current developments new gaap requirements and · pdf filecurrent developments –new gaap...

Current Developments – New GAAP

Requirements and Effect on Accounting

for Income Taxes

Greg Pfahl/John Monahan

December 8, 2016

New Revenue Recognition

StandardReplacing industry-specific guidance, the ASU focuses on a new

five-step analysis to be applied to all contracts with customers to

transfer goods or services. These steps include:

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the

contract

5. Recognize revenue when (or as) the entity satisfies a performance

obligation.

© 2016 Hein & Associates LLP.All rights reserved.


Standard• The model indicates that revenue should be recognized when

(or as) an entity transfers control of goods or services to a

customer at the amount to which the entity expects to be

entitled.

• Depending on whether certain criteria are met, revenue is

recognized either over time, in a manner that demonstrates the

entity's performance, or at a point when control of the goods or

services is transferred to the customer.



StandardPractically all companies will be affected to some extent

– Change in timing of recognizing revenue

– Significant increase in required disclosures

– Impact will vary depending on industry and current accounting practices

– Companies will need to consider changes that might be necessary to

information technology systems, processes, and internal controls to

capture new data and address changes in financial reporting



StandardEffective Dates

– Public – annual reporting periods beginning after December 15, 2017

– All other – annual reporting periods beginning after December 15, 2018

– Early adoption only permitted as of the original effective date for public

companies

– Transition methods – Full retrospective or modified retrospective



Standard

Tax Considerations


• Companies will need to asses if new book standard of revenue recognition is allowed for tax purposes.

• Will likely affect temporary difference related to deferred revenue

• For tax purposes, can be on a cash method of deferred revenue recognition or defer revenue recognition up to one year under Regs. Sec. 1.451-5 or Rev. Proc. 2004-34– One year deferral cannot exceed the financial

accounting deferral


Standard

Tax Considerations


• Companies will need to consider the impact that

an acceleration of book revenue may have on

their cash taxes

• The IRS considers a change in the underlying

book method to be a method change for which

consent is required– However, for taxpayers using Rev. Proc. 200434, consent may

be obtained automatically under Rev. Proc. 2015-14


Standard

Tax Considerations


• It is important to understand that if a company’s tax method

has been following financial accounting and the company

changes its book method, it cannot simply change its tax

method to follow the new book method.

• Rather, it needs to evaluate whether applying the tax rules

would result in the same answer as the new book method, and

if so, the company will have to file a Form 3115 to change it tax

method to implement it on its tax return

New Lease Standard

• The new standard does not fundamentally

change lease accounting from the lessor’s

perspective

• From a lessee’s perspective, the most significant

change from prior lease guidance is that lessees

are required to recognize the rights and

obligations resulting from most operating leases

as assets and liabilities on the balance sheet


New Lease Standard

• Prior to the new standard, a lessee did not recognize assets and liabilities arising from most operating leases– While recognizing assets the related expense in the

income statement, the lease obligations were off-balance sheet liabilities under previous GAAP

• As a result of recognizing the rights and obligations arising from most leases on the balance sheet, the new standard will dramatically impact the balance sheet of lessee


New Lease Standard

Effective Dates

– Public – fiscal years beginning after December 15, 2018, including

interim periods within those fiscal years

– All other – Fiscal years beginning after December 15, 2019, and interim

periods beginning after December 15, 2020annual reporting periods

– Early adoption permitted

– Transition method – Modified retrospective as of the beginning of the

earliest period presented


New Lease Standard

Tax Considerations

• The new standard does not change the

treatment of leases for income tax purposes

• A lessee that is not otherwise required to

capitalize the lease for income tax purposes will

not have any tax basis in the right-of-use asset

and related lease liability recorded for tax

purposes


New Lease Standard

Tax Considerations

• Differences are temporary in nature – Must recognize a deferred tax liability for excess

GAAP basis in the right-of-use asset

– Must recognize a deferred tax asset for the excess GAAP basis in the related lease liability

• Other tax considerations– State apportionment

• State definition of property

• Effect on rent expense

– Franchise/Net Worth taxes


Balance Sheet Classification of

Deferred TaxesASU 2015-17, Simplifying the Balance Sheet Classification of Deferred Taxes

• New guidance requires all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet

– Any related valuation allowances are also to be classified as noncurrent

– Netting of deferred tax assets and liabilities from different jurisdictions is still prohibited

• Effective Dates

– Effective after December 15, 2016 for public companies and after December 15, 2017 (interim periods in the following year) for private companies

– Earlier application is permitted for all entities as of the beginning of any interim or annual reporting period


Balance Sheet Classification of

Deferred Taxes

ASU 2015-17, Simplifying the Balance Sheet

Classification of Deferred Taxes

• Adoption guidance

– New guidance may be applied prospectively or retrospectively

– Required disclosures for first interim and first annual period of

change:

• The nature and reason for the change in accounting principle

• Prospective change: a statement that prior periods were not

retrospectively adjusted

• Retrospective change: quantitative information about the effects of the

accounting change on prior periods


Intra-entity transactions under ASC

740-10-25-3(e)The FASB decided the following regarding the exception to recognizing tax effects in intra-entity asset transfers:

• To eliminate the exception for all intra-entity transfers except for transfers of inventory

• The FASB decided not to provide specific guidance on the treatment of the tax effects of intra-entity transfers in the determination of interim tax provision (e.g., inclusion in the annual effective tax rate versus discrete reporting)

• The Board decided to issue a final standard with an effective date for annual periods beginning after December 15, 2017 for public companies and December 15, 2018 (one year later for interim) for private companies

• Early adoption will be permitted although the specifics of when early adoption may be available were unclear from the Board’s discussion


Overview of Purchase Accounting –

Treatment of Goodwill and Other

Intangibles

John Monahan

December 8, 2016

ASC 740 – Basic Principles

• A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year (current provision).

• A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards (deferred provision).

• The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted law.

• The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized (valuation allowance).


ASC 805

Business Combinations - Basics• Requires that all business combinations be recorded using the

“acquisition” method of accounting

• The acquisition method requires:– Identification of the acquirer

– Determination of the acquisition date

– Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, and

– Recognizing and measuring goodwill or a gain from a bargain purchase

• Determine the acquirer. Business combination is defined as– A transaction or “other event” in which an acquirer obtains control of one

or more businesses. (Control defined under ASC 810-10 requirements)


ASC 805

Business Combinations - Basics• Determine the acquisition date

– Date on which the acquirer obtains control of the acquiree, usually on the date of the legal transfer of consideration (i.e., closing date)

– On the acquisition date, acquirer shall recognize and measure all consideration transferred (including equity consideration), assets acquired and liabilities assumed

• Recognize identifiable assets acquired and liabilities assumed– To qualify for recognition, identifiable assets and liabilities assumed

must meet the definitions under FASB Concepts Statement 6 (para 12)

– The recognition standard may cause the acquirer to recognize assets (i.e., brand names, etc.) that were not recorded by the acquirer

– Assets recognized using the measurement principle by looking to fair value as of the acquisition date. (ASC 805-20-30-1)


ASC 805

Business Combinations - Basics• Goodwill defined in ASC 805-10-20 as the excess of cost of:

– Consideration transferred as measured based on fair value, plus the fair value of non-controlling interests and the fair value of previously acquired equity interests, over

– The net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed as measured under ASC 805 (fair value approach)

• ASC 805-30-25-2 requires that the acquirer recognize gain in earnings on the acquisition date to the extent of the measured bargain purchase– Total consideration is less than the fair market value of assets acquired

and liabilities assumed

– The term “Negative Goodwill” from old FAS 141 no longer applies


ASC 805

Business Combination - Intangibles• Provides for the recognition of intangible assets,

apart from goodwill, where the intangible asset meets one of two criteria:– Recorded separately if it is either separable or transferable

(e.g., sold, rented, licensed, transferred or exchanged), or

– Recorded separately if it arises from contractual or other legal right (regardless of whether rights are separable or transferable)

• Identified Intangible – defined as an asset that lacks physical substance and specifically excludes goodwill


ASC 805

Business Combination - Intangibles• Illustrative list of identifiable intangibles acquired:

– Marketing-related intangibles (trademarks, tradenames, trade dress, internet domain names, non-compete agreements)

– Customer-related intangibles (customer lists, customer contracts, noncontractual customer relationships, order backlog)

– Artistic-related intangibles (plays, movies, books, music, newspapers, photos, video)

– Contract-based intangibles (royalty agreements, supply contracts, employment agreements, broadcast rights)

– Technology-based intangibles (software, patents, databases, trade secrets, formulas)


ASC 805Business Combinations – Other Issues

• Noncontrolling Interest in Acquiree – acquirer shall measure a noncontrolling interest of an acquiree based on fair value at the acquisition date

• Contingent Consideration – acquirer shall include the fair value of contingent consideration as a component of the total consideration transferred at the acquisition

– Contingent consideration as ultimately settled may increase or decrease acquired goodwill or intangibles and thus impact deferreds

• Step Acquisition – acquirer shall recognize 100% of the assets and liabilities when “control” is acquired, with a gain or loss recorded to P&L for previously acquired interests

– Often results in a book gain of previously acquired interests if there were prior impairments


ASC 805 and ASC 740Tax Accounting and Business Combinations

• In a business combination, the consideration transferred (i.e., cash, other assets, liabilities assumed, contingent consideration, equity interests) is considered the appropriate fair value of the enterprise.

