ASC 740-20
Intraperiod Tax Allocation
740 Income Taxes
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ASC 740-20 governs intraperiod tax allocation: after total income tax expense or benefit for the period is computed under ASC 740-10, this Subtopic allocates that total among continuing operations, discontinued operations, other comprehensive income, and items charged or credited directly to shareholders' equity (740-20-45-2). Continuing operations is computed first ("with-and-without"), considering only items in continuing operations (740-20-45-7), and the residual is assigned to the single other item, or apportioned among multiple other items in proportion to their individual effects (740-20-45-12 and 45-14).
Key points (7)
- Total income tax expense or benefit (current plus deferred) is first computed under Subtopic 740-10, then allocated among continuing operations, discontinued operations, other comprehensive income, and items charged or credited directly to shareholders' equity (740-20-45-1 through 45-2).
- The tax effect of pretax income or loss from continuing operations must be determined by a computation that does not consider the tax effects of items excluded from continuing operations (740-20-45-7); the amount allocated to continuing operations also includes tax effects of changes in judgment about realizability of deferred tax assets, changes in tax laws or rates, changes in tax status, and tax-deductible dividends paid to shareholders (740-20-45-8).
- The tax benefit of an operating loss carryforward or carryback is reported in the same manner as the source of income or loss in the current year, not the source of the prior loss or of expected future income, except for items allocated to equity under 740-20-45-11(c) through (f) (740-20-45-3).
- If there is only one item other than continuing operations, the entire residual after allocation to continuing operations goes to that item; if there are two or more, the residual is apportioned in proportion to their individual effects, with tax benefit apportioned ratably to net loss items first and the remaining expense ratably to net gain items (740-20-45-12, 45-14).
- Tax effects charged or credited directly to OCI or equity include retained earnings adjustments for changes in accounting principle or error corrections, gains and losses in comprehensive income but excluded from net income, increases/decreases in contributed capital, deductible temporary differences and carryforwards existing at a quasi reorganization, and changes in tax bases from transactions with shareholders (740-20-45-11).
- A valuation allowance established at the same time as a deferred tax asset for a net unrealized loss on available-for-sale securities is charged to OCI (740-20-45-15), but a valuation allowance recognized or reversed in a subsequent fiscal year due to a change in judgment is reported in continuing operations (740-20-45-16, 45-17).
- Changes in the beginning-of-year valuation allowance from changes in judgment about future realization are ordinarily allocated to continuing operations under 740-10-45-20, while other valuation allowance changes are allocated using the general methodology of this Section (740-20-45-4).
For students. Exam questions almost always test the "incremental" mechanics: compute tax on continuing operations as if the other items did not exist, then plug the residual to the other items. The most common error is letting a gain in discontinued operations or OCI influence the continuing-operations computation (e.g., using it to avoid a valuation allowance), which 740-20-45-7 prohibits.
intraperiod tax allocationcontinuing operationsdiscontinued operationsother comprehensive incomevaluation allowanceoperating loss carryforwarddeferred tax assetwith-and-without computation
Machine-generated study aid for ASC 740-20. Check the source paragraphs below.
740-20-00Status
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740-20-00-1
The following table identifies the changes made to this Subtopic.
740-20-05Overview and Background
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740-20-05-1
Subtopic 740-10 addresses the majority of accounting requirements for income taxes. That Subtopic also establishes the methods and requirements for computing total income tax expense or benefit for an entity.
740-20-05-2
This Subtopic addresses the process of intraperiod tax allocation that allocates total income tax expense or benefit of an entity for a period to different components of comprehensive income and shareholders' equity. This includes allocating income tax expense or benefit for the year to:
- aContinuing operations
- bDiscontinued operations
- c
- dOther comprehensive income
- eItems charged or credited directly to shareholders' equity.
740-20-15Scope and Scope Exceptions
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Overall Guidance
740-20-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 740-10-15, with specific transaction qualifications noted below.
