LIFO inventories reverse when the inventory is sold and not replaced as provided in paragraph [740-10-55-13](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-13). ##### [740-10-55-61](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-61) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:6271330a4624cbf5371046cca3f04c11f57c80e7c0a72c12fef383683b8a00e1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The other temporary difference is related to the deferred income for tax purposes that results from the initial catch-up adjustment. As stated above, that deferred income likely will be included in taxable income over four years. Ordinarily, the reversal pattern for this temporary difference should be considered to follow the tax pattern and would also be four years. This assumes that it is expected that inventory sold will be replaced. However, under the tax law, if there is a one-third reduction in the amount of inventory for two years running, any remaining balance of that deferred income is included in taxable income for the second year. If such inventory reductions are expected, then the reversal pattern will be less than four years. ##### [740-10-55-62](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-62) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8fa3e93236d055f95cfe329bc550c9153ea3f4a2d23c04c9d3e03cf6965b175d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-35-4](https://asc.understandingaccounting.org/asc/740/10/#740-10-35-4) requires recognition of the effect of a change in tax law or rate in the period that includes the enactment date. For example, the Tax Reform Act of 1986 was enacted in 1986. Therefore, the effects are recognized in a calendar-year entity's 1986 financial statements. ##### [740-10-55-63](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-63) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:dac74756284f2aa1817a9a2312579d9ab3e62f1758fbe76f032b0a5d17b1950a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Omnibus Budget Reconciliation Act of 1987 requires family-owned farming businesses to use the accrual method of accounting for tax purposes. The initial catch-up adjustment to change from the cash to the accrual method of accounting is deferred. It is included in taxable income if the business ceases to be family-owned (for example, it goes public). It also is included in taxable income if gross receipts from farming activities in future years drop below certain 1987 levels as set forth in the tax law. The deferral of the initial catch-up adjustment for that change in accounting method for tax purposes gives rise to a temporary difference because an assumption inherent in an entity's statement of financial position is that the reported amounts of assets and liabilities will be recovered and settled. Under the requirements of this Topic, deferred tax liabilities may not be eliminated or reduced because an entity may be able to delay the settlement of those liabilities by delaying the events that would cause taxable temporary differences to reverse. Accordingly, the deferred tax liability is recognized. If the events that trigger the payment of the tax are not expected in the foreseeable future, the reversal pattern of the related temporary difference is indefinite. ##### [740-10-55-64](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-64) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e172aeb49265554dd8c1ce781afdca1a7089faf7579401ca56793b1b2982c5d3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may change from taxable C corporation status to nontaxable S corporation status. An entity that makes that status change shall continue to recognize a deferred tax liability to the extent that the entity would be subject to a corporate-level tax on net unrecognized built-in gains. ##### [740-10-55-65](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-65) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8cec3d3e57e0f72adafa49e8b9fadec3e1971cc8929f78a492e928f96ea5cbeb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A C corporation that has temporary differences as of the date of change to S corporation status shall determine its deferred tax liability in accordance with the tax law. Since the timing of realization of a built-in gain can determine whether it is taxable, and therefore significantly affect the deferred tax liability to be recognized, actions and elections that are expected to be implemented shall be considered. For purposes of determining that deferred tax liability, the lesser of an unrecognized built-in gain (as defined by the tax law) or an existing temporary difference is used in the computations described in the tax law to determine the amount of the tax on built-in gains. Example 24 (see paragraph [740-10-55-168](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-168)) illustrates this guidance. ##### [740-10-55-66](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-66) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:eb7c9b3456b574deb486c08853164894159eacf0f526129a9e64eb648f2fd481 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Gain or loss resulting from an involuntary conversion of a nonmonetary asset to monetary assets that is not recognized for income tax reporting purposes in the same period in which the gain or loss is recognized for financial reporting purposes is a temporary difference for which a deferred tax liability or deferred tax asset should be recognized as required by this Subtopic. ##### [740-10-55-67](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-67) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:44956f8f538fcc78b7bffb6caae80ef7109cd33893b6134876f93f5bd972e1fc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity may make payments to taxing authorities for different reasons. The following guidance addresses certain of these payments. ##### [740-10-55-68](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-68) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c78acce5439783b211064cb269276d265afe626cbce0540e1ee59d650f9c9b88 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance refers to provisions of the Tax Reform Act of 1986 and the Revenue Act of 1987; however, it shall not be considered a definitive interpretation of the Acts for any purpose. ##### [740-10-55-69](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-69) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:4871857b21047ce50174c8b3638d2bd81abfbf4e20452d03990ec3393ef79463 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance addresses how a payment should be recorded in the financial statements of an entity for a payment to a taxing authority to retain their fiscal year. ##### [740-10-55-70](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-70) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ceb0894f41c263cda9a1a9cf66a50b304a284cd9652f5a3d0d69d1b86e803156 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. On December 22, 1987, the Revenue Act of 1987 was enacted, which allowed partnerships and S corporations to elect to retain their fiscal year rather than adopt a calendar year for tax purposes as previously required by the Tax Reform Act of 1986. Entities that elected to retain a fiscal year are required to make an annual payment in a single installment each year that approximates the income tax that the partners-owners would have paid on the short-period income had the entity switched to a calendar year. The payment is made by the entity and is not identified with individual partners-owners. Additionally the amount is not adjusted if a partner-owner leaves the entity. ##### [740-10-55-71](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-71) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c4fc13034360181226deb5f20cdcbf3c395f13ba82c508e4ac7b1c9df60c0e90 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this fact pattern, partnerships and S corporations should account for the payment as an asset since the payment is viewed as a deposit that is adjusted annually and will be realized when the entity liquidates, its income declines to zero, or it converts to a calendar year-end. ##### [740-10-55-72](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-72) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a8e712fd3ff8e6d01a6959594619a320627b2ddfe5593dd64b840803c4b3ac9a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance refers to provisions which may be present in the French tax structure; however, it shall not be considered a definitive interpretation of the historical or current French tax structure for any purpose. ##### [740-10-55-73](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-73) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:6732546f0915762f0c83b6dbdf4cb14a25d75bc63adcbf6d9f5f10ac292a7bd7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The French income tax structure is based on the concept of an integrated tax system. The system utilizes a tax credit at the shareholder level to eliminate or mitigate the double taxation that would otherwise apply to a dividend. The tax credit is automatically available to a French shareholder receiving a dividend from a French corporation. The precompte mobilier (or precompte) is a mechanism that provides for the integration of the tax credit to the shareholder with the taxes paid by the corporation. The precompte is a tax paid by the corporation at the time of a dividend distribution that is equal to the difference between a tax based on the regular corporation tax rate applied to the amount of the declared dividend and taxes previously paid by the corporation on the income being distributed. In addition, if a corporation pays a dividend from earnings that have been retained for more than five years, the corporation loses the benefit of any taxes previously paid in the computation of the precompte. ##### [740-10-55-74](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-74) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c96db67ce2777c710e4729cd0930da5809cb0f0c8a4cded033b755d2ffd2df4a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-15-4(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-15-4) sets forth criteria for determining whether a tax that is assessed on an entity based on dividends distributed is, in effect, a withholding tax for the benefit of recipients of the dividend to be recorded in equity as part of the dividend distribution in that entity's separate financial statements. A tax that is assessed on a corporation based on dividends distributed that meets the criteria in that paragraph, such as the French precompte tax, should be considered to be in effect a withholding of tax for the recipient of the dividend and recorded in equity as part of the dividend paid to shareholders. ##### [740-10-55-75](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-75) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:af5a31303b311c7aa83ba6a46b4b33f3c9a93699f44f2bc1eb214839b02c3491 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An employer that withdraws excess plan assets from its pension plan may be subject to an excise tax. If the excise tax is independent of taxable income, that is, it is a tax due on a specific transaction regardless of whether there is any taxable income for the period in which the transaction occurs, it is not an income tax and the employer should recognize it as an expense (not classified as income taxes) in the period of the withdrawal. ##### [740-10-55-76](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-76) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:80f5927ba51fdcb26049cdce7e895019f49f28e56db0c7de86bc014547827ac2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Example 26 (see paragraph [740-10-55-202](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-202)) illustrates a transaction directly with a governmental taxing authority. ##### [740-10-55-77](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-77) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c7c92cbe68810d5484a9999004582a146c9e613d618e5a0dff934543da03d032 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-78](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-78) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a99a6015a885d976a07ef5a9a5c3cc6183409a31dd4f2d35d7dc29efb225966e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-79](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-79) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b804cb397e2f0d897d6d99c0acbecf8f08a6e4f98ba386df81cbe841cddaf4e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-50-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-50-9) requires disclosure of the significant components of income tax expense attributable to continuing operations. The sum of the amounts disclosed for the components of tax expense should equal the amount of tax expense that is reported in the statement of earnings for continuing operations. Insignificant components that are not separately disclosed should be combined and disclosed as a single amount so that the sum of the amounts disclosed will equal total income tax expense attributable to continuing operations. Separate disclosure of the tax benefit of operating loss carryforwards and tax credits and tax credit carryforwards that have been recognized as a reduction of current tax expense and deferred tax expense is required. There are a number of ways to satisfy that disclosure requirement. Three acceptable approaches, referred to as the gross method, the net method, and the statutory tax rate reconciliation method, are illustrated in Example 29 (see paragraph [740-10-55-212](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-212)). ##### [740-10-55-80](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-80) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2631f5d897db7286c05291cc950964c139bdaa15f5d4f7ff830ed22e1ec45059 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Income tax expense is defined as the sum of current and deferred tax expense, and the amount to be disclosed under any of the above approaches is only the amount by which total income tax expense from continuing operations has been reduced by tax credits or an operating loss carryforward. For example, assume that a tax benefit is recognized for an operating loss or tax credit carryforward by recognizing a deferred tax asset in Year 1, with no valuation allowance required because of an existing deferred tax liability. Further, assume that the carryforward is realized on the tax return in Year 2. For financial reporting in Year 2: 1. a Current tax expense will be reduced for the tax benefit of the operating loss or tax credit carryforward realized on the tax return. 