• The acquiring entity shall assign the fair value to the assets acquired and liabilities assumed based on their estimated fair values, with any excess assigned to goodwill.

• Deferred taxes should be recognized on the acquisition date for the future tax consequences of the differences between the assigned values and tax bases of the assets acquired and liabilities assumed (ASC 805-740-25-3).

– The deferred tax adjustment ordinarily will increase or decrease acquired goodwill or intangible assets.

– Compute opening balance sheet deferred taxes based on the applicable tax rate for the jurisdiction that has the basis difference (U.S. federal/ U.S. State/ Foreign).


ASC 805 and ASC 740Tax Accounting and Business Combinations

• Acquiring entity shall account for the potential tax effects of temporary differences, carryforwards, and any income tax uncertainties of an acquiree that exist at the acquisition date or arise as a result of the acquisition.

– Acquiring entity shall not record deferred taxes for book goodwill in excess of tax deductible goodwill

– Deferred tax assets are recorded at the acquisition date for tax deductible goodwill that exceeds book goodwill

– Record deferred tax assets for acquired attributes (i.e., NOLs, general business credits, foreign tax credits, capital losses, etc.)

• ASC 805 maintains the basic concepts for recording deferred tax assets and liabilities related to all book/tax basis differences


ASC 805- Accounting for Income

Taxes in a Business Combination• ASC805/740 requires the recognition of a deferred tax

liability in the opening balance sheet for identified intangibles recorded for books that have no tax basis

• Occurs primarily in transactions involving tax-free reorganizations or the acquisition of the stock of a target corporation (no asset step-up for tax)

• ASC 805/740 requires the recognition of a deferred tax asset in the opening balance sheet for tax deductible goodwill or intangibles that have a smaller book basis


ASC 805- Accounting for Income

Taxes in a Business Combination

• Ex: Deferred Tax Liability recorded in purchase

accounting• The stock of Target, a consumer brand manufacturer, is acquired by Corporation X on

03/31/2013 for $1,500. Market-related and customer-related intangibles are identified

and recorded for book purposes in the amount of $600. Assume no section 338

election, a 40% effective tax rate, and $0 tax basis in the intangibles held by Target.


ASC 805-740-25-3 Book Tax Difference DTL

Identified Intangibles 600$ -$ 600$

Tax Rate 40% 240$

Journal Entry:

Dr. Goodwill 240$

Cr. Deferred Tax Liability 240$

ASC 805- Accounting for Income Taxes

in a Business Combination

• Ex: Deferred Tax Asset recorded in purchase

accounting• The stock of Target, a consumer brand manufacturer is acquired by Corporation Y on

03/31/2013 for $950. Market-related and customer-related intangibles are identified

and recorded for book purposes in the amount of $300. Assume no section 338

election, a 40% effective tax rate and historic tax basis of intangibles held by Target

from prior acquisition of $500.


ASC 805-740-25-3 Book Tax Difference DTA

Identified Intangibles 300$ 500$ 200$

Tax Rate 40% 80$

Journal Entry:

Dr. Deferred Tax Asset 80$

Cr. Goodwill 80$

ASC 350 – Goodwill and Intangible

Assets • Excess of purchase price over the value of identified tangible

and intangible assets is treated as goodwill

• Goodwill will not be amortized for book purposes (exception provided for private companies who can elect to amortize)

• Goodwill is tested for impairment at least annually for amounts recorded in the “reporting units.” Generally, look to segments as defined under ASC 280 to determine the “reporting unit”

• Goodwill impairment loss is recorded as a component of income from operations (i.e., pre-tax income) or to discontinued operations if the business unit is sold


ASC 350 – Goodwill and

Intangibles• Intangible assets identified under ASC 805 –

determine the useful life of the intangible asset:

– Intangibles with an indefinite useful life – no amortization

– Intangibles with a useful life – amortize over the useful life

– Amortize based on residual value of intangible with an useful life


Illustration of How Recognition of Tax Benefits

on Acquisition Date Affect Deferred Taxes

• Company A, newly formed HoCo, acquires 100% of Company B stock in a

taxable purchase on 01/01/2016 for $600,000 plus assumed liabilities.

Company B has an NOL carryforward of $10,000 with fair value and tax

basis information as follows:


FAIR VALUE TAX BASIS

TEMPORARY

DIFFERENCE

DEFERRED TAX

LIABILITY/(ASSET)

ACCOUNTS RECEIVABLE 70,000$ 75,000$ (5,000)$ (1,750)$

INVENTORY 90,000$ 80,000$ 10,000$ 3,500$

FIXED ASSETS 200,000$ 100,000$ 100,000$ 35,000$

INTANGIBLE ASSETS 100,000$ 50,000$ 50,000$ 17,500$

ACCOUNTS PAYABLE 35,000$ 35,000$ -$ -$

LONG-TERM DEBT 185,000$ 180,000$ (5,000)$ (1,750)$

TENTATIVE DEFERRED TAX LIABILITY 52,500$

NOL CARRYFORWARD (3,500)$

NET DEFERRED TAX LIABILITY 49,000$

Note: the NOL carryforward is a future deductible amount and decreases the deferred tax liability

otherwise recognized. Assumes a 35% tax rate.

Company A – Opening Balance

Sheet


Accounts Receivable 70,000

Inventory 90,000

Fixed Assets 200,000

Intangible Assets 100,000

Deferred Tax Asset 7,000

Goodwill 409,000

Total Assets 876,000$

Accounts Payable 35,000

Deferred Tax Liability 56,000

Long Term Debt 185,000

Equity 600,000

Total Liabilities and Equity 876,000$

Accounting for Tax Deductible

Goodwill• ASC 740 and ASC 805 provide an exception to

comprehensive recognition of deferred taxes for nondeductible goodwill

• Prior to enactment of IRC Section 197, in August 1993, acquired goodwill was never tax deductible– Accordingly goodwill amortization for financial reporting

was a “permanent difference”

• IRC Section 197 permits companies to deduct acquired goodwill over a 15-year period– Applies only to asset acquisitions and stock acquisitions in

which a Section 338 election is made


Tax Deductible Goodwill

• Accounting rules are complex (ASC 805-740-25-8)

– First, divide goodwill into two components:• Component 1 = Financial reporting goodwill equal to tax

goodwill– Generally will create a deferred tax liability in subsequent reporting

periods when tax benefits are realized for tax deductible goodwill

• Component 2 = Financial reporting goodwill in excess of tax goodwill or tax goodwill in excess of book goodwill

– Existing rules apply to excess book goodwill (i.e., no deferred tax recorded for book goodwill in excess of tax goodwill)

– Goodwill impairment charge for financial reporting treated as a “permanent difference”


Illustration of Excess Financial

Reporting Goodwill• Assumptions:

– Company A acquires Company B in an asset acquisition

– The carrying and fair values of Target’s assets and liabilities (for both financial

reporting and tax purposes) are as follows:


HISTORIC

BOOK VALUE

BOOK FAIR

VALUE TAX BASIS TAX FAIR VALUE

ACCOUNTS RECEIVABLE 70,000$ 70,000$ 75,000$ 70,000$

INVENTORY 80,000$ 90,000$ 80,000$ 90,000$

FIXED ASSETS 100,000$ 200,000$ 100,000$ 200,000$

ACCOUNTS PAYABLE (35,000)$ (35,000)$ (35,000)$ (35,000)$

ACCRUED LIABILITIES (180,000)$ (185,000)$ (180,000)$ (180,000)$

NET WORTH 35,000$ 140,000$ 40,000$ 145,000$

Assumed Tax Rate: 35%

The difference in fair values between financial reporting and tax relates to certain liabilities that are

recognized for financial reporting but not for income tax purposes (e.g., OPEB liabilities, restructuring

costs, etc.)

