ASC 740-942
Financial Services—Depository and Lending
740 Income Taxes
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This subtopic applies Topic 740 to stock and mutual savings and loan associations and mutual savings banks, whose tax bad-debt reserve deductions differ from book bad-debt experience. Its core rule is an exception to comprehensive deferred tax recognition: no deferred tax liability is recognized for the tax bad-debt reserve that arose in tax years beginning before December 31, 1987 (the base-year amount), while a deferred tax liability must be recognized for reserve amounts in excess of the base year. Related valuation allowance, measurement, and disclosure requirements are specified.
Key points (7)
- A deferred tax liability is not recognized for bad debt reserves for tax purposes of U.S. savings and loan associations (and other qualified thrift lenders) arising in tax years beginning before December 31, 1987 (the base-year amount) unless it becomes apparent the temporary difference will reverse in the foreseeable future (740-942-25-1).
- If circumstances indicate the association is likely to pay income taxes currently or later because of known or expected reductions in the bad debt reserve, those taxes must be accrued as tax expense of the current period (740-942-25-1).
- A deferred tax liability must be recognized for bad debt reserves arising in tax years beginning after December 31, 1987, that is, amounts in excess of the base-year amount (740-942-25-2; 740-30-25-5; 740-942-35-2).
- The entity must assess the need for a valuation allowance on deferred tax assets related to the association's bad-debt reserve for financial reporting, and in doing so may not count future reversals of taxable differences for which no deferred tax liability was recognized under the 740-10-25-3 exceptions (740-942-25-3; 740-942-25-4).
- If no deferred tax liability is recognized for the base-year reserve, the association shall not anticipate future percentage-of-taxable-income bad-debt deductions in measuring deferred taxes on other temporary differences (740-942-35-1; 740-942-35-3).
- Where graduated tax rates are a factor, the percentage-of-taxable-income bad-debt deduction may result in a lower average graduated rate being applied in measuring deferred taxes if it pushes taxable income into a lower bracket (740-942-35-3).
- When the base-year exception is used, disclose the types of temporary differences and events that would make them taxable, the cumulative amount of each type, and the unrecognized deferred tax liability; the same disclosures apply to a parent consolidating or equity-method accounting for the association (740-942-50-1; 740-942-50-2).
For students. This is one of the few surviving exceptions to comprehensive deferred tax recognition under Topic 740, so exam questions often test the pre-1988 "base-year" cutoff. A common misunderstanding is assuming the entire tax bad-debt reserve is exempt — only the base-year amount is; post-1987 excess reserves require a deferred tax liability, and unrecognized differences cannot be used as a source of taxable income for valuation allowance purposes.
base-year bad-debt reservetemporary differencedeferred tax liability recognition exceptionvaluation allowancepercentage-of-taxable-income bad-debt deductionsavings and loan associationqualified thrift lendergeneral reserves
Machine-generated study aid for ASC 740-942. Check the source paragraphs below.
740-942-00Status
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740-942-00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 942-740-15-2 | Amended | Accounting Standards Update No. 2018-06 | 05/07/2018 |
| 942-740-25-1 | Amended | Accounting Standards Update No. 2015-01 | 01/09/2015 |
| 942-740-45-1 | Superseded | Accounting Standards Update No. 2018-06 | 05/07/2018 |
740-942-05Overview and Background
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740-942-05-1
This Subtopic provides recognition, measurement, and disclosure guidance for deferred tax assets and liabilities of stock and mutual savings and loan associations and mutual savings banks.
740-942-05-2
Regulatory authorities require both stock and mutual savings and loan associations to appropriate a portion of earnings to general reserves and to retain the reserves as a protection for depositors. The terms general reserves and reserve for bad debts are used in the context of the special meaning these terms have in regulatory pronouncements and in the U.S. Internal Revenue Code. Provisions of the U.S. Internal Revenue Code permit a savings and loan association to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. This annual addition permitted by the Internal Revenue Code generally differs significantly from the bad debt experience upon which determination of pretax accounting income is based. Thus, taxable income and pretax accounting income of an association usually differ.