2. b Deferred tax expense will be larger (or a deferred tax benefit will be smaller) by the same amount. In those circumstances, the operating loss or tax credit carryforward affects only income tax expense (the sum of current and deferred tax expense) in Year 1 when a tax asset (with no valuation allowance) is recognized. There is no effect on income tax expense in Year 2 because the separate effects on current and deferred tax expense offset each other. Accordingly, the requirement for separate disclosure of the effects of tax credits or an operating loss carryforward is not applicable for Year 2. However, that disclosure requirement applies to financial statements for Year 1 that are presented for comparative purposes. #### Illustrations ##### [740-10-55-81](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-81) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b74fe0912dac67e8981d97c852c341440d3204541cdad966a0161a7e18be22b5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the initial and subsequent determination by an entity of the unit of account for a tax position. Paragraph [740-10-25-13](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-13) requires an entity to determine an appropriate unit of account for an individual tax position. The following Cases illustrate: 1. a The determination of the unit of account (Case A) 2. b A change in the unit of account (Case B). ##### [740-10-55-82](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-82) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2c83cbddae0219e0d86a689723f511fb0d6f1def1cacec57501e2eae86d3d42b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A and B share all of the following assumptions. ##### [740-10-55-83](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-83) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:223dbff248e27c3dddba0e2c3d60ac8af854423204c51e5ec3a9e198025e430a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity anticipates claiming a $1 million research and experimentation credit on its tax return for the current fiscal year. The credit comprises equal spending on 4 separate projects (that is, $250,000 of tax credit per project). The entity expects to have sufficient taxable income in the current year to fully utilize the $1 million credit. Upon review of the supporting documentation, management believes it is more likely than not that the entity will ultimately sustain a benefit of approximately $650,000. The anticipated benefit consists of approximately $200,000 per project for the first 3 projects and $50,000 for the fourth project. ##### [740-10-55-84](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-84) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:82e9fdee9745d0c977e7d6b2c68e8ebfa0d7e3c40f8bd53b5885552008b87017 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates an entity's initial determination of the unit of account for a tax position. ##### [740-10-55-85](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-85) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1783f7e682a2938134020111e4948e511aee2611b14aff857d7798f385afee46 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In its evaluation of the appropriate amount to recognize, management first determines the appropriate unit of account for the tax position. Because of the magnitude of expenditures in each project, management concludes that the appropriate unit of account is each individual research project. In reaching this conclusion, management considers both the level at which it accumulates information to support the tax return and the level at which it anticipates addressing the issue with taxing authorities. In this Case, upon review of the four projects including the magnitude of expenditures, management determines that it accumulates information at the project level. Management also anticipates the taxing authority will address the issues during an examination at the level of individual projects. ##### [740-10-55-86](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-86) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:77849b7312bfa3d5a0106d6a52eaff40bf7e57d2a039ac93dd33295410ca352f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In evaluating the projects for recognition, management determines that three projects meet the more-likely-than-not recognition threshold. However, due to the nature of the activities that constitute the fourth project, it is uncertain that the tax benefit related to this project will be allowed. Because the tax benefit related to that fourth project does not meet the more-likely-than-not recognition threshold, it should not be recognized in the financial statements, even though tax positions associated with that project will be included in the tax return. The entity would recognize a $600,000 financial statement benefit related to the first 3 projects but would not recognize a financial statement benefit related to the fourth project. ##### [740-10-55-87](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-87) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c68d59de198cffeafbc24f46e9b4edb0b30932cbd93be87c8cdc4ee9d1cd043b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates a change in an entity's initial determination of the unit of account for a tax position. ##### [740-10-55-88](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-88) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7d5cf232b75209f0d15272dc060f196f81f305ac9f49a749cfa19315c77d57a7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In Year 2, the entity increases its spending on research and experimentation projects and anticipates claiming significantly larger research credits in its Year 2 tax return. In light of the significant increase in expenditures, management reconsiders the appropriateness of the unit of account and concludes that the project level is no longer the appropriate unit of account for research credits. This conclusion is based on the magnitude of spending and anticipated claimed credits and on previous experience and is consistent with the advice of external tax advisors. Management anticipates the taxing authority will focus the examination on functional expenditures when examining the Year 2 return and thus needs to evaluate whether it can change the unit of account in subsequent years' tax returns. ##### [740-10-55-89](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-89) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1697086524898f39f66630342a5710f7d08972e8a792ab27a7cb1999ddd58190 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Determining the unit of account requires evaluation of the entity's facts and circumstances. In making that determination, management evaluates the manner in which it prepares and supports its income tax return and the manner in which it anticipates addressing issues with taxing authorities during an examination. The unit of account should be consistently applied to similar positions from period to period unless a change in facts and circumstances indicates that a different unit of account is more appropriate. Because of the significant change in the tax position in Year 2, management's conclusion that the taxing authority will likely examine tax credits in the Year 2 tax return at a more detailed level than the individual project is reasonable and appropriate. Accordingly, the entity should reevaluate the unit of account for the Year 2 financial statements based on the new facts and circumstances. ##### [740-10-55-90](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-90) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a6a4f19d9b8a08f59598dbedadf2240fbadb6b57e4c144937389842cb71f4823 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in paragraph [740-10-25-7(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-7) on evaluating a taxing authority's widely understood administrative practices and precedents shall be taken into account when assessing the more-likely-than-not recognition threshold established in paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6). This Example illustrates such consideration. ##### [740-10-55-91](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-91) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:958106759dce692c9a926fab1bf41cee3a831a4b6d91bf94c7f0945e83bb6f09 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity has established a capitalization threshold of $2,000 for its tax return for routine property and equipment purchases. Assets purchased for less than $2,000 are claimed as expenses on the tax return in the period they are purchased. The tax law does not prescribe a capitalization threshold for individual assets, and there is no materiality provision in the tax law. The entity has not been previously examined. Management believes that based on previous experience at a similar entity and current discussions with its external tax advisors, the taxing authority will not disallow tax positions based on that capitalization policy and the taxing authority's historical administrative practices and precedents. ##### [740-10-55-92](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-92) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:890c8dff2d5146abc35091bebb57f410671e36153007a49dcd075defbe6b6bd5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Some might deem the entity's capitalization policy a technical violation of the tax law, since that law does not prescribe capitalization thresholds. However, in this situation the entity has concluded that the capitalization policy is consistent with the demonstrated administrative practices and precedents of the taxing authority and the practices of other entities that are regularly examined by the taxing authority. Based on its previous experience with other entities and consultation with its external tax advisors, management believes the administrative practice is widely understood. Accordingly, because management expects the taxing authority to allow this position when and if examined, the more-likely-than-not recognition threshold has been met. ##### [740-10-55-93](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-93) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:db47f180fa1eb15cb4ec9a608836d745e0bf793a96213936bcd0c152e7e71b63 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in paragraph [740-10-25-7(b)](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-7) on evaluating a taxing authority's widely understood administrative practices and precedents shall be taken into account when assessing the more-likely-than-not recognition threshold established in paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6). This Example illustrates such consideration. ##### [740-10-55-94](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-94) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:16b8b1edf798ed216f449004eafeaa46435cc8757f3c47119462f225514b39a3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity has been incorporated in Jurisdiction A for 50 years; it has filed a tax return in Jurisdiction A in each of those 50 years. The entity has been doing business in Jurisdiction B for approximately 20 years and has filed a tax return in Jurisdiction B for each of those 20 years. However, the entity is not certain of the exact date it began doing business, or the date it first had nexus, in Jurisdiction B. ##### [740-10-55-95](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-95) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ab61db3dae492e438ce037003a185fccf90755c7c8d0fc8e4ce2121d4b085b1f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The entity understands that if a tax return is not filed, the statute of limitations never begins to run; accordingly, failure to file a tax return effectively means there is no statute of limitations. The entity has become familiar with the administrative practices and precedents of Jurisdiction B and understands that Jurisdiction B will look back only six years in determining if there is a tax return due and a deficiency owed. Because of the administrative practices of the taxing authority and the facts and circumstances, the entity believes it is more likely than not that a tax return is not required to be filed in Jurisdiction B at an earlier date and that a liability for tax exposures for those periods is not required. ##### [740-10-55-96](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-96) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2589e579ca52131de24550c478f207693580232ed6d43c2761e5a65dc0c6e0d2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-30-20](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-20) requires that entities determine the amount of available future taxable income from a tax-planning strategy based on the application of the recognition and measurement requirements of this Subtopic for tax positions. This Example illustrates the recognition aspect of that requirement. ##### [740-10-55-97](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-97) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8b0b9389944b5b7c293f98be296214525f42421d4f9016ceaf2fd0808ef6d369 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity has a wholly owned subsidiary with certain deferred tax assets as a result of several years of losses from operations. Management has determined that it is more likely than not that sufficient future taxable income will not be available to realize those deferred tax assets. Therefore, management recognizes a full valuation allowance for those deferred tax assets both in the separate financial statements of the subsidiary and in the consolidated financial statements of the entity. ##### [740-10-55-98](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-98) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:621fa614493392dc41a27e63f69d481cef7c447ff119ba33b2c1b306870bdeff Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Management has identified certain tax-planning strategies that might enable the realization of those deferred tax assets. Management has determined that the strategies will meet the minimum statutory threshold to avoid penalties and that it is not more likely than not that the strategies would be sustained upon examination based on the technical merits. Accordingly, those strategies may not be used to reduce the valuation allowance on the deferred tax assets. Only a tax-planning strategy that meets the more-likely-than-not recognition threshold would be considered in evaluating the sufficiency of future taxable income for realization of deferred tax assets. ##### [740-10-55-99](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-99) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:354ea6cc6ad065063e6340cb06a62fcd611a25b0d77688587b10c47bd13fbaae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the recognition and measurement criteria of this Subtopic to tax positions where the tax law is unambiguous. The recognition and measurement criteria of this Subtopic applicable to tax positions begin in paragraph [740-10-25-5](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-5) for recognition and paragraph [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7) for measurement. ##### [740-10-55-100](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-100) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8023d5673f98de514bb3dba2f3ca27db62eae4c4e38de1a7d76dd24a819804bd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. An entity has taken a tax position that it believes is based on clear and unambiguous tax law for the payment of salaries and benefits to employees. The class of salaries being evaluated in this tax position is not subject to any limitations on deductibility (for example, executive salaries are not included), and none of the expenditures are required to be capitalized (for example, the expenditures do not pertain to the production of inventories); all amounts accrued at year-end were paid within the statutorily required time frame subsequent to the reporting date. Management concludes that the salaries are fully deductible. ##### [740-10-55-101](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-101) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:fa38b5e76b921bdaf780adc6516586d8d62117f4bac48ddbb6aaaeb0bb7bc1d4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. All tax positions are subject to the requirements of this Subtopic. However, because the deduction is based on clear and unambiguous tax law, management has a high confidence level in the technical merits of this position. Accordingly, the tax position clearly meets the recognition criterion and should be evaluated for measurement. In determining the amount to measure, management is highly confident that the full amount of the deduction will be allowed and it is clear that it is greater than 50 percent likely that the full amount of the tax position will be ultimately realized. Accordingly, the entity would recognize the full amount of the tax position in the financial statements. ##### [740-10-55-102](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-102) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c675c3a1dc39c173abadae8d780364a0950d4d225bb278881e84e42be819dcc4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example demonstrates an application of the measurement requirements of paragraph [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7) for a tax position that meets the paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6) requirements for recognition. Measurement in this Example is based on identified information about settlement. ##### [740-10-55-103](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-103) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:12bc89f7bfe84a28d52f9b31cdf652e6518f8e0c11fd1869f5fad65040877beb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In applying the recognition criterion of this Subtopic for tax positions, an entity has determined that a tax position resulting in a benefit of $100 qualifies for recognition and should be measured. The entity has considered the amounts and probabilities of the possible estimated outcomes as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-579FEE11-52DC-4FDF-B7B9-D62BD9268C3F-low.gif) Possible Estimated Outcome Individual Probability of Occurring (%) Cumulative Probability of Occurring (%) $100 5 5 80 25 30 60 25 55 50 20 75 40 10 85 20 10 95 - 5 100 ##### [740-10-55-104](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-104) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:36b14961e035db8b7c11d490b352a180a5b32e17b006077970c409c696f902f9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because $60 is the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement, the entity would recognize a tax benefit of $60 in the financial statements. ##### [740-10-55-105](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-105) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7396672dc25706b8e8db965ae1aefba6ac8612929daff4a35e6faca12d628767 