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ASC 740: Income Tax

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ASC 740 deals with accounting for income taxes and requires that businesses analyze and disclose income tax risks. It establishes financial accounting standards & reports for the effect of income taxes on its financial results. Also, it provides a way to recognize a company’s income tax expense for reporting under US GAAP by computing the differences between the tax bases of assets and liabilities and the carrying amounts of assets and liabilities acknowledged in financials. It provides standards for measuring, identifying, and reporting uncertain tax positions.

Who does it apply to?
The accounting for income taxes principles and its requirements applies to foreign, domestic, public, and private entities to prepare financial statements as per U.S. GAAP. Additionally, it is also applicable to NPO’s having activities that are subject to income taxes.

Accounting for income taxes are complex for public companies
Public companies must suit the principles of the SOX Act 2002, which requires specific internal controls for taxes. Controls around accounting for income taxes are sources of material weakness in many public companies directed to the restatement of their financial statements.

Generally, internal controls for taxes under SOX must meet the following 3 objectives:

  • Independence
    An independent tax specialist uses it and controls it under SOX Act 2002.
  • Completeness
    All of the company’s key issues must be capture in Yearly and quarterly provisions.
  • Accuracy
    The CFO of the company and controller should adequately review and understand the tax calculation, and this calculation should be accurate.

Public companies concerned about ASC 740
Many recent comments by SEC have centred on income taxes on the disclosures in public registrant’s filings. These comments have included questions regarding vague income tax disclosures, undistributed earnings of foreign subsidiaries, and whether a deferred tax asset can be realized.

How can public companies manage their compliance requirements of ASC 740?
A CFO who has the resources of an internal tax department can produce tax accrual work papers that your independent outside auditors can audit. However, if you may want to consider engaging a tax service provider who has the capabilities for the following tasks:

  • To prepare & calculate the global income tax provision;
  • Analyzing uncertain tax positions; and
  • Preparing the related footnote disclosures in the financial statements of the company as per ASC 740.

ASC 740 needs that the tax effects of changes in tax laws or rates be retrieved separately as an element of the income tax provision related to continuing operations in the period of enactment.

Companies first need to calculate their current income taxes payable or receivable, then figure out their deferred tax assets and liabilities. The computations of deferred tax assets and liabilities should be based on enacted tax law, not future expectations. A valuation allowance reduces the deferred tax asset to a “more likely than not” amount to be realized. This can directly affect the income statement through the amount of deferred tax expense or benefit recorded. The effect of any recording or releasing a valuation allowance occurs discretely in the period that the determination is made.

At AJSH, we assist our clients with various income tax compliances, including income tax assessments, TDS returns, ITR filings, tax advisory and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about ASC 740 Income tax, kindly contact us.          


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