The purchase price and tax rates are as follows:

Purchase price: $500,000 plus assumed liabilities


Reporting Goodwill

• The calculation of goodwill is as follows:


BOOK TAX

PURCHASE PRICE 720,000$ 715,000$

FAIR VALUE OF NET ASSETS (360,000)$ (360,000)$

GOODWILL 360,000$ 355,000$

LESS: TAX DEDUCTIBLE AMOUNT 355,000$

EXCESS BOOK GOODWILL 5,000$

Component 2 goodwill (excess book goodwill over tax goodwill) of

$5,000 represents a "permanent difference"

Consider the impact of opening balance sheet DTA/DTL when

measuring component 1 and component 2 goodwill

Component 1 goodwill equal to $355,000


Reporting Goodwill

• The calculation of deferred taxes is as

follows:


CARRYING

VALUE TAX BASIS TEMPORARY

DEFERRED TAX

(ASSET)/

LIABILITY

ACCOUNTS RECEIVABLE 70,000$ 70,000$ -$ -$

INVENTORY 90,000$ 90,000$ -$ -$

FIXED ASSETS 200,000$ 200,000$ -$ -$

TOTAL LIABILITIES 220,000$ 215,000$ (5,000)$ (1,750)$

TOTAL DEFERRED ASSETS (1,750)$ ADJUSTED EXCESS FINANCIAL

REPORTING GOODWILL 3,250$

Component 2 goodwill (excess of book goodwill over tax goodwill) is thus reduced from $5,000 to

$3,250


• Tax deductible goodwill in excess of financial reporting goodwill– Under ASC 805, a deferred tax asset is created at the acquisition

date for tax goodwill that exceeds book goodwill (Component 2)

– The iterative process resulting from the deferred tax asset requires an adjustment to book goodwill in the opening balance sheet

– Formula to measure the DTA for excess tax goodwill;• Tax Rate / (1 – Tax Rate) x Preliminary Temp Diff = DTA

– Keep in mind that transaction costs are not considered a portion of the Component 2 tax deductible goodwill to measure the required deferred tax asset


ASC 350 – Accounting for Income Taxes

for Goodwill and Intangible Assets

• Unusual results of ASC 805/350 and ASC 740:

– Since goodwill is not amortized for book purposes, tax deductions for goodwill create deferred tax liabilities over time

– Tax deductions for long-lived intangible assets acquired (no book amortization) create deferred tax liabilities over time

– Deferred tax liabilities recorded due to acquired intangibles that have zero or low tax basis may substantially increase book goodwill. Impairment issues may be magnified for post-deal impairment testing.


ASC 350 – Accounting for Income Taxes

for Goodwill and Intangible Assets

• Unusual results of ASC 805/350 and ASC 740 (cont.):

– Deferred tax liabilities recorded for acquired long-lived intangibles in the opening balance sheet may not be viewed as a source of future taxable income for purposes of measuring valuation allowances (e.g.,“naked credits”)

– Tax benefits are not recognized to tax expense (P&L) in post-acquisition periods for the use of acquired NOLs or the tax benefits form tax deductible goodwill amortization


Goodwill Impairment

• When goodwill is subsequently impaired for book purposes the deferred tax impact will be as follows:– If no tax-deductible goodwill exists, no deferred tax implications

arise

– If tax-deductible goodwill exists, and book goodwill exceeds tax goodwill, the impairment must be allocated pro rata to the two components of book goodwill to determine the deferred tax effect

• The impairment is allocated pro rata to the two components based on the book carrying amounts

– If tax-deductible goodwill exceeds book goodwill, no allocation is necessary and the impairment will increase the DTA or reduce the DTL


Goodwill Impairment – An Example

• Assumptions:

– Goodwill for reporting unit X suffers and impairment loss of $400 four years after

the acquisition data

– Tax related goodwill is deductible over 15 years

– Applicable tax rate of 40%


COMPONENT

1 GOODWILL

COMPONENET

2 GOODWILL BOOK BASIS TAX BASIS

DEFERRED

TAXES

BALANCE AT ACQUISITION DATE 900$ 300$ 1,200$ 900$ -$

TAX AMORTIZATION -$ -$ -$ (240)$ (96)$

BALANCE BEFORE IMPAIRMENT TEST 900$ 300$ 1,200$ 660$ (96)$

IMPAIRMENT LOSS (300)$ (100)$ (400)$ -$ 120$

ENDING BALANCE 600$ 200$ 800$ 660$ 24$

$300 of the impairment loss represents a "temporary difference"

$100 of the impairment loss represents a "permanent difference"

Basic Asset vs. Stock Acquisition


Section 338 Elections

• IRC 338 provides that if elected, a stock deal is treated as an asset deal for federal income tax purposes

• For all other purposes (i.e., legal, GAAP, regulatory), the transaction is a stock deal

• IRC 338(h)(10) election is generally available only for the sale of a subsidiary out of a U.S. consolidated tax group or an S corporation

– Sellers are generally subject to only one level of tax (versus two in the typical asset sale), but incremental taxes may still be incurred

– Requires a joint election to be filed between Buyer and Seller, among other statutory requirements (e.g., corporate purchaser, QSP, etc.)

• IRC 338(g) election is a unilateral election that may be filed by a corporate purchaser, which is often utilized in connection with foreign acquisitions


Section 338(h)(10) Elections


GAAP & Tax Accounting Differences

Domestic Stock vs. Asset Deal


Identifying Acquired Tax Benefits

• Realization test for acquired tax benefits– An acquirer should consider the tax attributes and future taxable

income of the combined business when assessing whether acquired deferred tax assets are realizable.

– Deductible differences or carryforwards of the acquiree can be realized because the acquirer has sufficient taxable temporary differences that will generate future taxable income

• These new sources of future taxable income from the perspective of the combined business may make it possible to recognize deferred tax assets for the combined business at the date of acquisition.

• However, depending on the specific tax jurisdiction, there may be various limitations on the use of acquired tax benefits (Ex. Section 382 limitation).

• Any resulting DTA would be recorded through acquisition accounting



• Realization test for acquired tax benefits

– Combined tax attributes or income may also

provide evidence as to the realizability of the

acquirer’s own deferred tax assets at the date of

acquisition.

– However, changes in the assessment of

realizability of the acquiring company’s deferred

tax assets are not included in acquisition

accounting



• Changes to the acquired deferred tax assets after the business combination– The release of a valuation allowance that does not qualify as a

measurement period adjustment is reflected in income tax expense

– The release of a valuation allowance within the measurement period resulting from new information about facts and circumstances that existed at the acquisition date is reflected first as an adjustment to goodwill, then as a bargain purchase

– Changes resulting from discrete events or circumstances that arise within the measurement period and did not exist at the acquisition date generally would not be recorded in acquisition accounting



• Changes in the acquirer’s deferred tax balances related to acquisition accounting– The impact on the acquiring company’s deferred tax

assets and liabilities caused by an acquisition is recorded in the acquiring company’s financial statements outside of acquisition accounting.

– Such impact is not a part of the fair value of the assets acquired and liabilities assumed.

– For example, for a company using a composite state tax rate, the expected post-combination results of the company may cause a change in the tax rate expected to be applicable when the deferred tax assets and liabilities reverse.


Business Combinations – Tax

Uncertainties

• Recording tax uncertainties– In a taxable business combination, positions may be taken

in allocating the acquisition price and in filing subsequent tax returns, which are expected to be challenged by the taxing authority

– In nontaxable business combinations there may be uncertainties about the tax basis of individual assets or the pre-acquisition tax returns of the acquired business.

– Same recognition and measurement criteria with corresponding fair value of liability recorded to goodwill

• Treatment of indemnified items


Business Combinations – Tax

Uncertainties

• Subsequent resolution of tax uncertainties in a business combination– Adjustments to uncertain tax positions made subsequent

to the acquisition date are recognized in earnings, unless they qualify as measurement period adjustments.

– Measurement period adjustments are recorded first as an adjustment to goodwill, then as a bargain purchase.

– Need to evaluate whether an adjustment within the measurement period relates to circumstances that were included in the acquirer’s assessment at the date of the acquisition


ASC 805 Business Combinations –

Acquisition Costs

• Acquirer Acquisition Costs – acquirer shall not include acquisition costs (professional fees, IB fees, registrations costs, etc.) as part of the consideration transferred– Acquirer shall record transaction costs as an expense in

measuring pre-tax income from operations

– Potential for permanent differences for stock acquisitions

– Potential for uncertain tax positions for transaction costs treated as a current section 162(a) ordinary and necessary business expense

– Look to Treas. Reg. 1.263(a)-5 to determine what portion of transaction costs may be deductible for income tax purposes


General Background – Treas. Reg.

§1.263(a)-5• A taxpayer must capitalize amounts paid to facilitate the

following transactions:– Acquisition of assets that constitute a trade or business

– Acquisition where the two parties are related within the meaning of §267(b) or 707(b) immediately after the transaction

– Acquisition of an ownership interest of the taxpayer (other than an acquisition by the taxpayer)

– Restructuring, recapitalization, or reorganization of the capital structure

– Transfers as described in §§351 or 721

– Formation of organization of a disregarded entity

– Acquisition of capital

– Borrowing

– Writing an option


General Background (continued)

• Covered transactions include:

– A taxable acquisition by the taxpayer of assets that constitute a trade or business

– A taxable acquisition of an ownership interest in a business entity (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately after the acquisition, the acquirer and the target are related within the meaning of the Sections 267(b) or 707(b)

– A reorganization described in Section 368(a)(1)(A), or © or a reorganization described in Section 368(a)(1)(D) in which stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under Section 354 or 356 (whether the taxpayer is the acquirer or the target in the reorganization).



• Bright-line test for certain acquisitive transactions-

– Capitalize any inherently facilitative amount

– Capitalize any amount related to activities performed after the earlier of:

• The date on which a letter of intent or exclusivity agreement is executed by representatives of the acquirer and the target; or

• The date on which the material terms of the transaction are authorized or approved by the taxpayer’s board of directors.

