2008 Accounting Day
FAS 109 Update
Presented by: Shelly McGuire
May 12, 2008
Agenda
• FAS 109 Overview
• Key Considerations
– Tax Rate Determination
– Goodwill
– Valuation Allowances
• Financial Statement Presentation
• Hot Topics
– FAS 141R
– FIN 48 for Private Companies
• Questions
FAS 109 Overview
FAS 109 Overview
Guidance comes in many different forms…
• FAS 109 issued February 1992
• FAS 115
• FAS 123R
• FAS 141, 141R
• Numerous EITFs
• FASB Q&A
• ASB guidance
• Other forms of guidance
FAS 109 Overview
Excerpt from FAS 109:
This Statement establishes standards of financial
accounting and reporting for income taxes that are
currently payable and for the tax consequences of:
• Revenue, expenses, gains or losses that are
included in taxable income of an earlier or later year
than the year in which they are recognized in
financial income
• Other events that create differences between the tax
bases of assets and liabilities and their amounts for
financial reporting
• Operating loss or tax credit carrybacks for refunds of
taxes paid in prior year and carryforwards to reduce
taxes payable in future years.
FAS 109 Overview
Applies to :
• Federal, foreign, state and local taxes
based on income
– this includes franchise taxes based on
income
• All entities included in the reporting entity’s
financial statements
– this generally includes foreign entities
• Exception for partnerships and S
corporations
– beware of FIN48
FAS 109 Overview
FAS 109 is a balance sheet, liability-based
approach:
• Deferred tax liability represents an increase in
future taxes payable and a decrease in
current taxes payable
• Deferred tax asset represents a decrease in
future taxes payable and an increase in
current taxes payable
FAS 109 Overview
Temporary versus Permanent Differences
• Temporary differences defined as book-tax
basis differences that will result in taxable or
deductible amounts in future years.
• Permanent differences not defined in FAS
109, but definition of temporary differences
states: some events recognized in financial
statements do not have consequences.
Certain revenues are exempt from taxation
and certain expenses are not deductible.
Events that do not have tax consequences do
not give rise to temporary differences.
FAS 109 Overview
The formula…
Ending Deferred Taxes
less
Beginning Deferred Taxes
equals
Deferred Tax Expense/Benefit
plus
Current Taxes Payable
equals
Book Tax Expense/Benefit
FAS 109 Overview
Example 1
• X Co formed in 2008
• Purchased asset for $100; depreciable over 4
years for financial reporting, 3 years for
income taxes
• Received payment of $150 in 2008 for service
to be performed in 2011
• X Co accrued legal fees of $50 in 2009, paid
in 2011
• Book income of $100 in 2008 - 2011
FAS 109 Overview
2008
B/T
2009
B/T
2010
B/T
2011
B/T
Total
B/T
Deferred Revenue
0/150
0/0
0/0
150/0
150/150
Professional Fees
0/0
<50>/0
0/0
0/<50>
<50>/<50>
Depreciation
Total
<25>/<33> <25>/<33> <25>/<34> <25>/0 <100>/<100>
<25>/117 <75>/<33> <25>/<34> 125/<50>
Net
92
<DR>/CR
<108>
<59>
75
0/0
0
FAS 109 Overview
2008
2009
2010
2011
Deferred Revenue
150
150
150
0
Professional Fees
0
50
50
0
Depreciation
<8>
<16>
<25>
0
Total
142
184
175
0
Statutory Rate
40%
40%
40%
40%
DTA/<DTL>
56.8
73.6
70
0
FAS 109 Overview
2008
2009
2010
2011
Book Income
100
100
100
100
Deferred Revenue
150
0
0
<150>
Professional Fees
0
50
0
<50>
Depreciation
<8>
<8>
<9>
25
Total
242
142
91
<75>
Statutory Rate
40%
Current Tax Expense/
<Benefit>
96.8
40%
56.8
40%
36.4
40%
<30>
FAS 109 Overview
Ending DTA/<DTL>
less
Beginning DTA/<DTL>
equals
Deferred Tax Expense/
<Benefit>
plus
Current Tax Expense/
<Benefit>
equals
Book Tax Expense/
<Benefit>
2008
2009
2010
2011
0
56.8
73.6
70
56.8
73.6
70
0
<56.8>
<16.8>
3.6
70
96.8
56.8
36.4
<30>
40
40
40
40
FAS 109 Overview
2008
Ending DTA/<DTL>
less
Beginning DTA/<DTL>
equals
Deferred Tax Expense/
<Benefit>
plus
Current Tax Expense/
<Benefit>
equals
Book Tax Expense/
<Benefit>
2010
2011
73.6
70
70
0
Permanent
Differences
<56.8>
<16.8>
3.6
70
0
2009
Hint:
56.8
Book Income
56.8
73.6
plus
multiplied by
Effective
Tax Rate36.4
96.8
56.8
<30>
equals
Book Tax Expense
40
40
40
40
Key Considerations
Tax Rate Determination
DTAs/DTLs measured using enacted rates expected to
apply to taxable income in the periods in which they
will be realized.