Transactions
740-20-15-2
The guidance in this Subtopic applies to the process of allocating total income tax expense or benefit of an entity for a period to different components of comprehensive income and shareholders' equity.
740-20-45Other Presentation Matters
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Allocation of Income Tax Expense or Benefit for the Year
740-20-45-1
This guidance addresses the requirements to allocate total income tax expense or benefit. Subtopic 740-10 defines the requirements for computing total income tax expense or benefit for an entity. As defined by those requirements, total income tax expense or benefit includes current and deferred income taxes. After determining total income tax expense or benefit under those requirements, the intraperiod tax allocation guidance is used to allocate total income tax expense or benefit to different components of comprehensive income and shareholders' equity.
740-20-45-2
Income tax expense or benefit for the year shall be allocated among:
- a Continuing operations
- b Discontinued operations
- c
- d Other comprehensive income
- e Items charged or credited directly to shareholders' equity.
740-20-45-3
The tax benefit of an operating loss carryforward or carryback (other than for the exceptions related to the carryforwards identified at the end of this paragraph) shall be reported in the same manner as the source of the income or loss in the current year and not in the same manner as 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. The only exception is the tax effects of deductible temporary differences and carryforwards that are allocated to shareholders' equity in accordance with the provisions of paragraph 740-20-45-11(c) through (f).
- a
- b
740-20-45-4
Paragraph 740-10-45-20 requires that changes in the beginning of the year balance of a valuation allowance caused by changes in judgment about the realization of deferred tax assets in future years are ordinarily allocated to continuing operations. That paragraph also identifies certain exceptions to that allocation guidance related to business combinations and the items specified in paragraph 740-20-45-11(c) through (f). The effect of other changes in the balance of a valuation allowance are allocated among continuing operations and items other than continuing operations using the general allocation methodology presented in this Section.
740-20-45-5
See Section 740-20-55 for examples of the allocation of total tax expense or benefit to continuing operations, the effect of a tax credit carryforward, and an allocation to other comprehensive income.
Allocation to Continuing Operations
740-20-45-6
This guidance addresses the allocation methodology for allocating total income tax expense or benefit to continuing operations. The amount of income tax expense or benefit allocated to continuing operations may include multiple components. The tax effect of pretax income or loss from current year continuing operations is always one component of the amount allocated to continuing operations.
740-20-45-7
The tax effect of pretax income or loss from continuing operations should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations.
740-20-45-8
The amount allocated to continuing operations is the tax effect of the pretax income or loss from continuing operations that occurred during the year, plus or minus income tax effects of:
- a Changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years (see paragraph 740-10-45-20 for a discussion of exceptions to this allocation for certain items)
- b Changes in tax laws or rates (see paragraph 740-10-35-4)
- c Changes in tax status (see paragraphs 740-10-25-32 and 740-10-40-6)
- d Tax-deductible dividends paid to shareholders.
740-20-45-9
See Example 1 (paragraph 740-20-55-1) for an example of the allocation of total tax expense or benefit to continuing operations.
Allocations to Items Other Than Continuing Operations
740-20-45-10
This guidance identifies specific items outside of continuing operations that require an allocation of income tax expense or benefit. It also establishes the methodology for allocation. That methodology differs depending on whether there is only one item other than continuing operations or whether there are multiple items other than continuing operations.
740-20-45-11
The tax effects of the following items occurring during the year shall be charged or credited directly to other comprehensive income or to related components of shareholders' equity:
- a Adjustments of the opening balance of retained earnings for certain changes in accounting principles or a correction of an error. Paragraph 250-10-45-8 addresses the effects of a change in accounting principle, including any related income tax effects.
- b Gains and losses included in comprehensive income but excluded from net income (for example, translation adjustments accounted for under the requirements of Topic 830 and changes in the unrealized holding gains and losses of securities classified as available-for-sale as required by Topic 320).
- c An increase or decrease in contributed capital (for example, deductible expenditures reported as a reduction of the proceeds from issuing capital stock).
