FASB 109 Implications of the 1993 Tax Act
FASB 109 IMPLICATIONS OF THE 1993 TAX ACT Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies Financial Accounting Standards Board emerging issues task force (EITF) consensuses as sources of established generally accepted accounting principles. This month's column includes our annual roundup of EITF issues covering the January 21 through November 18, 1993, meetings (see the "EXECUTIVE SUMMARY"). In addition, two consensuses on FASB Statement no. 109 implications of the Omnibus Budget Reconciliation Act of 1993 (OBRA) are summarized: (1) determining and disclosing the tax effect of a retroactive change in enacted tax rates and (2) recognizing and measuring the tax benefit of excess tax-deductible goodwill. The summaries are presented in the order of importance from broad to narrow applicability. EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700. ISSUE NO. 93-13 Issue no. 93-13, Effect of a Retroactive Change in Enacted Tax Rates That Is Included in Income from Continuing Operations, is an intraperiod tax allocation issue arising from OBRA, which changed the top corporate tax rate from 34% to 35% for tax years beginning after 1992. Paragraph 27 of FASB Statement no. 109, Accounting for Income Taxes, requires that the deferred tax effect of changes in tax laws or rates be included in income from continuing operations for the period that includes the enactment date. The issue is how to determine the tax effect of a retroactive change in enacted tax rates that is included in income from continuing operations for the period that includes the enactment date of the retroactive change. That is, should the effect be measured using temporary differences existing at the date of enactment (August 10, 1993) or those existing at the effective date of the tax rate change January 1, 1993, for entities with a December 31, 1993, yearend)? A second issue is the possible effect of the tax rate change on items not included in income from continuing operations (that is, discontinued operations, extraordinary items, cumulative effects of changes in accounting principles and items charged or credited directly to shareholders' equity in accordance with paragraph 36 of Statement no. 109). The EITF reached a consensus that the tax effect of a retroactive change in enacted tax rates on current and deferred tax assets and liabilities should be determined at the enactment date using temporary differences and currently taxable income existing as of that date. The cumulative tax effect is included in income from continuing operations. The EITF also reached a consensus that the reported tax effect of items not included in income from continuing operations that arose during the current fiscal year and prior to the enactment date should be measured based on the enacted rate at the time the transaction was recognized for financial reporting purposes. Those tax effects also are included in income from continuing operations in the period of enactment and are not allocated to the items below the line. ISSUE NO. 93-12 Issue no. 93-12, Recognition and Measurement of the Tax Benefit of Excess Tax-Deductible Goodwill Resulting from a Retroactive Change in Tax Law, arose from the repeal of the longstanding prohibition against deducting for tax purposes goodwill amortization on acquired businesses. OBRA allows the amortization of acquired goodwill to be deducted over 15 years. It also allows businesses to make a one-time election to amortize goodwill acquired after July 25, 1991, retroactively and amend prior-year tax returns to take the resulting deduction. …