– Comment: A letter of intent or exclusivity agreement could pre-date board approval by months while the due diligence is underway



• Documentation of success-based fees:– Regulations provide that the following documentation

requirements must be met:• Identify activities provided by the service provider

• The amount of fee (or percentage of time) allocable to each activity

• The amount of fee (or percentage of time) allocable to the performance of activities before and after the decision date

• Name, address and phone number of the service provider

– Historically, area of controversy with IRS-exam agents want detailed timesheets

– Documentation must be completed on or before due date of tax return (incl. extensions) for year during which transaction closes



• Documentation of success-based fees – safe harbor election

• Rev. Proc. 2011-29

– Creates a safe-harbor election for taxpayers seeking to allocate success-based fees between facilitative and non-facilitative amounts

– In lieu of requiring documentation specified under regulations, safe harbor allows use of a simplified, percentage-based allocation

– Elect to treat 70% of all success-based fees incurred as non-facilitative and remaining 30% is considered facilitative and must be capitalized

– Statement required in originally filed return


Recovery of Previously Capitalized

Costs• Professional fees incurred by target corporation provide a long-term

future benefit in the form of synergistic and resource benefits that are indefinite in nature and therefore must be capitalized

– Generally capitalized into a floating intangible

• In INDOPCO, the Supreme Court observed that capitalized costs could later be recovered by amortization or depreciation deductions over the life of the asset, or “where no specific asset or useful life can be ascertained, is deducted upon dissolution of the enterprise.”

• What event might allow for capitalized transaction costs to be recovered?

– Termination of relationship giving rise to the benefits (i.e., sale of the company, IPO, etc.) may be an identifiable event

– Losses must be evidenced by a “closed and completed transaction” that is fixed by “identifiable events” – Treas. Reg. Sec. 1.165-1(b)


Contact Information


John Monahan

Tax Partner

[email protected]

(303) 226-7013

https://www.facebook.com/heincpa


https://www.linkedin.com/company/hein-&-associates


https://twitter.com/heincpa


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Tax Accounting for Equity

Compensation

Brian Parmelee

December 8, 2016

Agenda

• Introduction

• Overview – ASC 718

• Specific Equity Arrangements –

Accounting Treatment

• Specific Equity Arrangements – Income

Tax Treatment


Introduction – ASC 718, Stock

Compensation

• Establishes deferred tax asset on cumulative book expense which is expected to result in future tax benefit

• Reverse deferred tax asset as award is settled for income tax purpose

• Complex and Audit risk

– Many granting jurisdictions

– Many types of awards, large amount of awards, and many grant dates

– Tax rules


Recognition of Compensation Cost

• Compensation cost recognized for

financial statement purposes under one of

two methods:

– Equity classified

– Liability classified


Equity Classified Method

• Fair value of equity award determined at grant date– Options/Stock appreciation rights – Black-Scholes or

binomial model

– Restricted stock/ Restricted stock unit– fair market value of stock

• Recognize compensation cost over requisite service period (generally vesting period)– Debit to compensation cost

– Credit to additional paid in capital

• Settlement– Forfeiture

– Expiration

– Exercise


Liability Classified Method

• Fair value of equity award determined at grant date

• Fair value remeasured at end of each reporting period until award settled

• True-up compensation cost for changes in fair value pro-rated for portion of requisite service period rendered

• After end of requisite service period, recognize change in compensation cost based on change in fair value

• Liability account credited instead of APIC

• Financial statement and tax compensation cost the same


Income Tax Deduction

• Tax deduction recorded when settlement

occurs

– Nonqualified stock options – exercise date

– Incentive stock options – date of disqualifying

disposition

– Stock appreciation rights – exercise

– Restricted stock – vesting date

– Restricted stock units – date stock is

transferred


Reconciling Timing Difference

• Use principles of ASC 740

• Grant date and requisite service period– Recognize deferred tax asset (DTA) as book

compensation cost recorded for awards expected to provide future tax deduction

• No DTA for incentive stock options

• No DTA for employee stock purchase plans

– Deferred tax benefit recorded in income statement based on book compensation cost for the reporting period

– Deferred tax liability (DTL) recorded when tax deduction occurs prior to recognizing book compensation cost (Section 83(b) election made)


Reconciling Timing Difference

• Tax Settlement– Deferred tax asset reversed with off setting entry to deferred tax

benefit

– Difference between deferred tax asset and actual tax benefit results in a “windfall” or “shortfall”

– Current rules:• Windfalls add to APIC pool and shortfalls reduce APIC pool, if any

• Excess shortfalls recorded as additional tax expense in current period

• May only recognize windfall benefit if there is a reduction in taxes payable

– New rules:• Windfalls and shortfalls recognized in income statement in period

realized

• Discrete item

• Effective for periods beginning after December 15, 2016

• May adopt earlier


Incentive Stock Options

• No DTA Recorded

• Tax benefit recorded only if there is a disqualifying disposition– Windfalls reflected in period of disqualifying

disposition

– No shortfall recorded

• $100,000 limitation– ISOs exceeding $100,000 annual limitation

(determined at date of grant) treated as nonqualified stock options

– Accelerating future vesting may cause ISOs to be treated as nonqualified stock options resulting in the need to establish DTA at that time


Income Tax Limitations – Section

162(M)• Applies only to publicly held corporations

• Limitation does not apply to performance-based compensation

• Methodologies for allocating limitation:– Equity first – DTA established on equity compensation up

to $1Million limitation before other compensation taken into account

– Salary first – DTA established on equity compensation only if available limit exists after taking into account cash compensation

– Pro Rata – Allocate $1Million to all compensation

• Future change in cash compensation could result in reduction to DTA and increase to tax expense


Modification of Awards

• Exchange of original award for a new award

• Additional compensation cost if fair value of new award greater than fair value of original award

• Record additional DTA if necessary on vested awards

• If there is a modification that causes equity classified award to become a liability classified award, DTA needs to be adjusted

• If modification to ISO results in loss of ISO status, then establish DTA as of modification date


Pool of Windfall Tax Benefits- Prior

to 2017

• Pool of realized windfall tax benefits available to offset shortfalls

• Hypothetical account in APIC

• Windfalls recorded only when associated tax deduction reduces taxes payable

• Reduce APIC pool by shortfalls but not below zero

• No tax benefit recorded if excess tax deduction part of net operating loss carryforward

• Business combinations may result in allocation of APIC pool


Windfall/ Shortfall Tax Benefits –

After 2016

• Windfalls and Shortfalls Reflected in income statement at the time award is settled for tax purposes

• No more APIC pool

• Included in net operating loss DTA, may need a valuation allowance on the NOL

• Effective for public business entities for annual reporting period beginning after December 15, 2016 and interim periods included in such period (other business entities 12 months later) –although early adoption is permitted


Business Combination

• Exchange of target awards for acquiring company awards

• Record DTA on Acquisition date for pre-combination portion of the fair value of vested awards acquirer is obligated to replace

• Fair value of replaced unvested awards expensed over requisite service period

• Fair value of awards acquirer not obligated to replace are expensed post-combination

• Windfalls and shortfalls recorded at time replacement awards settled


Business Combination - Example


Exercise Price 10.00$

FMV of stock on acquisition date 30.00$

FMV of option on acquisition date (Black-Scholes) 21.00$

Outstanding options exchanged 10,000,000

Fair value of options exchanged ($21 x 10,000,000) 210,000,000$

Deferred tax asset established at acquisition (40% tax rate) 84,000,000$

Total deemed consideration paid for stock options 294,000,000$

Actual tax benefit (exercise at $35 FMV -40% tax rate) 100,000,000$

Excess tax benefit ($100,000,000 - $84,000,000) 16,000,000$

Actual tax benefit (Exercise price $25 FMV - 40% tax rate) 60,000,000$

Deficit tax benefits (60,000,000 - $84,000,000) (24,000,000)$

Specific Equity Arrangements –

Accounting Treatment


Nonqualified Stock Option – Equity

ClassifiedEvent Action

Grant Date • Measure fair value of option (Black-Scholes, binomial model)

During Requisite Service Period

• Recognize Compensation cost and related DTA on options that vest and for which future tax deduction is expected

• Reverse entry for options forfeited• Reflect changes in tax rates• Record valuation allowance

Settlement Date, (exercise, cancel, lapse)

• Reverse prior tax entry and reconcile DTA• If tax deduction exceeds cumulative book expense, additional tax

benefit is a windfall• If tax deduction is less than cumulative book expense, a shortfall

occurs



Classified – Windfall ExampleFacts

• 10,000 options granted at $10• Fair value is $3 per option• One year vesting and all options vest

• Exercise when stock value is $25• Combined tax rate of 40%

Recognition of expense and DTA

Dr. Compensation Cost $30,000Cr. APIC $30,000

Dr. Deferred Tax Asset $12,000Cr. Deferred Tax Benefit $12,000

• Recognize compensation expense (10,000 x $3)

• Recognize deferred tax asset ($30,000 x 40%)