- d
- e
- f Deductible temporary differences and carryforwards that existed at the date of a quasi reorganization.
- g All changes in the tax bases of assets and liabilities caused by transactions among or with shareholders shall be included in equity including the effect of valuation allowances initially required upon recognition of any related deferred tax assets. Changes in valuation allowances occurring in subsequent periods shall be included in the income statement.
Single Item of Allocation Other Than Continuing Operations
740-20-45-12
If there is only one item other than continuing operations, the portion of income tax expense or benefit for the year that remains after the allocation to continuing operations shall be allocated to that item.
740-20-45-13
See Example 2 (paragraph 740-20-55-8) for an example of the allocation of total tax expense or benefit to continuing operations and one other item.
Multiple Items of Allocation Other Than Continuing Operations
740-20-45-14
If there are two or more items other than continuing operations, the amount that remains after the allocation to continuing operations shall be allocated among those other items in proportion to their individual effects on income tax expense or benefit for the year. When there are two or more items other than continuing operations, the sum of the separately calculated, individual effects of each item sometimes may not equal the amount of income tax expense or benefit for the year that remains after the allocation to continuing operations. In those circumstances, the procedures to allocate the remaining amount to items other than continuing operations are as follows:
- a Determine the effect on income tax expense or benefit for the year of the total net loss for all net loss items.
- b Apportion the tax benefit determined in (a) ratably to each net loss item.
- c Determine the amount that remains, that is, the difference between the amount to be allocated to all items other than continuing operations and the amount allocated to all net loss items.
- d Apportion the tax expense determined in (c) ratably to each net gain item.
Presentation of Deferred Tax Assets Relating to Losses on Available-for-Sale Debt Securities
740-20-45-15
An entity that recognizes a deferred tax asset relating to a net unrealized loss on available-for-sale securities may at the same time conclude that it is more likely than not that some or all of that deferred tax asset will not be realized. In that circumstance, the entity shall report the offsetting entry to the valuation allowance in the component of other comprehensive income classified as unrealized gains and losses on certain investments in debt securities because the valuation allowance is directly related to the unrealized holding loss on the available-for-sale securities. The entity shall also report the offsetting entry to the valuation allowance in the component of other comprehensive income classified as unrealized gains and losses on certain investments in debt securities if the entity concludes on the need for a valuation allowance in a later interim period of the same fiscal year in which the deferred tax asset is initially recognized.
740-20-45-16
An entity that does not need to recognize a valuation allowance at the same time that it establishes a deferred tax asset relating to a net unrealized loss on available-for-sale securities may, in a subsequent fiscal year, conclude that it is more likely than not that some or all of that deferred tax asset will not be realized. In that circumstance, if an entity initially decided that no valuation allowance was required at the time the unrealized loss was recognized but in a subsequent fiscal year decides that it is more likely than not that the deferred tax asset will not be realized, a valuation allowance shall be recognized. The entity shall include the offsetting entry as an item in determining income from continuing operations. The offsetting entry shall not be included in other comprehensive income.
740-20-45-17
An entity that recognizes a deferred tax asset relating to a net unrealized loss on available-for-sale securities may, at the same time, conclude that a valuation allowance is warranted and in a subsequent fiscal year makes a change in judgment about the level of future years' taxable income such that all or a portion of that valuation allowance is no longer warranted. In that circumstance, the entity shall include any reversals in the valuation allowance due to such a change in judgment in subsequent fiscal years as an item in determining income from continuing operations, even though initial recognition of the valuation allowance affected the component of other comprehensive income classified as unrealized gains and losses on certain investments in debt securities. If, rather than a change in judgment about future years' taxable income, the entity generates taxable income in the current year (subsequent to the year the related deferred tax asset was recognized) that can use the benefit of the deferred tax asset, the elimination (or reduction) of the valuation allowance is allocated to that taxable income. Paragraph 740-10-45-20 provides additional information.
