ASC

ASC 740-944

Financial Services—Insurance

740 Income Taxes

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In brief

AdvancedIncome taxesIndustry-specificRecognitionDisclosure

This Subtopic applies Topic 740's income tax model to insurance entities. Deferred tax liabilities and assets are recognized for temporary differences generally, but a life insurance entity does not provide deferred taxes on taxable temporary differences related to policyholders' surplus arising in fiscal years beginning on or before December 15, 1992 — unless a known or expected reduction in that surplus makes tax payment likely, in which case the attributable tax is accrued currently. Disclosure of unrecognized deferred tax liabilities under the Topic 740 exceptions is required.

Key points (6)
  • Except as otherwise provided, a deferred tax liability or asset shall be recognized for the deferred tax consequences of temporary differences in accordance with Topic 740 (740-944-25-2).
  • A life insurance entity shall not provide deferred taxes on taxable temporary differences related to policyholders' surplus that arose in fiscal years beginning on or before December 15, 1992 (740-944-25-3).
  • If circumstances indicate the insurer is likely to pay income taxes currently or later because of a known or expected reduction in policyholders' surplus, the income taxes attributable to that reduction shall be accrued as tax expense of the current period (740-944-25-3).
  • A dividend recognized under 944-50-25-3 is treated as a planned contractual benefit in computing GAAP liabilities, but its amount may need to be identified to compute deferred taxes where the dividend provision plus dividends paid or declared may exceed the federally deductible amount (740-944-25-1).
  • When a deferred tax liability is not recognized under the exceptions in Section 740-10-25, the entity must 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 for differences other than policyholders' surplus (740-944-50-1).
  • The Subtopic follows the scope and scope exceptions of Section 944-10-15 (740-944-15-1).

For students. The exam trap is the grandfathered policyholders' surplus exception: no deferred tax is recorded on pre-December 16, 1992 policyholders' surplus differences, yet tax must be accrued currently once a reduction in that surplus is known or expected. Note also that this unrecognized amount is expressly excluded from the quantitative disclosure in 740-944-50-1(c).

policyholders' surplustemporary differencesdeferred tax liabilityexceptions to comprehensive recognitionlife insurance entitypolicyholder dividendsplanned contractual benefit

Machine-generated study aid for ASC 740-944. Check the source paragraphs below.

740-944-00Status

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740-944-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
944-740-25-3AmendedAccounting Standards Update No. 2015-0101/09/2015

740-944-05Overview and Background

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740-944-05-1
This Subtopic provides guidance to insurance entities on accounting for and financial reporting of income taxes.

740-944-15Scope and Scope Exceptions

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Overall Guidance

740-944-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 944-10-15.

740-944-25Recognition

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Policyholder Dividends

740-944-25-1
Although payment is not required, a dividend recognized under paragraph 944-50-25-3 is considered a planned contractual benefit in computing liabilities under generally accepted accounting principles (GAAP). However, it may be necessary to identify the amount of this dividend to calculate deferred income taxes in those cases in which there is a question as to whether the dividend provision in the liabilities, together with the dividends paid or declared, may exceed the amount of dividends otherwise deductible for federal income tax purposes.

Policyholders' Surplus

740-944-25-2
Except as noted in the following paragraph, a deferred tax liability or asset shall be recognized for the deferred tax consequences of temporary differences in accordance with Topic 740.
740-944-25-3
As described in Topic 740, a life insurance entity shall not provide deferred taxes on taxable temporary differences related to policyholders' surplus that arose in fiscal years beginning on or before December 15, 1992. However, if circumstances indicate that the insurance entity is likely to pay income taxes, either currently or in later years, because of a known or expected reduction in policyholders' surplus, income taxes attributable to that reduction shall be accrued as a tax expense of the current period.

740-944-50Disclosure

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740-944-50-1
The following information shall be disclosed if a deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes for any of the areas addressed by Section 740-10-25:
  1. 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
  2. b
    The cumulative amount of each type of temporary difference
  3. c
    The amount of the deferred tax liability for temporary differences other than the policyholders' surplus of a life insurance entity that is not recognized in accordance with the provisions of paragraph 740-10-25-3.

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