FASB Releases ASU 2019-12 as Part of Simplification Initiative

On Dec. 18, 2019, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2019-12, which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The FASB has stated that the ASU is being issued as part of its Simplification Initiative, which is meant to reduce complexity in accounting standards by improving certain areas of generally accepted accounting principles (GAAP) without compromising information provided to users of financial statements.

ASU 2019-12 removes the following four exceptions to the general framework in various areas:


The exception to the incremental approach for intraperiod tax allocation in the event of a loss from continuing operations and income or a gain from other items.

Current Guidance Overview: ASC 740 provides a general framework for allocating tax expense between financial statement components (such as continuing operations, discontinued operations, and other comprehensive income). The framework begins by allocating tax expense or benefit to continuing operations and then allocates the residual of total tax expense or benefit to other components. In general, the tax effect of income from continuing operations should be determined without considering the tax effect of other financial statement components. Current guidance provides an exception to the general framework in situations where there is a loss from continuing operations and a gain within another financial statement component. This exception often resulted in allocating a tax benefit to continuing operations and tax expense to another component, even when total tax expense may have been zero.

ASU 2019-12 Update Overview: ASU 2019-12 removes this exception to the general framework. In many instances, removing the exception will now result in allocating zero tax expense or benefit to continuing operations where prior guidance would have allocated a tax benefit to continuing operations.


The exception to the requirement to recognize a deferred tax liability for equity method investments in the event a foreign subsidiary becomes an equity method investment.

Current Guidance Overview: Generally, where the book basis exceeds the tax basis in a foreign equity method investee, a deferred tax liability is required to be recognized. However, current guidance under ASC 740 provides an exception where due to ownership changes or other causes, a former foreign subsidiary becomes an equity method investee. The exception guidance required a bifurcation of the pre and post change periods such that if a permanent reinvestment assertion were in place before the change, the post transition deferred tax liability would only reflect post transition activity.

ASU 2019-12 Update: ASU 2019-12 removes this exception such that a deferred tax liability should be recognized on the full outside basis difference for a foreign equity method investment.


The exception to the ability to not recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary.

Current Guidance Overview: When the book basis exceeds the tax basis in a foreign subsidiary (or foreign investment), a deferred tax liability should generally be recognized unless a permanent reinvestment assertion is made. Under current guidance, when a foreign equity method investee becomes a foreign subsidiary, any deferred tax liability that exists as of the transition date must continue to be recognized, regardless of the permanent reinvestment assertion of the foreign subsidiary. This guidance was an exception to the general framework of permanent reinvestment provided by ASC 740-30-25-17 (formerly known as APB 23).

ASU 2019-12 Update: ASU 2019-12 removes this exception such that the APB 23 framework can be applied to all foreign subsidiaries, regardless of whether at one time they were a foreign equity method investee.


The exception to using general methodology for the interim period tax accounting for year-to-date losses that exceed anticipated losses.

Current Guidance Overview: Under the interim period guidance of ASC 740-270 (formerly known as FIN 18), an entity calculates an estimated annual effective rate and applies that rate to year-to-date income or loss. However, current guidance includes an exception for situations where the year-to-date loss in an interim period exceeds the expected loss for the full tax year. This exception added considerable complexity to interim reporting in loss periods and was prone to errors in calculation.

ASU 2019-12 Update: ASU 2019-12 removes this benefit limitation exception.

ASU 2019-12 also seeks to simplify and/or clarify accounting for income taxes by adding certain requirements that would simplify GAAP for financial statement preparers. These improvements apply to the following:


Franchise taxes that are partially based on income, which are required to be recognized as an income-based tax.

Current Guidance Overview: ASC 740 only applies to taxes based on a measure of income. In some jurisdictions, local taxes (including franchise taxes) may be based on the greater of a measure of income or a measure not based on income (such as equity or capital). In such situations, current guidance specifies that franchise taxes based on income should only be included in income tax expense to the extent that they exceed the franchise taxes not based on income.

ASU 2019-12 Update: ASU 2019-12 essentially flips the requirement such that the franchise taxes calculated based on income are included in income tax expense. To the extent that the franchise taxes not based on income exceed the franchise taxes based on income, the excess is recorded outside of income tax expense.


Transactions with a government resulting in a step up in the tax basis of goodwill, which should now be evaluated and considered part of the business combination of being recognized and considered as a transaction.

In some jurisdictions, additional tax basis in Goodwill can be obtained by making a cash payment to the taxing authority or by surrendering some other tax attribute (such as a net operating loss carryover). This amendment addresses such exchanges that occur after a business combination. Current guidance precludes the recording of a deferred tax asset for the additional tax basis in Goodwill unless it would have been Component 2 Tax Goodwill if measured at the time of the business combination. ASU 2019-12 distinguishes between Goodwill step-up transactions that are related to the original business combination and those that are unrelated to the original business combination. To the extent a Goodwill step-up transaction is unrelated to the original business combination, a deferred tax asset will be recorded for this additional tax basis in Goodwill.


Certain legal entities not subject to tax and their financial statements.

Current Guidance Overview: Current guidance requires that where a group of entities files a consolidated tax return, consolidated current and deferred tax expense be allocated among the members of the group when those members issue separate financial statements. This has created substantial diversity in practice with respect to disregarded entities (DRE). Some practitioners have favored allocating tax expense to DREs while some have not.

ASU 2019-12 Update: ASU 2019-12 provides that tax expense is not required to be allocated to non-taxable DREs. However, if a DRE issues separate financial statements and chooses to include income taxes in their separate financial statements, it may elect to do so. This accounting policy election is to be applied on an entity by entity basis.


Changes in tax laws during interim periods.

Current Guidance Overview: When there is a change in tax law (such as a change in the statutory tax rate), ASC 740 requires the impact on deferred taxes to be recognized in the reporting period that includes the enactment date. However, the interim period guidance under ASC 740-270 (FIN 18) required that the effect of a change in tax rate be recognized in the estimated annual effective tax rate at enactment date or the effective date, whichever occurred later. Thus, in situations where a rate change was enacted in one interim period but effective in another interim period, complexities arose with respect to deferred tax balances and taxes payable.

ASU 2019-12 Update: ASU 2019-12 modifies the FIN 18 approach so that changes in tax law should be reflected in the estimated annual rate in the period of enactment. This better aligns the interim reporting framework with the overall guidance with respect to changes in tax law.


Minor improvements to codification regarding employee stock ownership plans (ESOP) and investments in qualified affordable housing projects, which are accounted for using the equity method.

The existing guidance with respect to the tax benefit of tax-deductible dividends on employee stock ownership plan shares simply states that the benefit shall be recognized in the income statement. ASU 2019-12 clarifies that the tax benefit should be included in income or loss from continuing operations.

The guidance in ASC 323-740 includes an example dealing with the equity method of accounting for a limited liability investment in a qualified affordable housing project. The example provided in the guidance current guidance included a computational error. ASU 2019-12 corrects the computational error in that example.

For public companies, ASU 2019-12 is effective for fiscal years (and interim periods within those fiscal years) beginning after Dec. 15, 2020. For non-public companies, the standard is effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption is permitted but requires simultaneous adoption of all provisions of the new standard.

For more information regarding accounting for income taxes, or for questions regarding ASU 2019-12, please reach out to us at tax@dhg.com.


Phil Laminack
Senior Manager, DHG Tax

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