740-20-45-18
An entity that has recognized a deferred tax asset relating to other deductible temporary differences in a previous fiscal year may at the same time have concluded that no valuation allowance was warranted. If in the current year an entity recognizes a deferred tax asset relating to a net unrealized loss on available-for-sale securities that arose in the current year and at the same time concludes that a valuation allowance is warranted, management shall determine the extent to which the valuation allowance is directly related to the unrealized loss and the other deductible temporary differences, such as an accrual for other postemployment benefits. The entity shall report the offsetting entry to the valuation allowance in the component of other comprehensive income classified as unrealized gains and losses on certain investments in debt securities only to the extent the valuation allowance is directly related to the unrealized loss on the available-for-sale securities that arose in the current year.
740-20-55Implementation Guidance and Illustrations
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Illustrations
740-20-55-1
Paragraph 740-20-45-8 states that the amount of income tax expense or benefit allocated to continuing operations is the tax effect of pretax income or loss from continuing operations that occurred during the year plus or minus certain adjustments.
740-20-55-2
The adjustments include the tax effects of:
- a Changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years
- b Changes in tax laws or rates
- c Changes in tax status
- d Tax-deductible dividends paid to shareholders.
740-20-55-3
The allocation of income tax expense between pretax income from continuing operations and other items shall include deferred taxes.
740-20-55-4
This Example illustrates allocation of current and deferred tax expense. The assumptions are as follows:
- a Tax rates are 40 percent for Years 1, 2, and 3 and 30 percent for Year 4 and subsequent years. No valuation allowances are required for deferred tax assets.
- b At the end of Year 1, there is a $500 taxable temporary difference relating to the entity's contracting operations and a $200 deductible temporary difference related to its other operations. Determination of the entity's deferred tax assets and liabilities at the end of Year 1 is as follows.
-
Future Years Temporary Differences Year 2 Year 3 Year 4 Total Contracting operations $- $- $500 $500 Other operations (100) (100) - (200) $(100) $(100) $500 $300 Enacted tax rate for future years 40% 40% 30% Deferred tax liability (asset) $(40) $(40) $150 $70
-
- c During Year 2, the entity decides that it will sell its contracting operations in Year 3. As a result, all temporary differences related to the contracting operations (the $500 taxable temporary difference that existed at the end of Year 1, plus an additional $200 taxable temporary difference that arose during Year 2) are now considered to result in taxable amounts in Year 3 because the contracting operations will be sold in Year 3.
- d At the end of Year 2, the entity also has $300 of deductible temporary differences ($100 of the temporary difference that existed at the end of Year 1, plus an additional $200 that arose during Year 2) from continuing operations.
- e For Year 2, the entity has $50 of pretax reported income from continuing operations and $200 of pretax reported income from discontinued operations.
- f Determination of the entity's deferred tax asset and liability at the end of Year 2 is as follows.
-
Future Years Temporary Differences Year 3 Year 4 Total Discontinued operations $700 $- $700 Continuing operations (200) (100) (300) $500 $(100) $400 Enacted tax rate for future years 40% 30% Deferred tax liability (asset)—net $200 $(30) $170
-
740-20-55-5
Total deferred tax expense for Year 2 is $100 ($170 - $70). The deferred tax benefit of the deductible temporary differences related to the entity's continuing operations during Year 2 is determined as follows.
-
Deferred tax asset related to the entity's continuing operations at the end of Year 2 (40 percent of $200 and 30 percent of $100) $(110) Deferred tax asset related to the entity's continuing operations at the beginning of Year 2 (40 percent of $200) (80) Deferred tax benefit for Year 2 $(30)
740-20-55-6
The deferred tax expense for taxable temporary differences related to the entity's discontinued operations during Year 2 is determined as follows.
-
Deferred tax liability at the end of Year 2 (40 percent of $700) $280 Deferred tax liability at the end of Year 1 (30 percent of $500) (150) Deferred tax expense for Year 2 $130
740-20-55-7
Total tax expense and tax expense allocated to continuing and discontinued operations for Year 2 are determined as follows.