740-942-05-3
Although a general reserve determined according to requirements of the regulatory authorities is not directly related to a reserve for bad debts computed according to provisions of the U.S. Internal Revenue Code, the purposes and restrictions of each reserve are similar. Amounts of bad debt deductions for income tax purposes are includable in taxable income of later years only if the bad debt reserves are used subsequently for purposes other than to absorb bad debt losses.
740-942-15Scope and Scope Exceptions
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Overall Guidance
740-942-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 942-10-15, with specific entity exceptions noted below.
Entities
740-942-15-2
The guidance in this Subtopic is applicable to stock and mutual savings and loan associations and mutual savings banks.
740-942-25Recognition
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Deferred Tax Liability
740-942-25-1
As described in paragraph 740-10-25-3, a deferred tax liability shall not be recognized for the following types of temporary differences unless it becomes apparent that those temporary differences will reverse in the foreseeable future:
- aBad debt reserves for tax purposes of U.S. savings and loan associations (and other qualified thrift lenders) that arose in tax years beginning before December 31, 1987 (that is, the base-year amount).
740-942-25-2
Paragraph 740-30-25-5 requires that a deferred tax liability be recognized for the following types of taxable temporary differences:
- aBad debt reserves for tax purposes of U.S. savings and loan associations (and other qualified thrift lenders) that arise in tax years beginning after December 31, 1987 (that is, amounts in excess of the base-year amount).
Deferred Tax Asset
740-942-25-3
The entity shall assess the need for a valuation allowance for deferred tax assets related to a savings and loan association's bad-debt reserve for financial reporting.
740-942-25-4
Paragraph 740-10-30-18 identifies four sources of taxable income to be considered in determining the need for and amount of a valuation allowance for those and other deferred tax assets. One source is future reversals of temporary differences. Future reversals of taxable differences for which a deferred tax liability has not been recognized based on the exceptions cited in paragraph 740-10-25-3, however, shall not be considered. Another source is future taxable income exclusive of reversing temporary differences and carryforwards.
740-942-35Subsequent Measurement
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Deferred Tax Assets and Liabilities
740-942-35-1
The temporary difference under current U.S. federal tax law for the base-year tax reserve of a savings and loan association is one of the exceptions to comprehensive recognition of deferred taxes under Topic 740. If a deferred tax liability is not recognized for that temporary difference, a savings and loan association shall not anticipate future percentage-of-taxable-income bad-debt deductions in determining the deferred tax liability for other types of temporary differences. See paragraphs 740-10-25-3, 740-10-25-37, 740-10-30-5, and 740-10-30-9.
740-942-35-2
The base-year tax reserve is the income tax bad-debt reserve that arose in tax years beginning before December 31, 1987 as provided by the income tax law changes enacted in 1986. The excess of a tax bad-debt reserve over the base-year reserve is a temporary difference for which deferred taxes must be provided.
740-942-35-3
Under Topic 740, deferred tax assets and liabilities for temporary differences shall be measured by applying the enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. It is not permissible to reduce a deferred tax liability so determined by anticipated future percentage-of-taxable-income bad-debt deductions for the same reasons that other special deductions may not be anticipated as set forth in paragraphs 740-10-25-37 and 740-10-30-13. However, for associations for which graduated tax rates are a factor, the existence of the percentage-of-taxable-income bad-debt deduction may result in a lower average graduated tax rate being applied in measuring deferred taxes if it results in taxable income falling into a lower tax rate bracket.
740-942-45Other Presentation Matters
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740-942-50Disclosure
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Deferred Tax Liability
740-942-50-1
All of the following information shall be disclosed whenever a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to a savings and loan association's bad-debt reserve for financial reporting:
- a A description of the types of temporary differences for which a deferred tax liability has not been recognized and the types of events that would cause those temporary differences to become taxable
- b The cumulative amount of each type of temporary difference
- c The amount of the deferred tax liability for temporary differences (that is, the bad-debt reserve for tax purposes of a U.S. savings and loan association or other qualified thrift lender) that is not recognized in accordance with the provisions of paragraphs 740-10-25-3, 740-30-25-5, 740-30-25-18, and .
740-942-50-2
The disclosure requirements set forth in the preceding paragraph also apply to a parent entity of a savings and loan association accounting for that investment either through consolidation or by the equity method.