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: [phone].

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.

Businesses that elect this option may find that tax-deductible goodwill exceeds book goodwill. The issue is how that tax benefit should be accounted for under Statement no. 109.

If book goodwill exceeds tax-deductible goodwill, paragraph 262 of Statement no. 109 prohibits recognition of deferred tax liabilities on nondeductible goodwill.

Initially, there were two viewpoints on how Statement no. 109 applied to this issue. Some felt paragraph 27 of the statement applied. As discussed above, paragraph 27 governs the accounting treatment of enacted changes in tax laws or rates and requires tax benefits resulting from such changes to be recognized as a reduction of income tax expense for the period that includes the enactment date (August 10, 1993, in this case). The tax benefit would be recognized currently (assuming a December 31, 1993, yearend) and accounted for as a reduction of income tax expense.

Others believed paragraph 262 contained the answer. Paragraph 262, which describes the accounting for tax-deductible goodwill in taxable business combinations at the date of the combination, says the tax benefit for the excess of tax-deductible goodwill over book goodwill is recognized when realized on the tax return. Further, that tax benefit first reduces reported goodwill to zero, then reduces other noncurrent intangible assets from that acquisition to zero and finally reduces income tax expense. Under this approach, the tax benefit is smaller because the benefit is spread over the tax amortization period and either reduces book goodwill or income tax expense (depending on how paragraph 262 is applied).

The EITF reached a consensus that a tax benefit related to tax-deductible goodwill in excess of goodwill for financial reporting purposes should be included in income from continuing operations in the period of enactment if the entity expects to elect to amortize goodwill retroactively for tax purposes. The tax benefit consists of both current and deferred components. A current tax benefit is reported for the effect of retroactive amortization deducted from the combination date to the enactment date. A deferred tax benefit is reported for the tax-deductible goodwill (less retroactive amortization to the enactment date) in excess of the reported amount of goodwill as of the enactment date.

This consensus reflects the paragraph 27 viewpoint. The EITF agreed that the accounting described in paragraph 262 was applicable only to combinations occurring after OBRA's enactment date.

EXECUTIVE SUMMARY

* EITF Issue no. 93-13

Accounting problems: (1) Should the tax effect of a retroactive change in enacted tax rates be determined at the enactment date using temporary differences and currently taxable income existing as of the enactment date? (2) Should 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 be measured based on the older tax rate? (3) Should the tax effects of (1) and (2) above be included in income from continuing operations in the period of enactment?

Consensuses: (1) Yes. (2) Yes. (3) Yes.

* EITF Issue no. 93-12

Accounting problem: Should a tax benefit related to tax-deductible goodwill in excess of book goodwill be included in income from continuing operations in the period of enactment if the entity expects to elect to amortize goodwill retroactively for tax purposes?

Consensus: Yes.

By LINDA A. VOLKERT, CPA, senior technical manager of the AICPA technical information division.