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As in the preceding Example, this Example also demonstrates an application of the measurement requirements of paragraph [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7) for a tax position determined to meet recognition requirements. While measurement in this Example is also based on identified information about settlement, the information is more limited than in the preceding Example. ##### [740-10-55-106](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-106) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:415e0a4a791234c07be6f2e7864f53d0cfc7675ba620b1425d8db7d4136a8222 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In applying the recognition criterion of this Subtopic for tax positions an entity has determined that a tax position resulting in a benefit of $100 qualifies for recognition and should be measured. There is limited information about how a taxing authority will view the position. After considering all relevant information, management's confidence in the technical merits of the tax position exceeds the more-likely-than-not recognition threshold, but management also believes it is likely it would settle for less than the full amount of the entire position when examined. Management has considered the amounts and the probabilities of the possible estimated outcomes. - ![](https://asc.understandingaccounting.org/asc-img/GUID-196C25BA-AA73-472D-81AF-6EAF4B072871-low.gif) Possible Estimated Outcome Individual Probability of Occurring (%) Cumulative Probability of Occurring (%) $100 25 25 75 50 75 50 25 100 ##### [740-10-55-107](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-107) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f5eb2cb5a492622b21128b7df3421e4b00d7907049515be35307829a76ccdecf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Because $75 is the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement, the entity would recognize a tax benefit of $75 in the financial statements. ##### [740-10-55-108](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-108) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:62136b419578283a5d47cefec7dd7f94dbe92aeb97b0b21f4638b5f9761b6a4b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example demonstrates an application of the measurement requirements of paragraph [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7) for a tax position that meets the paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6) requirements for recognition. Measurement in this Example is based on settlement of a similar tax position with the taxing authority. ##### [740-10-55-109](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-109) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:146f9621cf6a7a9398c8a9537025e97f0bc4f20ba068c9f43aa3a4f7a393c4b3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In applying the recognition criterion of this Subtopic for tax positions, an entity has determined that a tax position resulting in a benefit of $100 qualifies for recognition and should be measured. In a recent settlement with the taxing authority, the entity has agreed to the treatment for that position for current and future years. There are no recently issued relevant sources of tax law that would affect the entity's assessment. The entity has not changed any assumptions or computations, and the current tax position is consistent with the position that was recently settled. In this case, the entity would have a very high confidence level about the amount that will be ultimately realized and little information about other possible outcomes. Management will not need to evaluate other possible outcomes because it can be confident of the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement without that evaluation. ##### [740-10-55-110](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-110) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c806d0f10f47fa4b72f2f22fcbe374a625cb63adc8009002fd1414d601bd641a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example demonstrates an application of the measurement requirements of paragraph [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7) for a tax position that meets the paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6) requirements for recognition. Measurement in this Example is based on the timing of the deduction. ##### [740-10-55-111](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-111) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:bf22bf93616a801487286b095ab9e4f6b916c6704362d2d7e1e54bfdb9aad5c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In Year 1, an entity acquired a separately identifiable intangible asset for $15 million that has an indefinite life for financial statement purposes and is, therefore, not subject to amortization. Based on some uncertainty in the tax code, the entity decides for tax purposes to deduct the entire cost of the asset in Year 1. While the entity is certain that the full amount of the intangible is ultimately deductible for tax purposes, the timing of deductibility is uncertain under the tax code. In applying the recognition criterion of this Subtopic for tax positions, the entity has determined that the tax position qualifies for recognition and should be measured. The entity believes it is 25 percent likely it would be able to realize immediate deduction upon settlement, and it is certain it could sustain a 15-year amortization for tax purposes. Thus, the largest Year 1 benefit that is greater than 50 percent likely of being realized upon settlement is the tax effect of $1 million (the Year 1 deduction from straight-line amortization of the asset over 15 years). ##### [740-10-55-112](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-112) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8dff0b8a768c13a8a4a20984c62e19ee3cf6bf82d5ea7f0590e4bb96bb4cc926 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At the end of Year 1, the entity should reflect a deferred tax liability for the tax effect of the temporary difference created by the difference between the financial statement basis of the asset ($15 million) and the tax basis of the asset computed in accordance with the guidance in this Subtopic for tax positions ($14 million, the cost of the asset reduced by $1 million of amortization). The entity also should reflect a tax liability for the tax-effected difference between the as-filed tax position ($15 million deduction) and the amount of the deduction that is considered more likely than not of being sustained ($1 million). The entity should evaluate the tax position for accrual of statutory penalties as well as interest expense on the difference between the amounts reported in the financial statements and the tax position taken in the tax return. ##### [740-10-55-113](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-113) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:4151eec4bbb9463e41eabf2f5ca54aa92a9030b6cbfa976d06dcc0da54cddd3f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example demonstrates an application of the measurement requirements of paragraph [740-10-30-7](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-7) for a tax position that meets the paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6) requirements for recognition. Measurement in this Example is based on a change in timing of deductibility. ##### [740-10-55-114](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-114) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:bd3556065310d5e580622e1a441de25e51854dc89539e95270e0cdc4601f30a6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In 20X1 an entity took a tax position in which it amortizes the cost of an acquired asset on a straight-line basis over three years, while the amortization period for financial reporting purposes is seven years. After one year, the entity has deducted one-third of the cost of the asset in its income tax return and one-seventh of the cost in the financial statements and, consequently, has a deferred tax liability for the difference between the financial reporting and tax bases of the asset. ##### [740-10-55-115](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-115) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:36f99363dba659aa3e22e39d01caf359345fed39c1d1b0acec494d389db22cb4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with the requirements of this Subtopic, the entity evaluates the tax position as of the reporting date of the financial statements. In 20X2, the entity determines that it is still certain that the entire cost of the acquired asset is fully deductible, so the more-likely-than-not recognition threshold has been met according to paragraph [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6). However, in 20X2, the entity now believes based on new information that the largest benefit that is greater than 50 percent likely of being realized upon settlement is straight-line amortization over 7 years. ##### [740-10-55-116](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-116) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7481b43ff0bc05ea355f2b97142397a28459849b9c85caa82522c396a5d744a2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example, the entity would recognize a liability for unrecognized tax benefits based on the difference between the three- and seven-year amortization. In 20X2, no deferred tax liability should be recognized, as there is no longer a temporary difference between the financial statement carrying value of the asset and the tax basis of the asset based on this Subtopic's measurement requirements for tax positions. Additionally, the entity should evaluate the need to accrue interest and penalties, if applicable under the tax law. ##### [740-10-55-117](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-117) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b8dc21f8a2fbe5a16df28386f097048c636a1db48ba9d3db683c97ae055ab360 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraphs [740-10-25-6](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-6) and [740-10-25-8](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-8) require that tax positions be recognized and measured based on information available at the reporting date. This Example demonstrates the effect of information becoming available after the reporting date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25). ##### [740-10-55-118](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-118) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:4a9e9f92a8bfd6728916fbacbfdbf4e810e56c1868504e3d71bd05d201060029 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A has evaluated a tax position at its most recent reporting date and has concluded that the position meets the more-likely-than-not recognition threshold. In evaluating the tax position for recognition, Entity A considered all relevant sources of tax law, including a court case in which the taxing authority has fully disallowed a similar tax position with an unrelated entity (Entity B). The taxing authority and Entity B are aggressively litigating the matter. Although Entity A was aware of that court case at the recent reporting date, management determined that the more-likely-than not recognition threshold had been met. After the reporting date, but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), the taxing authority prevailed in its litigation with Entity B, and Entity A concludes that it is no longer more likely than not that it will sustain the position. ##### [740-10-55-119](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-119) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:436dd9baaace9b51ec69040b97256c46c08e2104746b7be29c2422bfd4d73bac Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-40-2](https://asc.understandingaccounting.org/asc/740/10/#740-10-40-2) provides the guidance that an entity shall derecognize a previously recognized tax position in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination, and paragraphs [740-10-25-14](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-14); [740-10-35-2](https://asc.understandingaccounting.org/asc/740/10/#740-10-35-2); and[740-10-40-2](https://asc.understandingaccounting.org/asc/740/10/#740-10-40-2) establish that subsequent recognition, derecognition, and measurement shall be based on management's best judgment given the facts, circumstances, and information available at the reporting date. Because the resolution of Entity B's litigation with the taxing authority is the information that caused Entity A to change its judgment about the sustainability of the position and that information was not available at the reporting date, the change in judgment would be recognized in the first quarter of the current fiscal year. ##### [740-10-55-120](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-120) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d08483f0022ca5aa97c4adae486bbed1ce6f8939e063421caac5abcf08eb5269 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [740-10-55-7 through 55-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-7) relating to recognition of deferred tax assets and liabilities, including when a detailed analysis of sources of taxable income may not be necessary in considering the need for a valuation allowance for deferred tax assets. In this Example, an entity has $2,400 of deductible temporary differences and $1,500 of taxable temporary differences at the end of Year 3 (the current year). ##### [740-10-55-121](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-121) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1f44e23f66c0d08769d9a1278501d36c1f42c1158a2baa7d151673d0409912c7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A deferred tax liability is recognized at the end of Year 3 for the $1,500 of taxable temporary differences, and deferred tax asset is recognized for the $2,400 of deductible temporary differences. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of the deferred tax asset. If evidence about one or more sources of taxable income (see paragraph [740-10-30-18](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-18)) is sufficient to support a conclusion that a valuation allowance is not needed, other sources of taxable income need not be considered. For example, if the weight of available evidence indicates that taxable income will exceed $2,400 in each future year, a conclusion that no valuation allowance is needed can be reached without considering the pattern and timing of the reversal of the temporary differences, the existence of qualifying tax-planning strategies, and so forth. ##### [740-10-55-122](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-122) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:99aee8bd52a0be2191cacb56e4c0c569b2fc478d4de7134dbc2666923b2a8801 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Similarly, if the deductible temporary differences will reverse within the next 3 years and taxable income in the current year exceeds $2,400, nothing needs to be known about future taxable income exclusive of reversing temporary differences because the deferred tax asset could be realized by carryback to the current year. A valuation allowance is needed, however, if the weight of available evidence indicates that some portion or all of the $2,400 of tax deductions from future reversals of the deductible temporary differences will not be realized by offsetting any of the following: 1. a The $1,500 of taxable temporary differences and $900 of future taxable income exclusive of reversing temporary differences 2. b $2,400 of future taxable income exclusive of reversing temporary differences 3. c $2,400 of taxable income in the current or prior years by loss carryback to those years 4. d $2,400 of taxable income in one or more of the circumstances described above and as a result of a qualifying tax-planning strategy (see paragraphs [740-10-55-39 through 55-48](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-39) ). Paragraph [740-10-55-8](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-8) provides guidance on when a detailed analysis of sources of taxable income may not be necessary in considering the need for a valuation allowance for deferred tax assets. ##### [740-10-55-123](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-123) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:fc781855702e50dd502f2a23dec75fd3c3e1144fc0696e33a994d07ae5715eca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Detailed analyses are not necessary, for example, if the entity earned $500 of taxable income in each of Years 1-3 and there is no evidence to suggest it will not continue to earn that level of taxable income in future years. That level of future taxable income is more than sufficient to realize the tax benefit of $2,400 of tax deductions over a period of at least 19 years (the year(s) of the deductions, 3 carryback years, and 15 carryforward years) in the U.S. federal tax jurisdiction. ##### [740-10-55-124](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-124) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1eb7125e09ac69a571026899b68bceb4abd4a102d063f3d32d1b60028c257564 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [740-10-55-7 through 55-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-7) relating to recognition of a valuation allowance for a portion of a deferred tax asset in one year and a subsequent change in circumstances that requires adjustment of the valuation allowance at the end of the following year. This Example has the following assumptions: 1. a At the end of the current year (Year 3), an entity's only temporary differences are deductible temporary differences in the amount of $900. 