– Graduated rates?
– Loss companies?
– Multi-state filers?
– Impact of tax planning?
Goodwill
Goodwill can be ‘created’ as a result of
business combination
–Tax deductibility depends on type of
transaction and prior ownership of goodwill
–Goodwill is not amortized for financial
purposes
Goodwill
• Nondeductible goodwill – no deferred tax
assets/liabilities recognized; impairments
treated as permanent differences
• Deductible goodwill – deferred tax
assets/liabilities will be recognized
–Reported amount of goodwill and tax
deductible goodwill each need to be
segregate into two components:
• First component is the lesser of book
goodwill and tax deductible goodwill
• Second component is remaining balance
–Deferred taxes recognized on difference
between first components
Valuation Allowances
• Companies must evaluate the likelihood that
they will realize deferred tax assets
• If it is ‘more likely than not’ that the Company
will not realize their deferred tax assets, they
are required to record a valuation allowance
against the deferred tax assets.
– Recording the valuation allowance will
affect the book tax expense
Valuation Allowances
• When evaluating the need for a valuation
allowance, all available evidence (both positive
& negative) must be considered.
• Four future sources of taxable income that can
be considered:
–Future reversal of existing taxable differences
–Future taxable income (exclusive of reversing
temporary differences and carryforwards)
–Taxable income in prior carryback years (if
allowable)
–Tax planning strategies
Financial Statement Presentation
Financial Statement Presentation
Balance Sheet
• Current and non-current deferred tax
balances should be reported separately
• Valuation allowance should be allocated
proportionately to current and non-current
deferred tax assets
• Deferred tax assets and liabilities may be
offset and presented as a single amount
where they relate to the same taxing
jurisdiction and taxpayer within the company
Financial Statement Presentation
Footnote disclosures
• Total of deferred tax assets, deferred tax liabilities and
valuation allowance
• Net change in valuation allowance
• Non-public entities disclose types of significant
temporary differences and carryforwards
• Public entities disclose tax effects of each type
• Significant components of income tax expense by
taxing jurisdiction
• Allocation of income tax expense to continuing
operations and other discrete events
• Public entities disclose rate reconciliation
Sample
The (provision) benefit for income taxes is comprised of:
Current federal
Current state
Deferred federal
Deferred state
Provision for income tax
expense (benefit)
2008
100
8
150
7
2009
150
24
200
16
2010
200
32
<30>
<2>
265
390
200
The provision for income taxes differs from the amount
computed by applying the statutory federal income tax rate to
income before provision for income taxes.
Sample
The Company has the following deferred tax assets and liabilities:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets/
<deferred tax liabilities>
2008
$150
<50>
2009
$200
<75>
2010
$175
<100>
$100
$125
$100
The Company’s deferred tax assets consist of deferred revenue and
accounts receivable basis differences. The Company’s deferred tax
liabilities consist of basis differences in fixed assets.
Hot Topics
FAS 141R
• Effective for periods beginning after
December 15, 2008
• Changes accounting applicable to valuation
allowances established as part of the
business combination
• Under FAS 141 – adjustment to goodwill
• Under FAS141R – results in income tax
expense/benefit
FIN 48
• Generally effective for private companies for
years beginning after December 15, 2007
• Clarifies accounting for income taxes by
prescribing minimum thresholds that must be
met before a tax position can be recognized
for financial reporting purposes.
• Tune in to the next session for further details!
Questions?
2008 Accounting Day
FAS 109 Update