ASC

ASC 740-852

Reorganizations

740 Income Taxes

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In brief

IntermediateIncome taxesDebt and equityPresentationIndustry-specific

ASC 740-852 gives incremental income tax guidance for entities emerging from Chapter 11 that qualify for fresh-start reporting and for entities that effect a quasi-reorganization. Under fresh-start reporting, deferred taxes follow ordinary GAAP, and tax benefits of preconfirmation NOL carryforwards and deductible temporary differences recognized later (by releasing the valuation allowance) reduce income tax expense. After a quasi-reorganization, by contrast, subsequently recognized tax benefits of deductible temporary differences and carryforwards that existed at the quasi-reorganization date are credited directly to contributed capital, not income.

Key points (6)
  • The Subtopic applies only to entities that filed a Chapter 11 petition, expect to reorganize as a going concern, and qualify for fresh-start reporting under 852-10-45-19, or that have undertaken a quasi-reorganization (740-852-05-1).
  • Fresh-start entities report deferred taxes in conformity with GAAP; benefits of preconfirmation NOL carryforwards and deductible temporary differences not recognizable at the plan confirmation date are, when later recognized by eliminating the valuation allowance, reported as a reduction to income tax expense (740-852-45-1).
  • Tax benefits of deductible temporary differences and carryforwards existing at the date of a quasi-reorganization (Subtopic 852-20) are reported as a direct addition to contributed capital if recognized in subsequent years (740-852-45-3; 852-740-55-2).
  • Because post-quasi-reorganization accounting is substantially similar to that of a new entity (852-20-25-5), subsequently recognized benefits of preexisting NOL or tax credit carryforwards are excluded from income regardless of whether the underlying losses were charged to income before the quasi-reorganization or directly to contributed capital (740-852-55-4).
  • If a change in circumstances after a quasi-reorganization requires recognizing or increasing a valuation allowance against tax benefits recognized at the quasi-reorganization date, the resulting adjustment is charged to income (740-852-55-5).
  • The equity treatment of subsequently recognized tax benefits does not differ based on whether gains were credited or losses were charged directly to contributed capital in the quasi-reorganization (740-852-55-6).

For students. The exam trap is the asymmetry: post-emergence release of a valuation allowance on preconfirmation attributes reduces income tax expense under fresh-start reporting, but the identical release after a quasi-reorganization is credited directly to contributed capital. Note the one-way street — later increases in the valuation allowance after a quasi-reorganization are charged to income, not equity.

fresh-start reportingquasi-reorganizationvaluation allowancenet operating loss carryforwarddeductible temporary differencescontributed capitalplan confirmation datedeferred tax asset

Machine-generated study aid for ASC 740-852. Check the source paragraphs below.

740-852-00Status

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740-852-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
Temporary DifferenceAmendedAccounting Standards Update No. 2016-1610/24/2016
852-740-45-2SupersededAccounting Standards Update No. 2010-0802/02/2010
852-740-45-3AmendedAccounting Standards Update No. 2016-1912/14/2016
852-740-65-1AddedAccounting Standards Update No. 2010-0802/02/2010

740-852-05Overview and Background

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740-852-05-1
This Subtopic provides incremental guidance on accounting for income taxes if an entity:
  1. a
    Has filed a petition with the Bankruptcy Court and expects to reorganize as a going concern under Chapter 11 of the Bankruptcy Code and qualifies for fresh-start reporting under paragraph 852-10-45-19
  2. b
    Has undertaken a corporate readjustment procedure known as a quasi-reorganization.

740-852-15Scope and Scope Exceptions

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Overall Guidance

740-852-15-1
The guidance in this Subtopic on fresh-start reporting in a Chapter 11 reorganization follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 852-10-15, except that an entity must also meet the paragraph 852-10-45-19 requirements for fresh-start reporting.
740-852-15-2
The guidance in this Subtopic on quasi-reorganizations follows the same Scope and Scope Exceptions as outlined in Subtopic 852-20, see Section 852-20-15.

740-852-45Other Presentation Matters

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Fresh-Start Reporting in a Chapter 11 Reorganization

740-852-45-1
For entities that meet the paragraph 852-10-45-19 requirements for fresh-start reporting, deferred taxes shall be reported in conformity with generally accepted accounting principles (GAAP). If not recognizable at the plan confirmation date, initial recognition (that is, by elimination of the valuation allowance) of tax benefits realized from preconfirmation net operating loss carryforwards and deductible temporary differences shall be reported as a reduction to income tax expense.

Quasi-Reorganizations

740-852-45-3
The tax benefits of deductible temporary differences and carryforwards as of the date of a quasi-reorganization as defined and contemplated in Subtopic 852-20 shall be reported as a direct addition to contributed capital if the tax benefits are recognized in subsequent years.
740-852-45-4
See Section 852-740-55 for implementation guidance related to quasi-reorganizations.

740-852-55Implementation Guidance and Illustrations

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Implementation Guidance

740-852-55-1
This Section is an integral part of the requirements of this Subtopic. This Section provides implementation guidance that addresses the application of requirements to specific aspects of income tax accounting for quasi-reorganizations.
740-852-55-2
As required by paragraph 852-740-45-3, unrecognized tax benefits of deductible temporary differences and carryforwards that existed at the date of a quasi-reorganization shall be reported as a direct addition to contributed capital when recognized after the date of the quasi-reorganization.
740-852-55-3
For example, assume an entity charged losses directly to contributed capital at the date of a quasi-reorganization. At that date, the deferred tax asset for the entity's deductible temporary differences and carryforwards was offset by a valuation allowance. Part of those deductible temporary differences and carryforwards related to losses that were included in determining income in prior years. The remainder were attributable to losses that were charged directly to contributed capital as a result of the quasi-reorganization. When recognized (by reducing or eliminating the valuation allowance) after the date of the quasi-reorganization, the tax benefit of such deductible temporary differences and carryforwards would be reported as a direct addition to contributed capital under the guidance in the preceding paragraph.
740-852-55-4
As indicated in paragraph 852-20-25-5, after a quasi-reorganization, the entity's accounting shall be substantially similar to that appropriate for a new entity. As such, any subsequently recognized tax benefit of an operating loss or tax credit carryforward that existed at the date of a quasi-reorganization shall not be included in the determination of income of the new entity, regardless of whether losses that gave rise to an operating loss carryforward were charged to income before the quasi-reorganization or directly to contributed capital as part of the quasi-reorganization. A new entity would not have tax benefits attributable to operating losses or tax credits that arose before its organization date.
740-852-55-5
A charge to income should be recorded, however, if after a quasi-reorganization an entity concludes that due to a change in circumstances a valuation allowance should be recognized or increased to reduce the amount of tax benefits that were recognized at the time of the quasi-reorganization.
740-852-55-6
The accounting for any subsequently recognized tax benefit of deductible temporary differences and carryforwards that existed at the date of a quasi-reorganization does not change based on whether gains were credited directly to contributed capital or losses were charged directly to contributed capital.

740-852-65Transition and Open Effective Date Information

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740-852-65-1
Paragraph superseded on 07/01/2010 after the end of the transition period stated in Accounting Standards Update No. 2010-08, Technical Corrections to Various Topics.

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