2. b Pretax financial income, taxable income, and taxes paid for each of Years 1-3 are all positive, but relatively negligible, amounts. 3. c The enacted tax rate is 40 percent for all years. ##### [740-10-55-125](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-125) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:79cf7f29dc4346612cc7aaf251b6b5e075a30e8cd5305048e7c5492634b86213 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A deferred tax asset in the amount of $360 ($900 at 40 percent) is recognized at the end of Year 3. If management concludes, based on an assessment of all available evidence (see guidance in paragraphs [740-10-30-17 through 30-24](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-17) ), that it is more likely than not that future taxable income will not be sufficient to realize a tax benefit for $400 of the $900 of deductible temporary differences at the end of the current year, a $160 valuation allowance ($400 at 40 percent) is recognized at the end of Year 3. ##### [740-10-55-126](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-126) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e286f221053e8ea4091f9d6aedc29a7bbd57e4c1ba1315ba0f78cd81d937a757 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume that pretax financial income and taxable income for Year 4 turn out to be as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-F53D0D64-3003-4904-A9DD-90B8A1086111-low.gif) Pretax financial loss $(50) Reversing deductible temporary differences (300) Loss carryforward for tax purposes $(350) ##### [740-10-55-127](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-127) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:9de165c0eb99394c4ed62e4b87acfeec4e136076d97813841da2d39b4a1b955c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The $50 pretax loss in Year 4 is additional negative evidence that must be weighed against available positive evidence to determine the amount of valuation allowance necessary at the end of Year 4. Deductible temporary differences and carryforwards at the end of Year 4 are as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-3997F3D9-6A79-48F3-AF72-FD86E930F108-low.gif) Loss carryforward from Year 4 for tax purposes (see above) $350 Unreversed deductible temporary differences ($900 - $300) 600 $950 ##### [740-10-55-128](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-128) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a7cba621da593e05eef9b62aea1d134ea8bec7811d70b8f734def542f5693dac Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The $360 deferred tax asset recognized at the end of Year 3 is increased to $380 ($950 at 40 percent) at the end of Year 4. Based on an assessment of all evidence available at the end of Year 4, management concludes that it is more likely than not that $240 of the deferred tax asset will not be realized and, therefore, that a $240 valuation allowance is necessary. The $160 valuation allowance recognized at the end of Year 3 is increased to $240 at the end of Year 4. The $60 net effect of those 2 adjustments (the $80 increase in the valuation allowance less the $20 increase in the deferred tax asset) results in $60 of deferred tax expense that is recognized in Year 4. ##### [740-10-55-129](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-129) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:6585e9bbde5e11ba6d033bcc1126c5b4336eb4a4dce2e2914d8c869caf9d4941 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [740-10-55-23](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-23) for determination of the tax rate for measurement of a deferred tax liability for taxable temporary differences when there is a phased-in change in tax rates. At the end of Year 3 (the current year), an entity has $2,400 of taxable temporary differences, which are expected to result in taxable amounts of approximately $800 on the future tax returns for each of Years 4-6. Enacted tax rates are 35 percent for Years 1-3, 40 percent for Years 4-6, and 45 percent for Year 7 and thereafter. ##### [740-10-55-130](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-130) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:6a3f48d8f0c822e11a4659a9ef88842d122654e2ceaccd5ecaad4a00d272b0e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax rate that is used to measure the deferred tax liability for the $2,400 of taxable temporary differences differs depending on whether the tax effect of future reversals of those temporary differences is on taxes payable for Years 1-3, Years 4-6, or Year 7 and thereafter. The tax rate for measurement of the deferred tax liability is 40 percent whenever taxable income is expected in Years 4-6. If tax losses are expected in Years 4-6, however, the tax rate is: 1. a 35 percent if realization of a tax benefit for those tax losses in Years 4-6 will be by loss carryback to Years 1-3 2. b 45 percent if realization of a tax benefit for those tax losses in Years 4-6 will be by loss carryforward to Year 7 and thereafter. ##### [740-10-55-131](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-131) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:6cd3f9695c9041148d3171437055ea1b971f7a0a1dd0c7af3db9042347fe0bfc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [740-10-55-23](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-23) for determination of the tax rate for measurement of a deferred tax asset for deductible temporary differences when there is a change in tax rates. This Example has the following assumptions: 1. a Enacted tax rates are 30 percent for Years 1-3 and 40 percent for Year 4 and thereafter. 2. b At the end of Year 3 (the current year), an entity has $900 of deductible temporary differences, which are expected to result in tax deductions of approximately $300 on the future tax returns for each of Years 4-6. ##### [740-10-55-132](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-132) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:5cdd2afc3f1e067c6762d52c58b992475c101606b23c0ef6259db3391485174d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax rate is 40 percent if the entity expects to realize a tax benefit for the deductible temporary differences by offsetting taxable income earned in future years. Alternatively, the tax rate is 30 percent if the entity expects to realize a tax benefit for the deductible temporary differences by loss carryback refund. ##### [740-10-55-133](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-133) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2fa973c27ccc2dac39202d2987eefbf36d75e872a372ae5455a22b0dd8738d44 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Further assume for this Example both of the following: 1. a The entity recognizes a $360 ($900 at 40 percent) deferred tax asset to be realized by offsetting taxable income in future years. 2. b Taxable income and taxes payable in each of Years 1-3 were $300 and $90, respectively. ##### [740-10-55-134](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-134) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:0f1a17a3976bd5b64190eaba34f62f3e81bab7b21cf456604c25552e31c5d7fc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Realization of a tax benefit of at least $270 ($900 at 30 percent) is assured because carryback refunds totaling $270 may be realized even if no taxable income is earned in future years. Recognition of a valuation allowance for the other $90 ($360 - $270) of the deferred tax asset depends on management's assessment of whether, based on the weight of available evidence, a portion or all of the tax benefit of the $900 of deductible temporary differences will not be realized at 40 percent tax rates in future years. ##### [740-10-55-135](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-135) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:147d149f9381c480f34fa21f57824eee1ba8d9d275670ddfa3234796d9a0e8ef Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Alternatively, if enacted tax rates are 40 percent for Years 1-3 and 30 percent for Year 4 and thereafter, measurement of the deferred tax asset at a 40 percent tax rate could only occur if tax losses are expected in future Years 4-6. ##### [740-10-55-136](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-136) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7dd647d033e1ba9d7203f8f51a617eddbc82599c2a44173e11737ffed60b19dc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [740-10-55-23](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-23) for determination of the average graduated tax rate for measurement of deferred tax liabilities and assets by an entity for which graduated tax rates ordinarily are a significant factor. At the end of Year 3 (the current year), an entity has $1,500 of taxable temporary differences and $900 of deductible temporary differences, which are expected to result in net taxable amounts of approximately $200 on the future tax returns for each of Years 4-6. Enacted tax rates are 15 percent for the first $500 of taxable income, 25 percent for the next $500, and 40 percent for taxable income over $1,000. This Example assumes that there is no income (for example, capital gains) subject to special tax rates. ##### [740-10-55-137](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-137) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1012363d5762006d095466f421ebd98e530adc0eebb327e98308ccd336ffd385 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The deferred tax liability and asset for those reversing taxable and deductible temporary differences in Years 4-6 are measured using the average graduated tax rate for the estimated amount of annual taxable income in future years. Thus, the average graduated tax rate will differ depending on the expected level of annual taxable income (including reversing temporary differences) in Years 4-6. The average tax rate will be: 1. a 15 percent if the estimated annual level of taxable income in Years 4-6 is $500 or less 2. b 20 percent if the estimated annual level of taxable income in Years 4-6 is $1,000 3. c 30 percent if the estimated annual level of taxable income in Years 4-6 is $2,000. ##### [740-10-55-138](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-138) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:923dde99206582ddf9c6da5d461a682512247b82021a0d312400992089946e6b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Temporary differences usually do not reverse in equal annual amounts as in the Example above, and a different average graduated tax rate might apply to reversals in different future years. However, a detailed analysis to determine the net reversals of temporary differences in each future year usually is not warranted. It is not warranted because the other variable (that is, taxable income or losses exclusive of reversing temporary differences in each of those future years) for determination of the average graduated tax rate in each future year is no more than an estimate. For that reason, an aggregate calculation using a single estimated average graduated tax rate based on estimated average annual taxable income in future years is sufficient. Judgment is permitted, however, to deal with unusual situations, for example, an abnormally large temporary difference that will reverse in a single future year, or an abnormal level of taxable income that is expected for a single future year. The lowest graduated tax rate should be used whenever the estimated average graduated tax rate otherwise would be zero. ##### [740-10-55-139](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-139) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a1524f80f14ae50db775673d846a01ba31700d8251982ef3809e8bcb03bf4639 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The guidance in paragraph [740-10-55-26](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-26) addressing when a tax is an income tax is illustrated using the following example. ##### [740-10-55-140](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-140) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:0310c111e82e41aa2fce4520e4bfc8c69e59096ee7f6f08a98ce6da6837a58e7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A state's franchise tax on each corporation is set at the greater of 0.25 percent of the corporation's net taxable capital and 4.5 percent of the corporation's net taxable earned surplus. Net taxable earned surplus is a term defined by the tax statute for federal taxable income. ##### [740-10-55-141](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-141) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:635f28e6cee8f143e17fa44bc083d0aecf6e4f5fca74c6af5bf04ad37197d8ad Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example, the amount of franchise tax equal to the tax on the corporation's net taxable earned surplus is an income tax. ##### [740-10-55-142](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-142) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a39a447f88b69e6128e7de954126298d0bfc7766396b064e2c0c72a398e04f48 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Deferred tax assets and liabilities are required to be recognized under this Subtopic for the temporary differences that exist as of the date of the statement of financial position using the tax rate to be applied to the corporation's net taxable earned surplus (4.5 percent). ##### [740-10-55-143](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-143) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1c12eb24cba8b03bad173fbd22459637f6cd9a5793d52da6597d7986cccbacb1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The portion of the total computed franchise tax that exceeds the amount equal to the tax on the corporation's net taxable earned surplus should not be presented as a component of income tax expense during any period in which the total computed franchise tax exceeds the amount equal to the tax on the corporation's net taxable earned surplus. ##### [740-10-55-144](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-144) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:5aa1d17336725e210a3044ac100c4346cec58e65e45482c6ee17a75b50647309 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. While the tax statutes of states or other jurisdictions differ, the accounting described in paragraphs [740-10-55-140 through 55-143](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-140) would be appropriate if the tax structure of another state or jurisdiction was essentially the same as in this Example. ##### [740-10-55-145](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-145) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ecb8c9614c86bbb410e7cd2f16a1f47d89872c010b7ae058d1948d485b0d12fb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-55-27](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-27) introduces guidance relating to a special deduction for qualified production activities that may be available to an entity under the American Jobs Creation Act of 2004. ##### [740-10-55-146](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-146) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c16dd64050bdfe89f4ba166e9cb737049d438ebf9e32838db46b6feb62183d14 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates how an entity with a calendar year-end would apply paragraphs [740-10-25-37](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-37) and [740-10-35-4](https://asc.understandingaccounting.org/asc/740/10/#740-10-35-4) to the qualified production activities deduction at December 31, 2004. In particular, this Example illustrates the methodology used to evaluate the qualified production activities deduction's effect on determining the need for a valuation allowance on an entity's existing net deferred tax assets. This Example