-
Discontinued Operations Continuing Operations Total Pretax reported income $200 $50 $250 "Originating and reversing temporary differences, net" (200) 100 (100) Taxable income $- $150 $150 Current tax expense (40 percent) $- $60 $60 Deferred tax expense (benefit) as determined above 130 (30) 100 Income tax expense $130 $30 $160
740-20-55-8
If there is only one item other than continuing operations, the portion of income tax expense or benefit for the year that remains after the allocation to continuing operations is allocated to that item. If there are two or more items other than continuing operations, the amount that remains after the allocation to continuing operations is allocated among those other items in proportion to their individual effects on income tax expense or benefit for the year.
740-20-55-9
The following Cases both present allocations of income tax to continuing operations when there is only one item other than income from continuing operations:
- aLoss from continuing operations with an extraordinary gain (Case A)
- bIncome from continuing operations with a loss from discontinued operations (Case B).
740-20-55-10
This Case illustrates allocation of income tax expense if there is only one item other than income from continuing operations. The assumptions are as follows:
- a The entity's pretax financial income and taxable income are the same.
- b The entity's ordinary loss from continuing operations is $500.
- c The entity also has a gain on discontinued operations of $900 that is a capital gain for tax purposes.
- d The tax rate is 40 percent on ordinary income and 30 percent on capital gains. Income taxes currently payable are $120 ($400 at 30 percent).
- e The entity has determined that the deferred tax asset that would have resulted from the loss from continuing operations if the gain on discontinued operations had not occurred would be expected to be realized (that is, a valuation allowance would not have been needed).
740-20-55-11
Income tax expense is allocated between the pretax loss from operations and the gain on discontinued operations as follows.
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Total income tax expense $120 Tax benefit allocated to the loss from operations (200) Incremental tax expense allocated to the gain on discontinued operations $320
740-20-55-12
The effect of the $500 loss from continuing operations was to offset an equal amount of capital gains that otherwise would be taxed at a 30 percent tax rate. However, the guidance in paragraph 740-20-45-7 requires that an entity determine the tax effects of pretax income from continuing operations by a computation that does not consider the tax effects of items that are not included in continuing operations. The entity has determined that, absent the capital gain from discontinued operations, a valuation allowance would not have been needed on the deferred tax asset resulting from the $500 loss from continuing operations. Thus, $200 ($500 at 40 percent) of tax benefit is allocated to continuing operations. The $320 incremental effect of the gain on discontinued operations is the difference between $120 of total tax expense and the $200 tax benefit allocated to continuing operations.
740-20-55-12A
This Case illustrates allocation of income tax expense if there is only one item other than income from continuing operations. The assumptions are the same as in Case A except that the entity has determined that the deferred tax asset that would have resulted from the loss from continuing operations if the gain on discontinued operations had not occurred would not be expected to be realized (that is, a valuation allowance would have been needed).
740-20-55-12B
Income tax expense is allocated between the pretax loss from operations and the gain on discontinued operations as follows.
-
Total income tax expense $120 Tax benefit allocated to the loss from operations - Incremental tax expense allocated to the gain on discontinued operations $120
740-20-55-12C
The effect of the $500 loss from continuing operations was to offset an equal amount of capital gains that otherwise would be taxed at a 30 percent tax rate. However, the guidance in paragraph 740-20-45-7 requires that an entity determine the tax effects of pretax income from continuing operations by a computation that does not consider the tax effects of items that are not included in continuing operations. The entity has determined that, absent the capital gain from discontinued operations, a valuation allowance would have been needed on the deferred tax asset resulting from the $500 loss from continuing operations. Thus, zero tax benefit is allocated to continuing operations. The $120 incremental income tax expense related to the gain on discontinued operations is the difference between $120 of total tax expense and the zero tax benefit allocated to continuing operations.