Exercise

Dr. Deferred Tax Benefit $12,000 Cr. Deferred Tax Asset $12,000

Dr. Current Taxes Payable $60,000 Cr. Current Tax Benefit $12,000Cr. APIC $48,000

• Reverse prior tax entry

• Calculate tax deduction/benefit (10,000 x $15 x 40%) and windfall ($60,000 -$12,000)



Classified – Shortfall ExampleFacts

• 10,000 options granted at $10• Fair value is $3 per option• One year vesting and all options vest







Exercise


Dr. Current Taxes Payable $8,000 Dr. APIC or Current Tax Benefit $4,000

Cr. Current Tax Benefit $12,000


• Calculate tax deduction/benefit (10,000 x $2 x 40%) and shortfall ($8,000 -$12,000)


Stock Appreciation Right – Equity


Grant Date • Measure fair value of SAR (Black-Scholes, binomial model)


• Recognize Compensation cost and related DTA on SARs that vest and for which future tax deduction is expected

• Reverse entry for SARs forfeited• Reflect changes in tax rates• Record valuation allowance


• Reverse prior tax entry and reconcile DTA• If tax deduction exceeds cumulative book expense, additional tax

benefit is a windfall• If tax deduction is less than cumulative book expense, a shortfall

occurs


Stock Appreciation Right– Equity

Classified – Windfall ExampleFacts

• 10,000 SARs granted at $10• Fair value is $3 per SAR• One year vesting and all SARs vest







Exercise


Dr. Current Taxes Payable $60,000 Cr. Current Tax Benefit $12,000Cr. APIC $48,000




Stock Appreciation Right– Equity

Classified – Shortfall ExampleFacts

• 10,000 options granted at $10• Fair value is $3 per SAR• One year vesting and all SARs vest







Exercise


Dr. Current Taxes Payable $8,000 Dr. APIC or Current Tax Benefit $4,000



• Calculate tax deduction/benefit (10,000 x $2 x 40%) and shortfall ($8,000 -$12,000)


Incentive Stock Option– Equity

Classified- Qualifying DispositionEvent Action

Grant Date • Measure fair value of Option (Black-Scholes, binomial model)


• Recognize Compensation cost (no related DTA recorded) on options that vest

• Reverse entry for options forfeited• Reflect changes in tax rates


• No impact

Qualifying Disposition –Dispose after 1-year and 2-year Holding Periods

• No Impact


Incentive Stock Option- Equity

Classified- Qualifying Disposition

Facts

• 10,000 ISOs granted at $10• Fair value is $3 per option• One year vesting and all ISOs vest

• Exercise when stock value is $25• Qualifying disposition at $30• Combined tax rate of 40%




Exercise

• No tax entry

Disposition

• No tax entry


Incentive Stock Option – Equity

Classified-Disqualifying DispositionEvent Action

Grant Date • Measure fair value of Option (Black-Scholes, binomial model)


• Recognize Compensation cost (no related DTA recorded) on options that vest

• Reverse entry for options forfeited• Reflect changes in tax rates

Settlement Date,(exercise, cancel, lapse)

• No impact

DisqualifyingDisposition –Dispose within 1-year and 2-year Holding Periods

• Record income tax benefit of compensation cost• If tax deduction greater than cumulative book compensation cost,

then tax benefit associated with excess tax deduction treated as a windfall

• If tax deduction less than cumulative book compensation cost, then credit to income tax expense limited to actual tax benefit


Incentive Stock Option - Equity Classified-

Disqualifying Disposition (Windfall)

Facts

• 10,000 ISOs granted at $10• Fair value is $3 per Option• One year vesting and all ISOs vest

• Exercise when stock value is $25• Disqualifying disposition at $30• Combined tax rate of 40%




Exercise

• No tax entry

Disposition

Dr. Current Taxes Payable $60,000Cr. Current Tax Benefit $12,000 Cr. APIC $48,000

• Calculate tax deduction/benefit (10,000 x ($25 - $10) x 40% and windfall ($60,000 -$12,000)


Incentive Stock Option- Equity Classified-

Disqualifying Disposition (No Windfall)

Facts

• 10,000 ISOs granted at $10• Fair value is $3 per Option• One year vesting and all ISOs vest

• Exercise when stock value is $25• Disqualifying disposition at $12• Combined tax rate of 40%




Exercise

• No tax entry

Disposition

Dr. Current Taxes Payable $8,000Cr. Current Tax Benefit $8,000

• Calculate tax deduction/benefit (10,000 x ($12 - $10) x 40% - no windfall or shortfall


Restricted Stock – Equity Classified

– No Section 83(b) ElectionEvent Action

Grant Date • Measure fair value of stock


• Recognize Compensation cost and related DTA shares that vest and are expected to result in future tax deduction

• Reverse entry for restricted stock forfeited• Reflect changes in tax rates• Record valuation allowance

Vesting Date • Reverse DTA• If tax deduction is greater than cumulative book compensation

cost, additional tax benefit is a windfall• If tax deduction less than cumulative book compensation cost, a

shortfall occurs


Restricted Stock – Equity Classified – No

Section 83(b) Election With Windfall

Facts

• 10,000 restricted stock granted• Fair value of stock is $10• One year vesting and all shares vest

• Fair value of stock is $25 at vesting• Combined tax rate of 40%






Vesting

Dr. Deferred Tax Benefit $40,000Cr. Deferred Tax Asset $40,000



• Calculate tax deduction/ benefit (10,000 x $25 x 40%) and windfall ($100,000 -$40,000)


Restricted Stock – Equity Classified – No

Section 83(b) Election With Shortfall

Facts








Vesting


Dr. Current Taxes Payable $32,000Dr. APIC or Current Tax Benefit $8,000



• Calculate tax deduction/ benefit (10,000 x $8 x 40%) and shortfall ($32,000 - $40,000)


Restricted Stock – Equity Classified

– Section 83(b) ElectionEvent Action

Grant Date • Measure fair value of stock• Record DTL with respect to income tax deduction


• Recognize Compensation cost• Reflect book tax benefit as a debit to DTL

Vesting Date • No further adjustment• No windfall or shortfall as book and tax deductions are the same


Restricted Stock – Equity Classified –

Section 83(b) Election

Facts


• Combined tax rate of 40%


Dr. Current Taxes Payable $40,000Cr. Current Tax Benefit $40,000

Dr. Deferred Tax Benefit $40,000Cr. Deferred Tax Liability $40,000


Dr. Deferred Tax Liability $40,000Cr. Deferred Tax Benefit $40,000

• Recognize tax benefit of tax deduction (10,000 x $10 x 40%)

• Recognize Compensation Expense (10,000 x $10)

• Write down of deferred tax liability recorded ($100,000 x 40%)

Vesting

No Tax Entry


Restricted Stock Unit – Equity


Grant Date • Measure fair value of stock


• Recognize Compensation cost and related DTA on shares that vest and expected to result in future tax deduction

• Reverse entry for restricted stock units forfeited• Reflect changes in tax rates• Record valuation allowance

Vesting Date • No impact

Transfer Date • Reverse DTA• If tax deduction greater than cumulative book compensation

cost, additional tax benefit is a windfall• If tax deduction less than cumulative book compensation cost, a

shortfall occurs


Restricted Stock Unit – Equity Classified –

Windfall

Facts

• 10,000 restricted stock units granted• Fair value of stock is $10• One year vesting and all shares vest







Vesting






Restricted Stock Unit – Equity Classified –

Shortfall

Facts

• 10,000 restricted stock units granted• Fair value of stock is $10• One year vesting and all shares vest







Vesting


Dr. Current Taxes Payable $32,000Dr. APIC or Current Tax Benefit $8,000



• Calculate tax deduction/benefit (10,000 x $8 x 40%) and shortfall ($32,000 - $40,000)


Specific Equity Arrangements –

Income Tax Treatment


Nonqualified Stock Option

• Generally, exercise price equal to or greater than FMV as of date of grant to avoid deferred compensation rules under section 409A and deduction limit under section 162(m)

• Shareholder approval not required other than for section 162(m) purposes

• Income Tax deduction– None at time of grant

– None at the time of vesting as long as issued at FMV

– At date of exercise, deduction equal to amount included in service provider’s gross income (FMV less exercise price)



• Included in income means– Service provider filed income tax return and included

the amount on such income tax return

– Deemed to have included in income if employer timely files information return (Form W-2 and/or Form 1099MISC)

• Timing of deduction– Employer’s tax year which includes last day of service

provider’s tax year in which amount included in gross income

– Special rule- If stock is substantially vested upon transfer, then under the company’s normal method of accounting



• Withholding and reporting requirements with respect to employee

– Report compensation in Boxes 1, 3, and 5 of form W-2

– Compensation subject to income tax and FICA withholdings

– Compensation also reflected in Box 12 of Form W-2 with code “V”

• For non-employee, report on form 1099MISC in box 7, non-employee compensation


Nonqualified Stock Option -

Example

Facts

• 10,000 restricted stock granted with $10 exercise price (FMV) on June 10, 2015• FMV of stock on date of exercise (September 12, 2016) is $25