intentionally is not comprehensive (for example, it excludes state and local taxes). ##### [740-10-55-147](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-147) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e5211edb43c879ced24f719fb7411810fb7bf732f5611090fada173af3920efa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example has the following assumptions: 1. a Expected taxable income (excluding the qualified production activities deduction and net operating loss carryforwards) for 2005: $21,000 2. b Expected qualified production activities income for 2005: $50,000 3. c Net operating loss carryforwards at December 31, 2004, which expire in 2005: $20,000 4. d Expected W-2 wages for 2005: $10,000 5. e Assumed statutory income tax rate: 35% 6. f Qualified production activities deduction: 3% of the lesser of qualified production activities income or taxable income (after deducting the net operating loss carryforwards); limited to 50% of W-2 wages: $30. ##### [740-10-55-148](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-148) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7f9d3cb10ac47f28cedd3dc65b8ba45b271bbf0eea79d9dd344909cb12f19737 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Based on these assumptions, the entity would not recognize a valuation allowance for the net operating loss carryforwards at December 31, 2004, because expected taxable income in 2005 (after deducting the qualified production activities deduction) exceeds the net operating loss carryforwards, as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-FF169BBD-5E46-49F2-AB27-351FF563B898-low.gif) Analysis to compute the qualified production activities deduction Expected taxable income (excluding the qualified production activities deduction and net operating loss carryforwards) for the year 2005 " $21,000 " Less net operating loss carryforwards (a) " 20,000 " Expected taxable income (after deducting the net operating loss carryforwards) " $1,000 " Qualified production activities deduction $30 (a) "The Act requires that net operating loss carryforwards be deducted from the taxable income in determining the qualified production activities deduction. Therefore, the qualified production activities deduction will not result in a need for a valuation allowance for an entity's deferred tax asset for net operating loss carryforwards. However, certain types of tax credit carryforwards are not deducted in determining the qualified production activities deduction and, therefore, could require a valuation allowance." - ![](https://asc.understandingaccounting.org/asc-img/GUID-822D1D46-FDD1-4CEC-83CB-72978CF5FE90-low.gif) Analysis to determine the effect of the qualified production activities deduction on the need for a valuation allowance for deferred tax assets for the net operating loss carryforwards Expected taxable income after deducting the qualified production activities deduction " $20,970 " Net operating loss carryforwards " 20,000 " Expected taxable income exceeds the net operating loss carryforwards $970 ##### [740-10-55-149](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-149) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d06598757f37fe74531f002bca00a2b6d512d1939f4738e7bf02f01ce280b6e7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [740-10-55-35 through 55-36](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-35) for recognition of the tax benefit of an operating loss in the loss year and in subsequent carryforward years when a valuation allowance is necessary in the loss year. This Example has the following assumptions: 1. a The enacted tax rate is 40 percent for all years. 2. b An operating loss occurs in Year 5. 3. c The only difference between financial and taxable income results from use of accelerated depreciation for tax purposes. Differences that arise between the reported amount and the tax basis of depreciable assets in Years 1-7 will result in taxable amounts before the end of the loss carryforward period from Year 5. 4. d Financial income, taxable income, and [taxes currently payable or refundable](https://asc.understandingaccounting.org/glossary/i/#income-taxes-currently-payable-refundable "See Current Tax Expense (or Benefit).") are as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-18E66C28-8B40-4DD6-86C1-48FDDE0EF49F-low.gif) Year 1 Years 2-4 Year 5 Year 6 Year 7 Pretax financial income (loss) " $2,000 " " $5,000 " " $(8,000)" " $2,200 " " $7,000 " Depreciation differences (800) " (2,200)" (800) (700) (600) Loss carryback - - " 2,800 " - - Loss carryforward - - - " (6,000)" " (4,500)" Taxable income (loss) " $1,200 " " $2,800 " " $(6,000)" " $(4,500)" " $1,900 " Taxes payable (refundable) $480 " $1,120 " " $(1,120)" $- $760 5. e At the end of Year 5, profits are not expected in Years 6 and 7 and later years, and it is concluded that a valuation allowance is necessary to the extent realization of the deferred tax asset for the operating loss carryforward depends on taxable income (exclusive of reversing temporary differences) in future years. ##### [740-10-55-150](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-150) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:140dade66eb1b96c5582b6d5b47198f97842c48084a39e116fb94f0cb1eb712e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The deferred tax liability for the taxable temporary differences is calculated at the end of each year as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-59539EA7-84A3-4263-82DF-DA1C8687BC57-low.gif) Year 1 Years 2-4 Year 5 Year 6 Year 7 Unreversed differences: Beginning amount $- $800 " $3,000 " " $3,800 " " $4,500 " Additional amount 800 " 2,200 " 800 700 600 Total $800 " $3,000 " " $3,800 " " $4,500 " " $5,100 " Deferred tax liability (40 percent) $320 " $1,200 " " $1,520 " " $1,800 " " $2,040 " ##### [740-10-55-151](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-151) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:73466c406420df2d5baba59b33daca16169b7af412d0415330c942c128c588e3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The deferred tax asset and related valuation allowance for the loss carryforward are calculated at the end of each year as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-9A00BD42-3F11-411D-8561-79E3D9C344E7-low.gif) Year 1 Years 2-4 Year 5 Year 6 Year 7 Loss carryforward for tax purposes $- $- " $6,000 " " $4,500 " $- Deferred tax asset (40 percent) $- $- " $2,400 " " $1,800 " $- Valuation allowance equal to the amount by which the deferred tax asset exceeds the deferred tax liability - - (880) - - Net deferred tax asset $- $- " $1,520 " " $1,800 " $- ##### [740-10-55-152](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-152) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:900f2d7b1c8d5de55d6515654dff29ee03625d165e94aa64661768ffbd949946 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Total tax expense for each period is as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-D8D4F479-4A5F-4FF6-923B-F3A5387A4658-low.gif) Year 1 Years 2-4 Year 5 Year 6 Year 7 Deferred tax expense (benefit): Increase in deferred tax liability $320 $880 $320 $280 $240 (Increase) decrease in net deferred tax asset - - " (1,520)" (280) " 1,800 " 320 880 " (1,200)" - " 2,040 " Currently payable (refundable) 480 " 1,120 " " (1,120)" - 760 Total tax expense (benefit) $800 " $2,000 " " $(2,320)" $- " $2,800 " ##### [740-10-55-153](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-153) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:720abde4b67d794c161b7128dd834144280c3debe92292c0eddfbaf5e58d4846 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In Year 5, $2,800 of the loss is carried back to reduce taxable income in Years 2-4, and $1,120 of taxes paid for those years is refunded. In addition, a $1,520 deferred tax liability is recognized for $3,800 of taxable temporary differences, and a $2,400 deferred tax asset is recognized for the $6,000 loss carryforward. However, based on the conclusion described in paragraph [740-10-55-149(e)](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-149), a valuation allowance is recognized for the amount by which that deferred tax asset exceeds the deferred tax liability. ##### [740-10-55-154](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-154) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:006bef1956431d48054094c1a534197c4b6a17e3a62e715b36fd4d114d5be799 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In Year 6, a portion of the deferred tax asset for the loss carryforward is realized because taxable income is earned in that year. The remaining balance of the deferred tax asset for the loss carryforward at the end of Year 6 equals the deferred tax liability for the taxable temporary differences. A valuation allowance is not needed. ##### [740-10-55-155](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-155) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:bfcdf97588222b14cff7d44fc991569dcf827d2ed1f570190ca4a1deae68e752 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In Year 7, the remaining balance of the loss carryforward is realized, and $760 of taxes are payable on net taxable income of $1,900. A $2,040 deferred tax liability is recognized for the $5,100 of taxable temporary differences. ##### [740-10-55-156](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-156) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f2f52198537b557c0fcffb73ccad15e3934717c0ea2cee351dcbeddfe82050d3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [740-10-55-37](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-37) for the interaction of loss carryforwards and temporary differences that will result in net deductible amounts in future years. This Example has the following assumptions: 1. a The financial loss and the loss reported on the tax return for an entity's first year of operations are the same. 2. b In Year 2, a gain of $2,500 from a transaction that is a sale for tax purposes but does not meet the sale recognition criteria for financial reporting purposes is the only difference between pretax financial income and taxable income. ##### [740-10-55-157](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-157) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:60adb5352bda6b520e7e7aa0bea92c7456ebe26de5b6a4a12df65ed591e8efc2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Financial and taxable income in this Example are as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-1F0CFBE1-CAFA-41E2-9BB8-8FE6E608DEBB-low.gif) Financial Income Taxable Income Year 1: Income (loss) from operations " $(4,000)" " $(4,000)" Year 2: Income (loss) from operations $- $- Taxable gain on sale " 2,500 " Taxable income before loss carryforward " 2,500 " Loss carryforward from Year 1 " (4,000)" Taxable income $- ##### [740-10-55-158](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-158) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:357f364a08ff9ded1c9ad3a0b6d7c870475a9e59904734d14b3142778b1ca06b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The $4,000 operating loss carryforward at the end of Year 1 is reduced to $1,500 at the end of Year 2 because $2,500 of it is used to reduce taxable income. The $2,500 reduction in the loss carryforward becomes $2,500 of deductible temporary differences that will reverse and result in future tax deductions when the sale occurs (that is, control of the asset transfers to the buyer-lessor). The entity has no deferred tax liability to be offset by those future tax deductions, the future tax deductions cannot be realized by loss carryback because no taxes have been paid, and the entity has had pretax losses for financial reporting since inception. Unless positive evidence exists that is sufficient to overcome the negative evidence associated with those losses, a valuation allowance is recognized at the end of Year 2 for the full amount of the deferred tax asset related to the $2,500 of deductible temporary differences and the remaining $1,500 of operating loss carryforward. ##### [740-10-55-159](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-159) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8e2c35ba4b6fca54229a8d5cb01bdc4a10c70b74dd6a4bf4de64b2dab2d49973 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [740-10-55-44](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-44) for recognition of a deferred tax asset based on the expected effect of a qualifying tax-planning strategy when a significant expense would be incurred to implement the strategy. This Example has the following assumptions: 1. a A $900 operating loss carryforward expires at the end of next year. 2. b Based on historical results and the weight of other available evidence, the estimated level of taxable income exclusive of the future reversal of existing temporary differences and the operating loss carryforward next year is $100. 3. c Taxable temporary differences in the amount of $1,200 ordinarily would result in taxable amounts of approximately $400 in each of the next 3 years. 4. d There is a qualifying tax-planning strategy to accelerate the future reversal of all $1,200 of taxable temporary differences to next year. 5. e Estimated legal and other expenses to implement that tax-planning strategy are $150. 6. f The enacted tax rate is 40 percent for all years. ##### [740-10-55-160](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-160) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1414e00e138c9711699d6f3293bd049e93823aab3432a06c97471dc62a5693a1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Without the tax-planning strategy, only $500 of the $900 operating loss carryforward could be realized next year by offsetting $100 of taxable income exclusive of reversing temporary differences and $400 of reversing taxable temporary differences. The other $400 of operating loss carryforward would expire unused at the end of next year. Therefore, the $360 deferred tax asset ($900 at 40 percent) would be offset by a $160 valuation allowance ($400 at 40 percent), and a $200 net deferred tax asset would be recognized for the operating loss carryforward. ##### [740-10-55-161](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-161) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:236be6af9006bdbc1dce41d3b9433f671be6d383c21923066046afb9c5e122c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. With the tax-planning strategy, the $900 operating loss carryforward could be applied against $1,300 of taxable income next year ($100 of taxable income exclusive of reversing temporary differences and $1,200 of reversing taxable temporary differences). The $360 deferred tax asset is reduced by a $90 valuation allowance recognized for the net-of-tax expenses necessary to implement the tax-planning strategy. The amount of that valuation allowance is determined as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-4BD3DB6E-12A6-45DF-A7AB-A02B7C6CE7CF-low.gif) Legal and other expenses to implement the tax-planning strategy $150 Future tax benefit of those legal and other expenses—$150 at 40 percent 60 $90 ##### [740-10-55-162](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-162) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:dd9828bbd000407409a79345d3774b8299571d429d48ad37a3f9dd56fe3691c4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In summary, a $480 deferred tax liability is recognized for the $1,200 of taxable temporary differences, a $360 deferred tax asset is recognized for the $900 operating loss carryforward, and a $90 valuation allowance is recognized for the net-of-tax expenses of implementing the tax-planning strategy. ##### [740-10-55-163](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-163) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f8f1706664df4acc100eea21f28e2631d65ed4c980b59674b1380540cd2a5e77 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [740-10-55-39 through 55-48](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-39) relating to tax-planning strategies. An entity might identify several qualifying tax-planning strategies that would either reduce or eliminate the need for a valuation allowance for a deferred tax asset. For example, assume that an entity's required valuation allowance would be reduced $5,000 based on Strategy A, $7,000 based on Strategy B, and $12,000 based on both strategies. The entity may not recognize the effect of one of those strategies in the current year and postpone recognition of the effect of the other strategy to a later year. ##### [740-10-55-164](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-164) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ef65f1184fda26626e39beed5adbff2ee91098503a5bba7f3449ba14b5febdc6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The entity should recognize the effect of both tax-planning strategies and