ASC

ASC 740-946

Financial Services—Investment Companies

740 Income Taxes

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In brief

IntermediateIncome taxesIndustry-specificDisclosureSubsequent measurement

This subtopic gives investment companies the income tax accounting and reporting rules unique to their industry. Its core rules are narrow: any provision for deferred income taxes on unrealized appreciation must be charged against the unrealized gains account (946-740-35-1) and disclosed as such in the statement of operations (946-740-50-1). Implementation guidance addresses regulated investment companies' post-October capital and foreign currency loss deferrals and how they factor into deferred tax disclosures.

Key points (5)
  • This Subtopic provides guidance for investment companies on accounting for and financial reporting of income taxes (740-946-05-1), and follows the scope of Section 946-10-15 (740-946-15-1).
  • A provision for deferred income taxes on unrealized appreciation shall be charged against the unrealized gains account rather than against operating results (946-740-35-1).
  • That deferred tax provision charged to the unrealized gains account must be disclosed as such in the statement of operations (946-740-50-1).
  • Regulated investment companies distribute realized net capital and foreign currency gains through October 31 to avoid federal excise tax; federal tax regulations let post-October (November 1 to taxable year end) net capital or currency losses be deferred to the next succeeding taxable year's Form 1120-RIC (740-946-55-1).
  • In applying paragraph 740-10-50-6 (disclosure of the tax effect of each significant type of temporary difference and carryforward before valuation allowances), a public entity should consider the amounts and expiration dates of capital loss carryforwards and the amounts of any post-October capital and currency loss deferrals (740-946-55-2).

For students. The exam-worthy point is the presentation exception: deferred taxes on unrealized appreciation are charged to the unrealized gains account, not to tax expense in operations, but must still be labeled as such in the statement of operations. Students often assume RICs never record income taxes at all — they can, and post-October loss deferrals and capital loss carryforwards still drive deferred tax disclosures under 740-10-50-6.

investment companyregulated investment companydeferred income taxesunrealized appreciationunrealized gains accountpost-october loss deferralcapital loss carryforwardstatement of operations disclosure

Machine-generated study aid for ASC 740-946. Check the source paragraphs below.

740-946-05Overview and Background

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740-946-05-1
This Subtopic provides guidance for investment companies on accounting for and financial reporting of income taxes.

740-946-15Scope and Scope Exceptions

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740-946-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 946-10-15.

740-946-35Subsequent Measurement

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740-946-35-1
If a provision for deferred income taxes on unrealized appreciation exists, it shall be charged against the unrealized gains account.

740-946-50Disclosure

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740-946-50-1
A provision for deferred income taxes on unrealized appreciation charged against the unrealized gains account pursuant to paragraph 946-740-35-1 shall be disclosed as such in the statement of operations.

740-946-55Implementation Guidance and Illustrations

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Implementation Guidance

740-946-55-1
Regulated investment companies may have realized net capital and foreign currency gains during the period from the beginning of their current taxable year through October 31, which they are required to distribute to avoid federal excise tax. If those regulated investment companies then incur net capital or currency losses from November 1 to the close of their taxable year, their Form 1120-RIC tax returns would indicate that they had made distributions during the taxable year in excess of taxable gains (that is, returns of capital), even though the distributions were properly paid from gains at the time of the excise-tax distribution. To avoid this result, federal income tax regulations permit such post-October losses to be deferred and recognized on the Form 1120-RIC tax return of the next succeeding taxable year.
740-946-55-2
Paragraph 740-10-50-6 requires that a public entity disclose the approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets (before allocation of valuation allowances). The amounts and expiration dates of capital loss carryforwards and the amounts of any post-October capital and currency loss deferrals should be considered when an entity applies that paragraph.

740-946-S50DisclosureSEC

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Federal Income Taxes

740-946-S50-1
See paragraph 946-10-S99-3, Regulation S-X Rule 6-03(h), for required disclosures pertaining to federal income taxes.

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