Results

• Employee recognizes $150,000 of compensation (10,000 x [$25 - $10])• Employer must withhold income taxes, Medicare taxes, social security taxes• Employer reports $150,000 of compensation income on employee’s 2016 Form W-2• Since stock was fully vested upon transfer, employer entitled to an income tax

deduction under its normal method of accounting


Stock Appreciation Right

• Generally, exercise price equal to or greater than FMV as of date of grant to avoid deferred compensation rules under section 409A and deduction limit under section 162(m)


• Income Tax Deduction– None at time of grant

– None at time of vesting as long as issued at FMV

– At date of exercise, deduction equal to amount included in service provider’s gross income (FMV less exercise price)



• Included in income means– Service provider filed income tax return and included

the amount on such income tax return


• Timing of deduction – Stock Issued– Employer’s tax year which includes last day of service

provider’s tax year in which amount included in gross income

– Special rule- if stock is substantially vested upon transfer, then under company’s normal method of accounting



• Timing of deduction – Cash Payment– If exercised in same year as vesting, then deduct under

normal method of accounting

– If exercised in year after vesting, then treated as deferred compensation and deduct in tax year which includes last day of service provider’s tax year in which amount included in gross income

• Withholding and reporting requirements with respect to employee– Report compensation in Boxes 1, 3, and 5 of Form W-2


• For non-employee, report on form 1099MISC in box 7, non-employee compensation


Stock Appreciation Right- Example

Facts

• 10,000 SARs granted on June 10, 2015 when FMV is $10• FMV of stock on date of exercise (September 12, 2016) is $25 and stock transferred

Results

• Employee recognizes $150,000 of compensation (10,000 x [$25 - $10])• Employer must withhold income taxes, Medicare taxes, social security taxes• Employer reports $150,000 of compensation income on employee’s 2016 Form W-2• Since stock was fully vested upon transfer, employer entitled to an income tax

deduction under its normal method of accounting• If cash were paid• Vesting in year of exercise – deduction under normal method of accounting• Vesting in prior year – treated as deferred compensation


Incentive Stock Option

• Must satisfy the rules under section 422

• Available only to employees of parent corporation or any 50% controlled corporation

• Option price must not be less than FMV of stock on date of grant

• Option must be granted within 10 years of plan’s effective date and exercised within 10 years of grant

• 10% shareholder – option price 110% of FMV and exercise period is 5 years

• Option not transferable other than by will



• Shareholder approval of plan required

• $100,000 limit on total value of options that may become exercisable for the first time in any calendar year

• Provide employee with form 3921 for year of exercise

• Income tax impact– No employer income tax deduction upon grant, vesting or

exercise

– Income tax deduction available only at time of disqualifying disposition

• Stock disposed within 1 year of exercise, or

• Stock disposed within 2 years of grant



• Income tax deduction– Amount of ordinary income recognized by employee which

is the lesser of• Spread at time of exercise, or

• Spread at time of disqualifying disposition

– Obtain deduction if amount included in the income of the employee

– Included in income means• Employee filed income tax return and included the amount on

such income tax return

• Deemed to have included in income if employer files Form W-2 or Form W-2c before the employer files tax return on which it is claiming deduction

– Deduction available to employer for its tax year which includes the date of the disqualifying disposition



• Compensation income reported on form W-2, but not subject to withholding

• Disqualifying disposition includes any disposition except in the case of

– Transfer due to death

– Stock for stock acquisition

– Mere pledge or hypothecation

– Transfer to joint ownership with rights of survivorship

– Transfer to spouse incident to divorce


Incentive Stock Option – Qualifying

Disposition - ExampleFacts

• 10,000 options granted with $10 exercise price (FMV) on June 10, 2014• FMV of stock on date of exercise (July 15, 2015) is $25• FMV of stock on date of disposition (September 12, 2016) is $28

Results

• Employer required to file 3921 for calendar year 2015• Employee does not recognize compensation income for regular tax purposes since

the stock was disposed after the expiration of the two holding periods• Employer is not entitled to an income tax deduction


Incentive Stock Option –

Disqualifying Disposition - ExampleFacts

• 10,000 options granted with $10 exercise price (FMV) on June 10, 2014• FMV of stock on date of exercise (July 15, 2015) is $25• FMV of stock on date of disposition (April 12, 2016) is $28

Results

• Employer required to file 3921 for calendar year 2015• Employee recognizes $150,000 of compensation in 2016 since the stock was

disposed within both the 1-year/2-year holding periods (10,000 x [$25 - $10])• Employer not required to withhold income taxes, Medicare taxes, or social security

taxes, but must report the income on a Form W-2• Employer is entitled to an income tax deduction in the amount of $150,000 for tax

year that includes April 12, 2016


Restricted Stock

• Stock issued at date of grant subject to

substantial risk of forfeiture

• Forfeiture provision not satisfied, individual

must return shares to company

• Shareholder approval not required other

than for section 162(m) purposes

• Not subject to deferred compensation

rules under 409A


Restricted Stock

• Income tax deduction– None at the time of grant (unless Section 83(b) election

made)

– At time of vesting, tax deduction equal to amount included in service provider’s gross income (FMV at time of vesting)

• Included in Income means– Service provider filed income tax return and included the

amount on such income tax return

– Deemed to have included in income if employer timely files information return (W-2 and/or 1099MISC)

• Employer entitled to deduction for its tax year which includes last day of service provider’s tax year in which amount included in income.


Restricted Stock

• Withholding and reporting requirements – Employee– Report compensation in boxes 1, 3, and 5 of Form W-2


• For non-employees, report on form 1099MISC in box 7, non-employee compensation

• Section 83(b) election made by service provider– Deduction equal to FMV of stock on date of transfer which

is included in service provider’s income

– Deduction in employer’s tax year which includes last day of service provider’s tax year in which the amount is include in gross income

– Reverse deduction if stock is forfeited


Restricted Stock- Example

Facts

• 4,000 restricted stock transferred on June 10, 2015 when FMV is $10• FMV of stock on date of vesting (September 12, 2016) is $25• No Section 83(b) election is made

Results

• Employee recognize $100,000 of compensation in 2016 (4,000 x $25) which is required to be reported on Form W-2

• Employer must withhold income taxes, Medicare taxes, and social security taxes• Since the stock was not fully vested upon transfer, employer entitled to income tax

deduction for its tax year that includes the last day of the employee’s tax year (December 31, 2016) in which the amount is included in income


Restricted Stock- Section 83(b)

ExampleFacts

• 4,000 restricted stock transferred on June 10, 2015 when FMV is $10• FMV of stock on date of vesting (September 12, 2016) is $25• No Section 83(b) election is made

Results


• Employer must withhold income taxes, Medicare taxes, and social security taxes• Since the stock was not fully vested upon transfer, employer entitled to income tax

deduction for its tax year that includes the last day of the employee’s tax year (December 31, 2015) in which the amount is included in income

• No income tax impact on September 12, 2016 when the stock vests


Restricted Stock Unit

• Promise to issue stock at a future date after risk of forfeiture lapses

• Forfeiture provision not satisfied, individual does not receive the stock


• Subject to deferred compensation rules under section 409A if stock is transferred more than 2 ½ months after the calendar year in which the service provider vests



• Income Tax deduction– None at the time of grant and none at the time of vesting

– At time of transfer, tax deduction equal to amount included in service provider’s gross income (FMV at time of transfer)

• Included in income means– Service provider filed income tax return and included the

amount on such income tax return


• Since shares are substantially vested upon transfer, employer entitled to an income tax deduction under its normal method of accounting



• Withholding and reporting requirements –

Employee

– Report compensation in Boxes 1, 3, and 5 of

Form W-2

– Compensation subject to income tax and

FICA withholdings

• For non-employees, report on Form

1099MISC in Box 7, non-employee

compensation


Restricted Stock Unit - Example

Facts

• Promise made on June 10, 2015 to transfer 4,000 shares of stock within 45 days of vesting date

• Vesting Date (September 12, 2016)• Transfer shares on September 24, 2016 when FMV is $25

Results


• Employer must withhold income taxes, Medicare taxes, and social security taxes• Since the stock was fully vested upon transfer, employer entitled to income tax

deduction in accordance with its normal method of accounting


Contact Information


Brian Parmelee

Tax Director

[email protected]

(303) 294-7705

International Operations

Stu Myhill

December 8, 2016

Three Components of Consolidated

US Multinational Tax Provision

• Tax Provision of U.S. parent and other

domestic subsidiaries

• Tax Provision for the foreign business

– Entities, branches, or other foreign activities

• Impact on U.S. tax provision of foreign

entities, foreign branches, or other foreign

activities


Components of International Tax

Provision – (continued)

• Tax Provision of foreign business

– “Inside Basis”

– Current and deferred tax calculation

– Differences between U.S. GAAP and foreign

tax law

• U.S. GAAP income to statutory book income

• Statutory book income to local taxable income


Components of International Tax

Provision -

• Items of foreign activity potentially impacting U.S. tax provision

– Foreign branch activity flowing into U.S.