reduce the valuation allowance by $12,000 at the end of the current year. Paragraph [740-10-30-19](https://asc.understandingaccounting.org/asc/740/10/#740-10-30-19) provides guidance on tax-planning strategies and establishes the requirement that strategies meeting the criteria set forth in that paragraph shall be considered in determining the required valuation allowance. ##### [740-10-55-165](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-165) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:bf152281835f65100c6c10d55b17fcb39fa0e8805ddbedcb87cdb5d8a97d3bba Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-55-54](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-54) introduces guidance relating to a nontaxable subsidy that may be available to an entity under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. This Example illustrates that guidance. ##### [740-10-55-166](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-166) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:179b90eb946e91bea75e2f14bc9d1f5a3b3cfe702ee1497b91c557046b62becb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Before the accounting for the effects of the Act, an employer's carrying amount of accrued postretirement benefit cost (the amount recognized in the statement of financial position) is $100 for a noncontributory, unfunded prescription drug benefit plan with only inactive participants who are not yet eligible to collect benefits. Assuming a tax rate of 35 percent and no corresponding tax basis for the accrued postretirement benefit cost, the employer would report a $35 deferred tax asset related to that $100 deductible temporary difference. Because the employer has a policy of amortizing gains and losses under paragraph [715-60-35-29](https://asc.understandingaccounting.org/asc/715/60/#715-60-35-29), upon recognition of a $28 actuarial gain resulting from the estimate of the expected subsidy, neither the carrying amount of accrued postretirement benefit cost nor the deferred tax asset would change. Subsequently, ignoring interest on the accumulated postretirement benefit obligation (which includes interest on the subsidy), as the actuarial gain related to the subsidy is amortized as a component of net periodic postretirement benefit cost, the carrying amount of accrued postretirement cost would be reduced. However, the associated temporary difference and deferred tax asset would remain unchanged. That is, after the gain related to the subsidy is amortized in its entirety, the carrying amount of accrued postretirement benefit cost would be $72, and the deferred tax asset would remain at $35. ##### [740-10-55-167](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-167) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:073ea7431634a985086e9f0d8d00779c061577446466600f14b3cc96f66d10fb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For purposes of simplicity, this Example ignores complexities regarding the amount and timing of the subsidies reflected in the carrying amount of accrued postretirement benefit cost arising from any of the following: 1. a Netting gains and losses and application of the corridor amortization approach described in paragraph [715-60-35-29](https://asc.understandingaccounting.org/asc/715/60/#715-60-35-29) 2. b Recognition of additional subsidies through amortization of prior service costs that include effects of the subsidy 3. c Reduction in future service and interest costs. Those complexities must be considered in determining the temporary difference on which the deferred tax effects under this Topic will be based. ##### [740-10-55-168](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-168) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8eceda4a14066ce2c7c1faf8dc9e2cad2733b572536039190aa1405fe69b0dfd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates an entity's change from taxable C corporation status to nontaxable S corporation status, in accordance with the guidance provided in paragraph [740-10-55-65](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-65). This Example has the following assumptions: 1. a An entity's S corporation election is effective for calendar-year 1990 and that at the conversion date its assets comprise marketable securities, finished goods inventory, and depreciable assets as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-0B8C641B-9870-4C95-83A3-525F975DBB69-low.gif) Fair Market Value Tax Basis Reported Amount Temporary Differences Topic 740 Built-in Gain (Loss) Marketable securities $90 $100 $80 $(20) $(10) "Inventory, (first-in first-out \[FIFO\])" 100 50 100 50 50 Depreciable assets 95 80 90 10 10 $285 $230 $270 $40 $50 2. b The entity has no tax loss or credit carryforwards available to offset the built-in gains. 3. c The depreciable assets will be recovered by use in operations (and, therefore, will not result in a taxable amount pursuant to the tax law applied to built-in gains). 4. d The marketable securities will be sold in the same year that the [inventory](https://asc.understandingaccounting.org/glossary/i/#inventory "The aggregate of those items of tangible personal property that have any of the following characteristics: Held for sale in the ordinary course of business In process of production for such sale To be currently consumed in the production of goods or services to be available for sale. The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the finished goods of a manufacturer), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials and supplies). This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. Raw materials and supplies purchased for production may be used or consumed for the construction of long-term assets or other purposes not related to production, but the fact that inventory items representing a small portion of the total may not be absorbed ultimately in the production process does not require separate classification. By trade practice, operating materials and supplies of certain types of entities such as oil producers are usually treated as inventory.") is sold, the $50 built-in gain on the inventory is reduced by the $10 built-in loss on the marketable securities, and $40 would be taxed in the year that the inventory turns over and the securities are sold. Accordingly, the entity should continue to display in its statement of financial position a deferred tax liability for that $40 net taxable amount. ##### [740-10-55-169](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-169) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a56a0361f01bba107c268eadeadcd7d1a4c59bf944c6ff96f0bf3acd31f28e6d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. At subsequent financial statement dates until the end of the 10 years following the conversion date, the entity should remeasure the deferred tax liability for net built-in gains based on the provisions of the tax law. Deferred tax expense (or benefit) should be recognized for any change in that deferred tax liability. ##### [740-10-55-170](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-170) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1778aea75090a029f2f94dfd522f7489aa2c4c5db9ba140bd7474d390a880f67 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-25-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-51) addresses the accounting when an asset is acquired outside of a business combination and the tax basis of the asset differs from the amount paid. The following Cases illustrate the required accounting for purchase transactions that are not accounted for as business combinations in the following circumstances: 1. a The amount paid is less than the tax basis of the asset (Case A). 2. b The amount paid is more than the tax basis of the asset (Case B). 3. c The transaction results in a deferred credit (Case C). 4. d A deferred credit is created by a financial asset (Case D). 5. e [Subparagraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). 6. f The result is a purchase of future tax benefits (Case F). ##### [740-10-55-171](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-171) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a9c1b6742312715c898d28592da74124c13630e1a3e20f55fe4d9b9898d1ba28 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates an asset purchase that is not a business combination in which the amount paid differs from the tax basis of the asset (tax basis is greater). ##### [740-10-55-172](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-172) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e3ea73b44f7794214ec1280f040e5b52b7b7fb28ad8a5706fe69e3660b919914 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As an incentive for acquiring specific types of equipment in certain sectors, a foreign jurisdiction permits a deduction, for tax purposes, of an amount in excess of the cost of the acquired asset. To illustrate, assume that Entity A purchases a machine for $100 and its tax basis is automatically increased to $150. Upon sale of the asset, there is no recapture of the extra tax deduction. The tax rate is 35 percent. ##### [740-10-55-173](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-173) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ac8f2cd176114fe0fe4c62b133575b53f4affbad33b578cd8f8e1b84f927c031 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraph [740-10-25-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-51), the amounts assigned to the equipment and the related deferred tax asset should be determined using the simultaneous equations method as follows (where FBB is Final Book Basis; CPP is Cash Purchase Price; and DTA is Deferred Tax Asset): - Equation A (determine the final book basis of the equipment): - FBB - \[Tax Rate × (FBB - Tax Basis)\] = CPP - Equation B (determine the amount assigned to the deferred tax asset): - (Tax Basis - FBB) × Tax Rate = DTA. ##### [740-10-55-174](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-174) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ef54abad2e661a118a1d5694e9b82fa8cebffe7ae6548b6331209647951e6196 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, the following variables are known: 1. a Tax Basis = $150 2. b Tax Rate = 35 percent 3. c CPP = $100. ##### [740-10-55-175](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-175) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:5b23da6deac2d03d9efc64e203052e1962ed0218182fbe5b368ba75e9184a7e3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The unknown variables (FBB and DTA) are solved as follows: - Equation A: FBB = $73 - Equation B: DTA = $27. ##### [740-10-55-176](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-176) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:74dd5f1d2f7cdfaa3cbe2c04c81941902709a0721884e51d48434a9b83bc935b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accordingly, the entity would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-A8A2528D-9BD1-4AB6-AE0D-06087B4B51B0-low.gif) Equipment $73 Deferred tax asset 27 Cash $100 ##### [740-10-55-177](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-177) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:21cf55e08353ebaa924cdd29ebeda1cb10d33fdea4b1426d944391b03058c910 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates an asset purchase that is not a business combination in which the amount paid differs from the tax basis of the asset (tax basis is less). ##### [740-10-55-178](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-178) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:81363824efbc73314d6d6acedb9f717e3660de0f787e3cb41296babbceb672ba Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assume that an entity pays $1,000,000 for the stock of an entity in a nontaxable acquisition (that is, carryover basis for tax purposes). The acquired entity's sole asset is a Federal Communications Commission (FCC) license that has a tax basis of zero. Since the acquisition of the entity is in substance the acquisition of an FCC license, no goodwill is recognized. A deferred tax liability would need to be recorded for the temporary difference (in this Case, the entire $1,000,000 plus the tax-on-tax effect from increasing the carrying amount of the FCC license acquired) related to the FCC license. The tax rate is 35 percent. ##### [740-10-55-179](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-179) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e0258fa0a1ded990e2424f81e29245f0c9aaa0edf0b1481cc54a52b20aee99dc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraph [740-10-25-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-51), the amounts assigned to the FCC license and the related deferred tax liability should be determined using the simultaneous equations method as follows (where FBB is Final Book Basis; CPP is Cash Purchase Price; and DTL is Deferred Tax Liability): - Equation A (determine the FBB of the FCC license): - FBB - \[Tax Rate × (FBB - Tax Basis)\] = CPP - Equation B (determine the amount assigned to the DTL): - (FBB - Tax Basis) × Tax Rate = DTL. ##### [740-10-55-180](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-180) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:2561227c247b273931aeb507146c30c08179b9226ab02b3145b96b7bfd7ccf9f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, the following variables are known: 1. a Tax Basis = $0 2. b Tax Rate = 35 percent 3. c CPP = $1,000,000. ##### [740-10-55-181](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-181) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:4cccdf7c638865e7a3756a5dbf2ee546e10c97309e4f64698460415e95b749f6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The unknown variables (FBB and DTL) are solved as follows: - Equation A: FBB = $1,538,462 - Equation B: DTL = $538,462. ##### [740-10-55-182](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-182) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:150579b08a9d0e5ce1f1864d1c854f05a9aef2891828345d167fcbd8b7c87001 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Accordingly, the entity would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-D4F37AD4-2DE2-4CBC-BB5F-BCA9E31FC4D3-low.gif) FCC license " $1,538,462 " Deferred tax liability " $538,462 " Cash " $1,000,000 " ##### [740-10-55-183](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-183) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:edfd45d90bb35c359718cf9e5d79a60d07f2f17adcb57fbcaf821aa2f95d3c58 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case provides an illustration of a transaction that results in a deferred credit. ##### [740-10-55-184](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-184) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:9d439c40cc5cc2da3a6d966027b02adc88d247ec726459609f09bf3cda5d7c8d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A buys a machine for $50 with a tax basis of $200. The tax rate is 35 percent. ##### [740-10-55-185](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-185) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:db0318f504d263bd44f07d6f2ab19945f43776dd59db586ff1b1ad69921e42f1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraph [740-10-25-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-51), the amounts assigned to the machine and the deferred tax asset should be determined using the simultaneous equations method as follows (where FBB is Final Book Basis; CPP is Cash Purchase Price; and DTA is Deferred Tax Asset): - Equation A (determine the FBB of the machine): - FBB - \[Tax Rate × (FBB - Tax Basis)\] = CPP - Equation B (determine the amount assigned to the DTA): - (Tax Basis - FBB) × Tax Rate = DTA. ##### [740-10-55-186](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-186) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7d5b6783d7c7f2d706dcd3ac1504eb24b09fbcd6c34646dcd84c3f53125542be Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, the following variables are known: 1. a Tax Basis = $200 2. b Tax Rate = 35 percent 3. c CPP = $50. ##### [740-10-55-187](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-187) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:fcda7b0728e8c8591d49f0443c8eb079ddb88b5c4e3ba196e7a16622b4fcb098 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The unknown variables (FBB and DTA) are solved as follows: - Equation A: FBB = $(31). However, because the FBB cannot be less than zero, the FBB is recorded at zero. - Equation B: DTA = $70. ##### [740-10-55-188](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-188) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:25b37560b75bff97267de3d55f8c8baf56c5fc8ac017901c14ac9cc6a8069dae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The excess of the amount assigned to the deferred tax asset over the cash purchase price paid for the machine is recorded as a deferred credit. Accordingly, the entity