740-20-55-13
This Case further illustrates the general requirement to determine the tax effects of pretax income from continuing operations by a computation that does not consider the tax effects of items that are not included in continuing operations.
740-20-55-14
To illustrate, assume that in the current year an entity has $1,000 of income from continuing operations and a $1,000 loss from discontinued operations. At the beginning of the year, the entity has a $2,000 net operating loss carryforward for which the deferred tax asset, net of its valuation allowance, is zero, and the entity did not reduce that valuation allowance during the year. No tax expense should be allocated to income from continuing operations because the $2,000 loss carryforward is sufficient to offset that income. Thus, no tax benefit is allocated to the loss from discontinued operations.
740-20-55-15
This Example illustrates the guidance in paragraphs for allocation of the tax benefit of a tax credit carryforward that is recognized as a deferred tax asset in the current year. The assumptions are as follows:
- a The entity's pretax financial income and taxable income are the same.
- b Pretax financial income for the year comprises $300 from continuing operations and $400 from a gain on discontinued operations.
- c The tax rate is 40 percent. Taxes payable for the year are zero because $330 of tax credits that arose in the current year more than offset the $280 of tax otherwise payable on $700 of taxable income.
- d A $50 deferred tax asset is recognized for the $50 ($330 - $280) tax credit carryforward. Based on the weight of available evidence, management concludes that no valuation allowance is necessary.
740-20-55-16
Income tax expense or benefit is allocated between pretax income from continuing operations and the gain on discontinued operations as follows.
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Total income tax benefit $(50) Tax expense (benefit) allocated to income from continuing operations: Tax (before tax credits) on $300 of taxable income at 40 percent $120 Tax credits (330) (210) Tax expense allocated to the extraordinary gain $160
740-20-55-17
Absent the gain on discontinued operations and assuming it was not the deciding factor in reaching a conclusion that a valuation allowance is not needed, the entire tax benefit of the $330 of tax credits would be allocated to continuing operations. The presence of the gain on discontinued operations does not change that allocation.
740-20-55-18
Income taxes are sometimes allocated directly to shareholders' equity or to other comprehensive income. This Example illustrates the allocation of income taxes for translation adjustments under the requirements of Subtopic 830-30 to other comprehensive income. In this Example, FC represents units of foreign currency.
740-20-55-19
A foreign subsidiary has earnings of FC 600 for Year 2. Its net assets (and unremitted earnings) are FC 1,000 and FC 1,600 at the end of Years 1 and 2, respectively.
740-20-55-20
The foreign currency is the functional currency. For Year 2, translated amounts are as follows.
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Foreign Currency Exchange Rate Dollars "Unremitted earnings, beginning of year" " 1,000 " FC1 = $1.20 " $1,200 " Earnings for the year 600 FC1 = $1.10 660 "Unremitted earnings, end of year" " 1,600 " FC1 = $1.00 " $1,600 "
740-20-55-21
A $260 translation adjustment ($1,200 + $660 - $1,600) is reported in other comprehensive income and accumulated in shareholders' equity for Year 2.
740-20-55-22
The U.S. parent expects that all of the foreign subsidiary's unremitted earnings will be remitted in the foreseeable future, and under the requirements of Subtopic 740-30, a deferred U.S. tax liability is recognized for those unremitted earnings.
740-20-55-23
The U.S. parent accrues the deferred tax liability at a 20 percent tax rate (that is, net of foreign tax credits, foreign tax credit carryforwards, and so forth). An analysis of the net investment in the foreign subsidiary and the related deferred tax liability for Year 2 is as follows.
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. Net Investment Deferred Tax Liability "Balances, beginning of year" " $1,200 " $240 Earnings and related taxes 660 132 Translation adjustment and related taxes (260) (52) "Balances, end of year" " $1,600 " $320
740-20-55-24
For Year 2, $132 of deferred taxes are charged against earnings, and $52 of deferred taxes are reported in other comprehensive income and accumulated in shareholders' equity.
740-20-60Relationships
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