– Dividends from foreign subsidiaries

– Retained earnings of foreign subsidiaries

– Subpart F inclusions

– Foreign withholding tax on dividends, royalties, interest

– Foreign tax credits or deductions

– Foreign currency issues


Foreign Branch Operations

U.S. Foreign Branch Operations

• A branch represents the portion of U.S. operations located and taxed in a foreign jurisdiction

• Can be wholly owned foreign corporation electing to be treated as disregarded entity for U.S. tax purposes

• Branch operations subject to tax in two jurisdictions

129

Foreign Branch Activity

Foreign Branch Deferred Taxes

• Two sets of temporary differences that

give rise to deferred tax assets and

liabilities

• Adjust home country deferred taxes for the

effects of foreign deferred tax assets and

liabilities

130

Foreign Branch Deferred Taxes

• When a deferred foreign liability is settled, it

increases taxes paid, decreasing the home

country taxes paid because of additional foreign

tax credits or deductions.

• When a foreign tax asset is recovered, it

reduces taxes paid, increasing the home country

taxes because of lower foreign tax credits or

deductions.

131

International Operations Foreign Branch Deferred Taxes Example

Company A has a branch in Country X where the statutory tax rate is 25%

– In current year, branch has pretax income of $10,000

– For both Country X and US tax purposes, branch has excess tax-over-book depreciation of $5,000 and non-deductible inventory reserves of $3,000

– For U.S. tax purposes, the branch is taxed at 40%

– Taxes paid to Country X will be claimed as a foreign tax credit

How and in what jurisdiction should deferred taxes be recorded?

132

International Operations Foreign Branch Deferred Taxes Example

Country X

Nondeductible reserves $ 750 ($3,000 x 25%)

Depreciation (1,250) (($5,000) x 25%)

Branch DTL, Net $ (500)

U.S.

Nondeductible reserves $ 1,200 ($3,000 x 40%)

Depreciation (2,000) (($5,000) x 40%)

DTA on Branch DTL, Net 500 ($500 x 100%)*

U.S. DTL, Net $ (300)

Total DTA/(DTL) $ (800)

* Assumes when paid will be fully creditable

133

Dividends from Foreign Subsidiaries

• Gross amount of dividend included in taxable

income of US recipient

– Also include Section 78 Gross-Up if taking foreign tax

credits

• Withholding tax on dividend included in US

recipient’s tax provision

• Portion of foreign taxes paid by foreign subsidiary

deductible or creditable to US recipient

– Reduces current tax if utilized in current year

– Deferred tax asset if results in loss (“NOL”) or tax credit

(“FTC”) carry-forward

134

Dividends from Foreign Subsidiaries

Example

Assume:

Earnings of UK Sub $200

Taxes $ 40

Cash $160

Dividend to U.S. parent $ 80

Withholding tax on dividend $ 8

Result:

Cash Dividend $ 80

Section 78 Gross Up $ 20

U.S. Taxable Income $100

U.S. Tax at 35% plus withholding tax of $8 $ 43

Foreign Tax Credit ($ 28)

Net U.S. Tax (Incremental Tax from Dividend) $ 15

135

Retained Earnings of Foreign

Subsidiaries

• Treatment in consolidated tax provision

differs depending upon if earnings are

“permanently reinvested”

– Permanently reinvested – no impact on US

tax provision

– Not permanently reinvested – tax effects of

outside book-tax basis difference in subsidiary

must be accounted for in U.S. tax provision


Indefinite Reversal Assertion (APB 23)

ASC 740-30-25-18(a)

– A deferred tax liability is not recognized for “an excess of an amount of financial reporting over tax basis of an investment in a foreign subsidiary that is essentially permanent in duration”

• Basis differences usually a result of:– Undistributed earnings

– Changes in foreign exchange

• Indefinite reversal criteria must be met

137

Indefinite Reversal Assertion

• Positive assertion of management’s intent to

indefinitely reinvest its foreign undistributed

earnings

• Management’s ability and intent to indefinitely

prevent the outside basis difference of a foreign

subsidiary from reversing with a tax

consequence

138


Evidence Required

• History of not distributing foreign earnings

does not replace specific reinvestment

plans

• Document and maintain specific

reinvestment plans

139


Evidence Required (cont.)

• Forecasts and budgets for parent and subsidiary

• Financial requirements of parent and subsidiary

• Remittance restrictions in a loan agreement of the subsidiary

• Remittance restrictions imposed by foreign government

140


• Positive Evidence

– No need of cashflow from foreign subs to

support U.S. operations

– Specific plans to reinvest foreign cash in

capital projects or acquisitions

– Foreign debt service requirements



• Negative Evidence

– U.S. debt service requirements

– Subpart F



Q: Can a company make a partial

reinvestment assertion?

A: Yes, a deferred tax liability can be

maintained on some, but not all, of the

outside basis difference if the assertion is

justified by the evidence.

143


Effect of Change in an Indefinite Reversal

Assertion• Some or all of undistributed subsidiary earnings will be

remitted in foreseeable future

• Parent adjustment to income tax expense and deferred

tax liability in the current period and make ASC 740-10-

50-2 disclosure

144

Foreign Currency Issues

• Functional currency - Currency of the primary

economic environment of the entity

• Reporting currency – Currency used to report

financial statements

145


Translation gains and losses

– Deferred foreign income taxes are translated

at current rates if reporting currency is not

functional currency

– Translation adjustments are part of the

outside basis temporary difference on

investment in foreign subsidiary

146


Transaction gains and losses

– Usually recognized in income for financial

reporting

– Gains and losses from foreign currency

transactions recognized for tax purposes

– Deferred tax accounting required if tax gains

or losses included in period different than for

financial reporting purposes

147


Best Practices

– Prepare base calculations of foreign provisions in

the functional currency, not in U.S.$!

– Book all related provision entries on the foreign

books in functional currency, not topside in U.S.$!

• Be mindful of period issues

– Let the ERP software do the f/x translation

– Translate into U.S.$ in consolidated tax provision

workpapers using same f/x rates as ERP system

148

QUESTIONS?

149

State and Local Tax Provision –

Common Elements and Errors

Bill Mueldener

December 8, 2016

Common Elements

• Single biggest element for state tax

purposes:

Effective Tax Rate

– Broken into two components:

• Current Rate

• Deferred Rate


State Tax Provision Considerations

• Differences between the current and deferred rates:• Deferred should be booked at the tax rate in effect at

the time the deferred item is expected to turn.– All legislative changes to tax rates must be considered

(increases or decreases).

• Legislative changes impacting filing methodology in future years should be considered.– Does the state file on a combined, consolidated, or separate

company basis?

• Factors calculating the rate should represent the most accurate business information and changes known.


Calculation of the State Rate

One method of computing the current state tax

expense: blended effective rate computation

Company X Company X Company X

Total California Georgia

Pre-Tax Book Income $10,000,000 (A) $10,000,000 $10,000,000

State Apportionment 40% 20%

State Tax Rate 8.84% 6%

Current Blended Rate 4.74% (B) 3.54% 1.20%

Current State Provision $474,000 (A*B)

• Key Components: Income, Apportionment and Tax Rate


Common Provision Apportionment

Issues• Apportionment

– Property difference on current and deferred rate. • Property apportionment factor is typically the average of

BOY and EOY property.

– Sourcing of Sales• Sales of Goods vs. Services (current trend to move

towards market based sourcing of services)

• Sourcing of intangible income

• Inclusion of activity from ownership in a partnership

• Consideration of the definition of sales in a specific state

• Economic nexus and sourcing rules

– Other property and payroll sourcing issues


Concerns with a Simple Blended

Rate Calculation

Blended effective rate computationCompany X&Y Company X&Y Company Y

Total California (Unitary) Georgia (Separate)

Pre-Tax Book Income $10,000,000 (A) $10,000,000 ($1,000,000)



Current Blended Rate 4.74% (B) 3.54% 1.20%

Current State Provision $474,000


State by State Computation

Example ComputationCompany X&Y Company X&Y Company Y

Total California (Unitary) Georgia (Separate)

Pre-Tax Book Income $10,000,000 $10,000,000 $3,000,000

Perm. Differences 2,000,000 1,000,000

Temp. Differences 50,000 50,000

State Modifications 300,000 100,000

Apportionable Income 12,350,000 4,150,000


Pre-NOL State Income 4,940,000 830,000

State NOLs 500,000 0

State Taxable Income 4,440,000 830,000


Current State Tax Provision $441,800 (A+B) $ 392,000 (A) $ 49,800 (B)


State by State Computation

• Requires consideration of state level computation issues

– Items impacting individual state computation:• State filing methodology (separate, combined,

consolidated)

• State modifications and conformity to federal law

• “Top Side” accounting or tax adjustments

– State deferred tax items should be accounted for individually.

• State NOLs

• State tax credits


Valuation Allowance

• DTA is reduced by a valuation allowance if

it is more likely than not (i.e., >50%) that

some portion, or all, of the DTA will not be

realized.

– For example: NOL carryover provides no tax

benefit if there is no taxable income during

carryover period.