would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-88038B08-475D-4C36-A991-32E83DB904BC-low.gif) Machine $- Deferred tax asset 70 Deferred credit $20 Cash $50 ##### [740-10-55-189](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-189) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e61c93258f6a3d5248dc7703cd9a43d28d26907dad1ba11a94622c975df472e4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case provides an illustration of a deferred credit created by the acquisition of a financial asset. ##### [740-10-55-190](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-190) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:312fe2003c74e620d8cbc5d2c8d172d8b4798331537a1127aa211b44a1d6b944 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A acquires the stock of another corporation for $250. The principal asset of the corporation is a marketable equity security with a readily determinable fair value of $200 and a tax basis of $500. The tax rate is 35 percent. The acquired entity has no operations and so the acquisition is accounted for as an asset purchase and not as a business combination. ##### [740-10-55-191](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-191) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ff55a15380243344a6edc146256c403024be487a215d1c1c2df2ea49607430ed Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraph [740-10-25-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-51), the acquired financial asset should be recognized at fair value, and a deferred tax asset should be recorded at the amount required by this Subtopic. The excess of the fair value of the financial asset and the deferred tax asset recorded over the cash purchase price should be recorded as a deferred credit. Accordingly, the entity would record the following journal entry. - ![](https://asc.understandingaccounting.org/asc-img/GUID-E3F14D63-A1E8-440C-8846-5517E2AFAA6B-low.gif) Marketable equity security $200 Deferred tax asset (300 x .35) 105 Deferred credit $55 Cash $250 ##### [740-10-55-192](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-192) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:71475369475e35e88424789ea3283dbdbad76a8cd30a52c2686dff8bf9095da3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-193](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-193) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:10f5acbfb563090f362e4d2255cfc5063b9572584a95e4ac74a93f0fc88118aa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-194](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-194) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:322b5a97d8bdd2351371d174bc802fb5d5effca4ede23181ac9ab26559e2a731 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-195](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-195) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:92cbe656e76aedb72e306990ef36c01690a28c3433cd4d304ebcf6887e9d39f1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-196](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-196) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:393c11e9c2ef53f278bac4810acd28a6007b48f5e7aaa28548fdb13cbb8f1d5f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-197](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-197) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c540a70cac568f794d72868880ca69ab56175521b1369b787657944e0c4b3d4a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-198](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-198) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:95b8ff4ce3e269f4b26563c5441a5cade4df43dd688bb2ce2d2492d025ecf1ab Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [740-10-55-199](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-199) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e25bc96b0ae8ad968d1f218ef1ef1ed13879b6486e3650117fb39b0d034162ea Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case provides an illustration of the purchase of future tax benefits. ##### [740-10-55-200](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-200) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:5589ce4cacb612439d5dec67f16b8cb5ecba2c0e58c0c12ed19453897aa91ab8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A foreign entity that has nominal assets other than its net operating loss carryforwards is acquired by a foreign subsidiary of a U.S. entity for the specific purpose of utilizing the net operating loss carryforwards (this type of transaction is often referred to as a tax loss acquisition). It is presumed that this transaction does not constitute a business combination, since the acquired entity has no operations and is merely a shell entity. As a result of the time value of money and because the target entity is in financial difficulty and has ceased operations, the foreign subsidiary is able to acquire the shell entity at a discount from the amount corresponding to the gross deferred tax asset for the net operating loss carryforwards. Assume, for example, that $2,000,000 is paid for net operating loss carryforwards having a deferred tax benefit of $5,000,000 for which it is more likely than not that the full benefit will be realized. The tax rate is 35 percent. ##### [740-10-55-201](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-201) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:484304497103cdb73fd158c5e4eee17302e92fe138450577821933351f69de1d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In accordance with paragraph [740-10-25-51](https://asc.understandingaccounting.org/asc/740/10/#740-10-25-51), the amount assigned to the deferred tax asset should be recorded at its gross amount (in accordance with this Subtopic) and the excess of the amount assigned to the deferred tax asset over the purchase price should be recorded as a deferred credit as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-65BB39D8-FF92-43AD-B364-A367D52C5414-low.gif) Deferred tax asset " $5,000,000 " Deferred credit " $3,000,000 " Cash " $2,000,000 " ##### [740-10-55-202](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-202) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f957c55ce054c7a2ac167abac41e596c7ae2cbdba76ebe33290f9d2a69636207 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Guidance is provided on various types of payments made to taxing authorities in paragraphs [740-10-55-67 through 55-75](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-67) . This Example illustrates one possible payment situation. ##### [740-10-55-203](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-203) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:376f61f62229ea651824d57125f761fcb7646060999fef761eb5f8bbd825bfbb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example, tax laws in a foreign country enable corporate taxpayers to elect to step up the tax basis for certain fixed assets ($1,000,000) to fair value ($2,000,000) in exchange for a current payment to the government of 3 percent of the step-up ($30,000). An entity would be expected to avail itself of this election (and make the upfront payment) as long as it believed that it was likely that it would be able to utilize the additional deductions (at a tax rate of 35 percent) that were created as a result of the step-up to reduce future taxable income and that the timing and amount of the resulting future tax savings justified the current payment. (For purposes of this Example, it is assumed that the transaction that accomplishes this step-up for tax purposes does not create a taxable temporary difference. A taxable temporary difference would exist, for example, if the tax benefit associated with the transaction with the governmental taxing authority becomes taxable in certain situations, such as those described in paragraph [830-740-25-7](https://asc.understandingaccounting.org/asc/740/830/#740-830-25-7).) ##### [740-10-55-204](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-204) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8704a55bfc9d6ef421d0175bcdc60585ea95fa1982751c15691f0280320bed30 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example, the tax effects of transactions directly with a taxing authority are recorded directly in income as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-6678CF00-8D6F-491F-80B7-D355BAEC321D-low.gif) Deferred tax asset " $350,000 " Deferred income tax benefit " $320,000 " Cash " $30,000 " ##### [740-10-55-205](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-205) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d13aec448a56e3ecb29ab202d675bf4e4954dbb912b2eae7d232c80145ebbccf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-206](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-206) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:7927d77a92f4c1bbff94fc6a708beaec57c68c9a9da24fdb667bad0b671ea50b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-207](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-207) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:09a74ef8a897de59eba87bc89fda7f4fc66e5fc7d339d852cf7524b41ae459ec Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-208](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-208) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:a22eafa6835017777b815f4cecbb267af77242db706879b3e4f3f12fcd1e8d1f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-209](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-209) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:743121d1ea2e03a67c8014a1d22e5cfbe8282bfbee3a4f0666cb7d32aea59223 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-210](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-210) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:826b15708d82f74c22fef2f69bdb6512637d9bed148f537952cd7e8032b029bb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-211](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-211) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:ea87cae750e57797e5245ad31cf116c26b69b3fa463f05c55f033ad727d6e45b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2015-17](https://asc.understandingaccounting.org/updates/asu-2015-17/). ##### [740-10-55-212](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-212) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d14d24699e26ddfcce150667db6cbf59daf1c0ec34f321be5e77e443578c201e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [740-10-55-79](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-79) provides guidance on satisfying the required disclosure of the significant components of income taxes and identifies three acceptable approaches illustrated in this Example: 1. a The gross method (Case A) 2. b The net method (Case B) 3. c The statutory tax rate reconciliation method (Case C). ##### [740-10-55-213](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-213) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:df49bae831e09662d5c67b2d76181ee82d38a2a3e63b9a8d9269d110d532f14e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cases A, B, and C share the following assumptions: 1. a An entity has $1,588 of taxable income and $100 of investment tax credits for the current year. The $100 deferred tax asset for $295 of operating loss carryforwards was fully reserved at the beginning of the current year. 2. b Pretax financial income from continuing operations is $5,000. 3. c Income tax expense from continuing operations is $1,500. 4. d Effective tax rate is 30%. 5. e Statutory tax rate is 34%. ##### [740-10-55-214](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-214) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:b54176fcf53c7a5ff791eb7630bfb999290ea466a37a968738b2fb87f6d3e7e5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The first acceptable approach, illustrated as follows, to disclosure of components of income tax expense from continuing operations is referred to as the gross method. - ![](https://asc.understandingaccounting.org/asc-img/GUID-BA45BD2F-F8FE-4AFE-89CF-8079EAE449BC-low.gif) Current Deferred Tax expense before application of investment tax credits and operating loss carryforwards $540 " $1,160 " Investment tax credits (100) - Tax benefit of operating loss carryforwards (100) - Tax expense from continuing operations $340 " $1,160 " ##### [740-10-55-215](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-215) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e80e257f4894b69d7a12d0aa7207297ff992ec6eaef4398047a03352912668aa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The second acceptable approach, illustrated as follows, to disclosure of components of income tax expense from continuing operations is referred to as the net method. - ![](https://asc.understandingaccounting.org/asc-img/GUID-DDEB0BF6-D4A8-4AB0-AD1D-F2A49355B4F3-low.gif) Current tax expense (net of $100 investment tax credits and $100 tax benefit of operating loss carryforwards) $340 Deferred tax expense " 1,160 " Tax expense from continuing operations " $1,500 " ##### [740-10-55-216](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-216) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:65c71a9d7c6de5af755457b4a9f0839adc17acce2a74810701bad6f4d338a2ec Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The third acceptable approach, illustrated as follows, to disclosure of components of income tax expense from continuing operations is referred to as the statutory tax rate reconciliation method. - ![](https://asc.understandingaccounting.org/asc-img/GUID-439E5487-E59C-487B-A990-CF6A69395D20-low.gif) Current tax expense $340 Deferred tax expense " 1,160 " Tax expense from continuing operations " $1,500 " Tax expense at statutory rate " $1,700 " Benefit of investment tax credits (100) Benefit of operating loss carryforwards (100) Tax expense from continuing operations " $1,500 " ##### [740-10-55-217](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-217) Pending content: yes Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:727280715a5e573ae1a0b53cde8f80abed27da4c50ad2baece745525be860393 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [740-10-50-15](https://asc.understandingaccounting.org/asc/740/10/#740-10-50-15) for disclosures about uncertainty in income taxes. - The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 20X1. The Internal Revenue Service (IRS) commenced an examination of the Company's U.S. income tax returns for 20X2 through 20X4 in the first quarter of 20X7 that is anticipated to be completed by the end of 20X8. As of December 31, 20X7, the IRS has proposed certain significant adjustments to the Company's transfer pricing and research credits tax positions. Management is currently evaluating those proposed adjustments to determine if it agrees, but if accepted, the Company does not anticipate the adjustments would result in a material change to its financial position. However, the Company anticipates that it is reasonably possible that an additional payment in the range of $80 to $100 million will be made by the end of 20X8. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-E5D200DE-EF36-414C-B1B8-ACB8C2891915-low.gif) 20X7 20X6 20X5 (in thousands) Balance at January 1 " $370,000 " " 380,000 " " 415,000 " Additions based on tax positions related to the current year " 10,000 " " 5,000 " " 10,000 " Additions/Reductions for tax positions of prior years " 30,000 " " 10,000 " " 5,000 " Reductions for tax positions of prior years " (60,000)" " (20,000)" " (30,000)" Settlements " (40,000)" " (5,000)" " (20,000)" Balance at December 31 " $310,000 " " 370,000 " " 380,000 " - At December 31, 20X7, 20X6, and 20X5, there are $60, $55, and $40 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate. - The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 20X7, 20X6, and 20X5, the Company recognized approximately $10, $11, and $12 million in interest and penalties. The Company had approximately $60 and $50 million for the payment of interest and penalties accrued at December 31, 20X7, and 20X6, respectively. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [740-10-65-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-65-9)This Example illustrates the guidance in paragraph [740-10-50-15](https://asc.understandingaccounting.org/asc/740/10/#740-10-50-15) for disclosures about uncertainty in income taxes. - The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 20X1. The Internal Revenue Service (IRS) commenced an examination of the Company's U.S. income tax returns for 20X2 through 20X4 in the first quarter of 20X7 that is anticipated to be completed by the end of 20X8. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-E5D200DE-EF36-414C-B1B8-ACB8C2891915-low.gif) 20X7 20X6 20X5 (in thousands) Balance at January 1 " $370,000 " " 380,000 " " 415,000 " Additions based on tax positions related to the current year " 10,000 " " 5,000 " " 10,000 " Additions/Reductions for tax positions of prior years " 30,000 " " 10,000 " " 5,000 " Reductions for tax positions of prior years " (60,000)" " (20,000)" " (30,000)" Settlements " (40,000)" " (5,000)" " (20,000)" Balance at December 31 " $310,000 " " 370,000 " " 380,000 " - At December 31, 20X7, 20X6, and 20X5, there are $60, $55, and $40 million of unrecognized tax benefits that if recognized would affect the annual effective tax rate. - The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the years ended December 31, 20X7, 20X6, and 20X5, the Company recognized approximately $10, $11, and $12 million in interest and penalties. The Company had approximately $60 and $50 million for the payment of interest and penalties accrued at December 31, 20X7, and 20X6, respectively. ##### [740-10-55-218](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-218) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:455b95784406cd0daaf8adfe9aa3baaaf7c7d82c459cc43b060090d10bb5f72a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [275-10-50-8](https://asc.understandingaccounting.org/asc/275/10/#275-10-50-8) for disclosure relating to the realizability estimates of a deferred tax asset. ##### [740-10-55-219](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-219) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f65e22e8709da38a715c85834053f108d442cc6e4c9b721694ee3c7216e8c35b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Example, Entity A develops, manufactures, and markets limited-use vaccines. The entity has a dominant share of the narrow market it serves. As of December 31, 19X4, the entity has no temporary differences and has aggregate loss carryforwards of $12 million that originated in prior years and that expire in varying amounts between 19X5 and 19X7. As of December 31, 19X4, the entity has a deferred tax asset of $4.8 million that represents the benefit of the remaining $12 million in loss carryforwards, and it has concluded at that date that a valuation allowance is unnecessary. The loss carryforwards arose during the entity's development stage when it incurred high levels of research and development expenses prior to commencing sales. While the entity has earned, on average, $6 million income before tax (taxable income before carryforwards) in each of the last 5 years, future profitability in this competitive industry depends on continually developing new products. The entity has a number of promising new vaccines under development, but it is aware that other entities recently began testing vaccines that would compete with the vaccines being developed by the entity as well as products that will compete with the vaccines that are currently generating the entity's profits. Rapid introduction of competing products or failure of the entity's development efforts could reduce estimates of future profitability in the near term, which could affect the entity's ability to fully utilize its loss carryforward. ##### [740-10-55-220](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-220) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:47561004c4dbc5412623f5157a052e0f0e9bfe3729e75cfb34696dc6c9ceb843 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Illustrative disclosure for the entity follows. - The entity has recorded a deferred tax asset of $4.8 million reflecting the benefit of $12 million in loss carryforwards, which expire in varying amounts between 19X5 and 19X7. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. ##### [740-10-55-221](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-221) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:637e2b00dd393613a30b6b822fc1d2e53ff449344cd0be5009744a3df11734d5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In addition to other disclosures, information as to the amount of loss carryforwards and their expiration dates and the amount of any valuation allowance with respect to the recorded deferred tax asset is required under this Subtopic. ##### [740-10-55-222](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-222) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d74868c192559117993298d96db6c5165c37752f9f6037597ecc269330c62445 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The disclosure in this Example informs users that: 1. a Realization of the deferred tax asset depends on achieving a certain minimum level of future taxable income within the next three years. 2. b Although management currently believes that achievement of the required future taxable income is more likely than not, it is at least reasonably possible that this belief could change in the near term, resulting in establishment of a valuation allowance. ##### [740-10-55-223](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-223) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:1b90beee6a6f70175b5d4d5c79baf4f4431b86c55fe11e1a95e47bb5cdc27827 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A has sales in Jurisdiction S but no physical presence. Management has reviewed the nexus rules for filing a return in Jurisdiction S and must determine whether filing a tax return in Jurisdiction S is required. In evaluating the tax position to file a tax return, management should consider all relevant sources of tax law. The evaluation of nexus has to be made for all jurisdictions where Entity A might be subject to income taxes. Each of these evaluations is a separate tax position that is subject to the recognition, measurement, and disclosure requirements of this Subtopic. ##### [740-10-55-224](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-224) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d8f59633d946488148d2d9d707557ed19fe42fa6444ca6e9a7a9b589e18d1934 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity S converted to an S Corporation from a C Corporation effective January 1, 20X0. In 20X7, Entity S disposed of assets subject to built-in gains and reported a tax liability on its 20X7 tax returns. Tax positions to consider related to the built-in gains tax include, but are not limited to: 1. a Whether other assets were sold subject to the built-in gains tax 2. b Whether the income associated with the calculation of the taxable amount of the built-in gains is correct 3. c Whether the basis associated with the built-in gains calculation is correct. It should be noted that whether or not Entity S is subject to the built-in gains tax also is a tax position subject to the provisions of this Subtopic. ##### [740-10-55-225](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-225) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:0490846d12759d10d91af2839118e27908c50d32591e7dcda91d3fe7431c30fd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity N, a tax-exempt not-for-profit entity, enters into transactions that may be subject to income tax on unrelated business income. Tax positions to consider include but are not limited to: 1. a Entity N's characterization of its activities as related or unrelated to its exempt purpose 2. b Entity N's allocation of revenue between activities that relate to its exempt purpose and those that are allocated to unrelated business income 3. c The allocation of Entity N's expenses between activities that relate to its exempt purpose and those that are allocated to unrelated business activities. Even if Entity N were not subject to income taxes on unrelated business income, it still has a tax position of whether it qualifies as a tax-exempt not-for-profit entity. ##### [740-10-55-226](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-226) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:db6e75ac711e683ce527255e06d381de1e56b6d002a2d04d44d14ca103d7f77d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A, a partnership with two partners—Partner 1 and Partner 2—has nexus in Jurisdiction J. Jurisdiction J assesses an income tax on Entity A and allows Partners 1 and 2 to file a tax return and use their pro rata share of Entity A's income tax payment as a credit (that is, payment against the tax liability of the owners). Because the owners may file a tax return and utilize Entity A's payment as a payment against their personal income tax, the income tax would be attributed to the owners by Jurisdiction J's laws whether or not the owners file an income tax return. Because the income tax has been attributed to the owners, payments to Jurisdiction J for income taxes should be treated as a transaction with the owners. The result would not change even if there were an agreement between Entity A and its two partners requiring Entity A to reimburse Partners 1 and 2 for any taxes the partners may owe to Jurisdiction J. This is because attribution is based on the laws and regulations of the taxing authority rather than on obligations imposed by agreements between an entity and its owners. ##### [740-10-55-227](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-227) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f3bb39fcb5b78d35a0004a7c9143f706d669bd747d882e933ae4c1c07fc47fbd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the fact pattern in paragraph [740-10-55-226](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-226) changed such that Jurisdiction J has no provision for the owners to file tax returns and the laws and regulations of Jurisdiction J do not indicate that the payments are made on behalf of Partners 1 and 2, income taxes are attributed to Entity A on the basis of Jurisdiction J's laws and are accounted for based on the guidance in this Subtopic. ##### [740-10-55-228](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-228) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:f5249b121490468410f42042e2998272d19c7c0b1706393ea6643f85cc23b18a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity S, an S Corporation, files a tax return in Jurisdiction J. An analysis of the laws and regulations of Jurisdiction J indicates that Jurisdiction J can hold Entity S and its owners jointly and severally liable for payment of income taxes. The laws and regulations also indicate that if payment is made by Entity S, the payments are made on behalf of the owners. Because the laws and regulations attribute the income tax to the owners regardless of who pays the tax, any payments to Jurisdiction J for income taxes should be treated as a transaction with its owners. ##### [740-10-55-229](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-229) Pending content: no Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:d6bdfcd9488775527c873197bd0b63a2c7d13edb99e78085082fea2c2922c204 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A, a partnership with 2 partners, owns a 100 percent interest in Entity B and is required to issue consolidated financial statements. Entity B is a taxable entity that has unrecognized tax positions and a related liability for unrecognized tax benefits. Because entities within a consolidated or combined group should consider the tax positions of all entities within the group regardless of the tax status of the reporting entity, Entity A should include in its financial statements the assets, liabilities, income, and expenses of both Entity A and Entity B, including those relating to the implementation of this Subtopic to Entity B. This is required even though Entity A is a pass-through entity. ##### [740-10-55-230](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-230) Pending content: yes Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:657886e2905ca551adfaabca407c92612c4165533530a543ecd3091476cf98e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [740-10-65-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-65-9)The following Cases illustrate the rate reconciliation disclosure for a public business entity (Case A) and for an entity other than a public business entity (Case B). ##### [740-10-55-231](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-231) Pending content: yes Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:e8647834bf31391160dcd505020b63079f9af0e09b2ee78f0a009c48aa01ebd0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [740-10-65-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-65-9)The following illustrates the specific categories and the reconciling items disclosed by a public business entity in its tabular rate reconciliation in accordance with paragraphs [740-10-50-12A through 50-12B](https://asc.understandingaccounting.org/asc/740/10/#740-10-50-12A) . The entity is domiciled in the United States and presents comparative financial statements. For the disclosure of foreign tax effects in accordance with paragraph [740-10-50-12A(b)(2)](https://asc.understandingaccounting.org/asc/740/10/#740-10-50-12A), it is assumed that the 5 percent threshold, computed by multiplying the income (or loss) from continuing operations before income taxes by the applicable statutory federal (national) income tax rate of the United States, is met: 1. a For Ireland, both at the jurisdiction level and for certain individual reconciling items of the same nature within Ireland 2. b For the United Kingdom, for certain individual reconciling items of the same nature within the United Kingdom, but not at the jurisdiction level 3. c For Switzerland and Mexico, at the jurisdiction level, but not for any individual reconciling items of the same nature within each jurisdiction. ![](https://asc.understandingaccounting.org/asc-img/GUID-5BA4CA54-8C10-494F-9636-09ECA13B44F4-low.gif) "Year Ended December 31, 20X2" "Year Ended December 31, 20X1" "Year Ended December 31, 20X0" Amount Percent Amount Percent Amount Percent U.S. Federal Statutory Tax Rate $ AA aa % $ BB bb % $ CC cc % "State and Local Income Taxes, Net of Federal Income Tax Effect (a)" AA aa BB bb CC cc Foreign Tax Effects United Kingdom Statutory tax rate difference between United Kingdom and United States (AA) (aa) (BB) (bb) (CC) (cc) Share-based payment awards AA aa BB bb CC cc Research and development tax credits (AA) (aa) (BB) (bb) CC cc Other (AA) (aa) BB bb (CC) (cc) Ireland Statutory tax rate difference between Ireland and United States (AA) (aa) (BB) (bb) (CC) (cc) Changes in valuation allowances (AA) (aa) (BB) (bb) CC cc Enacted changes in tax laws or rates - - BB bb - - Other AA aa (BB) (bb) (CC) (cc) Switzerland (AA) (aa) (BB) (bb) (CC) (cc) Mexico AA aa BB bb CC cc Other foreign jurisdictions (AA) (aa) (BB) (bb) CC cc Effect of Changes in Tax Laws or Rates Enacted in the Current Period - - - - (CC) (cc) Effect of Cross-Border Tax Laws Global intangible low-taxed income AA aa BB bb CC cc Foreign-derived intangible income (AA) (aa) (BB) (bb) (CC) (cc) Base erosion and anti-abuse tax AA aa BB bb CC cc Other AA aa - - - - Tax Credits Research and development tax credits - - (BB) (bb) (CC) (cc) Energy-related tax credits (AA) (aa) - - - - Other - - (BB) (bb) - - Changes in Valuation Allowances AA aa (BB) (bb) (CC) (cc) Nontaxable or Nondeductible Items Share-based payment awards AA aa BB bb CC cc Goodwill impairment AA aa BB bb - - Other AA aa (BB) (bb) CC cc Changes in Unrecognized Tax Benefits (AA) (aa) BB bb (CC) (cc) Other Adjustments AA aa (BB) (bb) (CC) (cc) Effective Tax Rate $ AA aa % $ BB bb % $ CC cc % (a) State taxes in California and New York made up the majority (greater than 50 percent) of the tax effect in this category. ##### [740-10-55-232](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-232) Pending content: yes Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:c801adc252322b433d2a6860ed64279d28250383971bdf870fec2c68b6e4001e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [740-10-65-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-65-9)The following illustrates significant reconciling items disclosed by an entity other than a public business entity in accordance with paragraph [740-10-50-13](https://asc.understandingaccounting.org/asc/740/10/#740-10-50-13). ##### [740-10-55-233](https://asc.understandingaccounting.org/asc/740/10/#740-10-55-233) Pending content: yes Source downloaded (UTC): 2026-09-10T01:16:43.682Z to 2026-09-10T01:16:43.682Z Record version: sha256:8b0eb8fbeec769b075bad86902affada1e7d96e3033ec8b8cbd33cb475bb6a5c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2024; (N) December 16, 2025Transition guidance: [740-10-65-9](https://asc.understandingaccounting.org/asc/740/10/#740-10-65-9)The difference between Entity W’s effective tax rate and its statutory tax rate is primarily attributed to tax credits, state taxes, and foreign taxes. More specifically, the foreign tax effects of Entity W’s operations in Ireland had a decreasing effect on its effective tax rate, while the foreign tax effects of Entity W’s operations in France had an increasing effect on its effective tax rate. Entity W received federal research and development tax credits, which decreased its effective tax rate, while state taxes in California increased its effective tax rate.