# ASC 740-20-55: Income Taxes — Intraperiod Tax Allocation — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

[Read online](https://asc.understandingaccounting.org/asc/740/20/#55-implementation-guidance-and-illustrations)

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## ASC 740-20-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/740/20/#55-implementation-guidance-and-illustrations)

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#### Illustrations

##### [740-20-55-1](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-1)

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Paragraph [740-20-45-8](https://asc.understandingaccounting.org/asc/740/20/#740-20-45-8) states that the amount of [income tax expense or benefit](https://asc.understandingaccounting.org/glossary/i/#income-tax-expense-or-benefit "The sum of current tax expense (or benefit) and deferred 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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-2)

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The adjustments include the tax effects of:

1.  a
    
    Changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years
    
2.  b
    
    Changes in tax laws or rates
    
3.  c
    
    Changes in tax status
    
4.  d
    
    Tax-deductible dividends paid to shareholders.

##### [740-20-55-3](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-3)

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The allocation of income tax expense between pretax income from continuing operations and other items shall include deferred taxes.

##### [740-20-55-4](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-4)

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This Example illustrates allocation of current and [deferred tax expense](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."). The assumptions are as follows:

1.  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.
    
2.  b
    
    At the end of Year 1, there is a $500 [taxable temporary difference](https://asc.understandingaccounting.org/glossary/t/#taxable-temporary-difference "Temporary differences that result in taxable amounts in future years when the related asset is recovered or the related liability is settled. See Temporary Difference.") relating to the entity's contracting operations and a $200 [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.") related to its other operations. Determination of the entity's deferred tax assets and liabilities at the end of Year 1 is as follows.
    
    -   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-124829D9-4B61-4362-B2C5-BE8367101418-low.gif)
        
        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
        
3.  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.
    
4.  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.
    
5.  e
    
    For Year 2, the entity has $50 of pretax reported income from continuing operations and $200 of pretax reported income from discontinued operations.
    
6.  f
    
    Determination of the entity's [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.") and [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.") at the end of Year 2 is as follows.
    
    -   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-8EE9BFD4-EBED-4F95-BE72-D7F5954F5E9C-low.gif)
        
        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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-5)

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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.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-AE11AACF-382C-4CC0-A0A4-22828C8CE5EC-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-6)

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The deferred tax expense for taxable temporary differences related to the entity's discontinued operations during Year 2 is determined as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-B5B66C89-EDD9-4BE6-ACB6-CC5083AD1470-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-7)

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Total tax expense and tax expense allocated to continuing and discontinued operations for Year 2 are determined as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-5DF95978-6869-49AC-8AC1-52B538ED0115-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-8)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-9)

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The following Cases both present allocations of income tax to continuing operations when there is only one item other than income from continuing operations:

1.  a
    
    Loss from continuing operations with an extraordinary gain (Case A)
    
2.  b
    
    Income from continuing operations with a loss from discontinued operations (Case B).

##### [740-20-55-10](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-10)

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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:

1.  a
    
    The entity's pretax financial income and [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.") are the same.
    
2.  b
    
    The entity's ordinary loss from continuing operations is $500.
    
3.  c
    
    The entity also has a gain on discontinued operations of $900 that is a capital gain for tax purposes.
    
4.  d
    
    The tax rate is 40 percent on ordinary income and 30 percent on capital gains. [Income taxes currently payable](https://asc.understandingaccounting.org/glossary/i/#income-taxes-currently-payable-refundable "See Current Tax Expense (or Benefit).") are $120 ($400 at 30 percent).
    
5.  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](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.") would not have been needed).

##### [740-20-55-11](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-11)

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Income tax expense is allocated between the pretax loss from operations and the gain on discontinued operations as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-AC6F6AA5-8751-4C1A-9F1D-88B185E25436-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-12)

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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](https://asc.understandingaccounting.org/asc/740/20/#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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-12A)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-12B)

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Income tax expense is allocated between the pretax loss from operations and the gain on discontinued operations as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-24B9562D-04EF-4259-885C-7784D6C04928-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-12C)

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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](https://asc.understandingaccounting.org/asc/740/20/#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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-13)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-14)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-15)

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This Example illustrates the guidance in paragraphs

[740-20-45-7 through 45-8](https://asc.understandingaccounting.org/asc/740/20/#740-20-45-7)

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:

1.  a
    
    The entity's pretax financial income and taxable income are the same.
    
2.  b
    
    Pretax financial income for the year comprises $300 from continuing operations and $400 from a gain on discontinued operations.
    
3.  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.
    
4.  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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-16)

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Income tax expense or benefit is allocated between pretax income from continuing operations and the gain on discontinued operations as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-F543F015-0695-43BD-8B92-6906FE2F161B-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-17)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-18)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-19)

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-20)

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Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f

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The foreign currency is the functional currency. For Year 2, translated amounts are as follows.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-0A3597D4-4C79-4354-BCF0-B318A548D79F-low.gif)
    
    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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-21)

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Record version: sha256:f9468f79c6183d3b59beb9ffaf57615007ce885b3336258fac13dda0a1b8ba3d

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-22)

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Record version: sha256:230e6d70f9f9373d8a52df0174b915a1bb61a5e490b46b6ac0611911b03f2c9e

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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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-23)

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Record version: sha256:670fbd0820ddfdc6e25b3da65daf04fc10db1fddc3829cae906c47a2cd39471c

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The U.S. parent accrues the [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.") at a 20 percent tax rate (that is, net of foreign tax credits, foreign 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."), 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.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-8C722B72-619E-4780-8276-FF9C06100B97-low.gif)
    
    . 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](https://asc.understandingaccounting.org/asc/740/20/#740-20-55-24)

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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.