Forecasting the Effective Tax

Rate and Interim Reporting

John Monahan

December 8, 2016

Interim Reporting – Basic

Principles• ASC 740-270-30-2 APB 28, Interim Financial Reporting, ¶19

states that– “At the end of each interim period the company should make its best

estimate of the effective tax rate expected to be applicable for the full fiscal year.”

– “The rate so determined should be used in providing for income taxes on a current year-to-date basis.”

– “The effective tax rate should reflect anticipated investment tax credits, foreign tax rates, percentage deletion, capital gains rates, and other available tax planning alternatives.”

– “However, in arriving at this effective tax rate no effect should be included for the tax related to significant unusual, or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.”



Principles• ASC 740-270-25-9 (APB 28, Interim Financial Reporting, ¶29)

states that– “The tax effects of losses that arise in the early portion of a fiscal year

should be recognized only when the tax benefits are expected to be (a) realized during the year or (b) recognizable as a deferred tax asset at the end of the year in accordance with the provisions of [ASC 740].”

– “The effects of new tax legislation shall not be recognized prior to enactment.”

– “The tax effect of a change in tax laws or rates on taxes currently payable or refundable for the current year shall be reflected after the effective dates prescribed in the statutes in the computation of the annual effective tax rate beginning no earlier than the first interim period that includes the enactment date of the new legislation.”



Principles

• ASC 740-270-25-2 (FIN 18, Accounting for Income Taxes in Interim Periods, ¶6), clarifies that:

– The tax (or benefit) related to ordinary income is to be computed using an estimated annual effective tax rate, and

– The tax (or benefit) related to all other items is to be individually computed and recognized when the event occurs (“discrete period items”)



Principles

• Examples of Other Items:– Closing of prior years audits

– Expiration of the statute of limitations for prior tax years

– Subsequent recognition of uncertain tax position

– Change in tax law

– Change in tax status

– Certain changes in realizability of deferred tax assets

– Change in judgment about unremitted foreign earnings and other outside basis differences

– A significant, unusual or infrequent item


Interim Reporting – Discrete Items

Change related to:

Interim Accounting

Treatment

Prior year uncertain tax position Discrete

Current year uncertain tax position (related to

ordinary income included in ETR) Included in ETR

Current year uncertain tax position (related to income

excluded from ETR) Discrete



• Interest and penalties recognized on uncertain tax positions– ASC 740-10-25-56 requires that interest be

accrued in the first period in which the interest would begin accruing according to the provisions of the relevant tax law. Therefore, interest would be excluded from ETR calculation.

– ASC 740-10-25-57 indicates that a penalty should be recorded when a position giving rise to a penalty is taken or anticipated to be taken on the current year’s tax return.



• Change in tax law– Adjustments to deferred tax assets and liabilities as a

result of a change in tax law or rates should be accounted for discretely in continuing operations at the date of enactment.

– The effects of a retroactive change in tax rates should also be accounted for discretely in continuing operations in the interim period in which the law is enacted.

– Prospective effects of a change in tax law or rates on tax expense in the year of enactment should be reflected in the estimated annual effective tax rate calculation.



• Change in tax status

– The effect of a voluntary change in tax status

should be recognized discretely on

1. the date that approval is granted by the taxing

authority or

2. the filing date, if approval is unnecessary.



• Certain changes in the assessment of the realizability of deferred tax assets– The tax effect of a change in the beginning-of-the year balance

of a valuation allowance caused by a change in judgment about the realizability of the related deferred tax asset that results from changes in the projection of income expected to be available in future years should be recognized discretely in the interim period in which the change in judgment occurs.

– A change in judgment about the realizability of deferred tax assets resulting from changes in estimates of current-year ordinary income and/or deductible temporary differences and carryforwards that is expected to originate in ordinary income in the current year should be considered in determining the estimated annual effective tax rate.



• Certain changes in the assessment of the

realizability of deferred tax assets - Example


Estimated full year pre-tax income 500,000$

Tax expense:

Tax on current-year income at 35% 175,000

Reversal of valuation allowance related to current-year income (175,000)

Total current tax based on ETR -$

Reversal of valuation allowance based on future-years income (700,000)

Total tax provision (700,000)

Net income 1,200,000$

Estimated ETR at end of second quarter [($0) / $500,000] (0)%

The company has a $2.5M NOL carryfoward available at the beginning of the year. A valuation

allowance was recorded for the full amount of the related deferred tax asset for $875,000 (35%

rate). During Q2 of the current year, the full year forecast of pre-tax book income increased

from $0 to $500,000 causing partial utilization of the NOL carryforward. Adjusted future year

income forecasts have caused reversal of the remaining amount of the valuation allowance.


• Change in judgment regarding unremitted foreign earnings and other outside-basis differences– The tax effect of the change in judgment for the

establishment/reversal of the deferred tax liability related to the outside basis difference that had accumulated as of the beginning of the year should be recorded in continuing operations in the interim period during which the intentions changed.

– The tax effect of the change in intentions on unremitted earnings of the current year should be reflected in the determination of the company’s ETR.



• Change in estimate related to a prior-year tax provision– The language in ASC 740-270-25-2, makes it

clear that the estimated annual effective tax rate approach should only be used to record the tax effect of current-year ordinary income.

– A change in estimate in the current year that is related to a prior-year tax provision does not constitute a tax effect on current-year income –therefore, change should be recorded discretely in period that change in estimate occurs.



• Change in estimate vs. error– Examples of errors

A mechanical error is made when calculating the income tax provision

Misapplications of ASC 740 and related accounting principles and interpretations are made.

The company chose to estimate rather than obtain an amount for tax provision purposes at the balance sheet date that was “readily accessible” in the company’s books and records, and the actual amount differs from the estimate.



• Change in estimate vs. error

– Examples of changes in estimateAn adjustment of a prior-period tax accrual that results

either from new information (including a change in facts and circumstances) or later identification of information that was not reasonably “knowable” at the original balance sheet date and that results in improved judgment would lead to a change in estimate.

An event occurs that results in a changed judgment with respect to the sustainability of an uncertain tax position


Interim Reporting - Definitions

• Tax (or benefit) is defined to be the total income tax expense (or benefit), including the provision (or benefit) for income taxes both currently payable and deferred. ASC 740-270-20 (FIN 18, ¶5)

• “Ordinary” income (or loss) refers to income (or loss) from continuing operations before income taxes (or benefits)” excluding significant “unusual or infrequently occurring items.” Extraordinary items, discontinued operations, and cumulative effects of changes in accounting principles are also excluded from this term. ASC 740-270-20 (FIN 18, ¶5)


Interim Reporting - Computation

• Steps to compute the interim tax provision using the annual effective tax rate1. Determine projected income, permanent differences,

credits and carryforwards for the entire year.

2. Calculate the projected total provision for the year (excluding discrete items).

3. Calculate the effective tax rate (ETR) for the year.

4. Apply the ETR to the year to date earnings (i.e. “Ordinary Income”.

5. Adjust interim provision for discrete period items, if any.


Interim Reporting- Computation


Computing the Annual ETR: Example (Q3)

Q1-3 (Actual) Q4 (Estimate) Total (Estimate)

Pre-Tax Book Income 25,000 15,000 40,000

Permanent Items 3,000

Book Taxable Income 43,000

Statutory Tax Rate 28%

Extimated Annual Tax divided by 12,000

Pre-Tax Book Income 40,000

Estimated Annual effective Tax Rate 30%

Interim Reporting- Computation


Computing the Annual ETR: Example (Q3)

Total (Estimate)

Pre-Tax Book Income 25,000

Estimated Annual ETR 30%

"Ordinary" Tax 7,500

Audit Settlement (Q1) (1,000)

FIN 48 Interest (Q1) 100

Account Balance Correction (Q2) (500)


Impairment (Permanent) (Q3) 3,000


Total Tax Expense 9,300

Q3 Effective Tax Rate 37%

Interim Reporting

• Limitation on benefits of losses in loss

periods

– The ETR approach is modified by ASC 740-270-30-

30 through 30-34, which limit the tax benefit

recognized for a loss in interim periods to the amount

that is expected to be

(a) realized during the year or

(b) recognizable as a deferred tax asset at the end of the year.


Interim Reporting


periods – Example


First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

Year-to-date ordinary income/(loss) 40,000$ (120,000)$ (280,000)$ (200,000)$

Annual Effective Rate

Tax benefit at statutory rate ($200,000 at 30%) (60,000)$

Tax Credits (15,000)

Net tax benefit (75,000)$

Estimated annual effective rate -37.50%

For the year, an entity anticipates an ordinary loss of $(200,000). A total of $15,000 in R&D credits

will be generated during the year. The entity operates in one jurisdiction where the statutory tax

rate is 30%. The entity has the following year-to-date ordinary income and losses for the following

interim periods:

Interim Reporting


periods – Example (cont.)


Reporting

period

Quarterly

income/(loss)

Year-to-date

income/(loss)

Estimated

annual

effective

tax rate Computed Limited to

Less

previously

provided

Reporting

period

amount

Q1 40,000$ 40,000$ 37.50% 15,000$ -$ 15,000$

Q2 (160,000) (120,000) 37.50% (45,000) 15,000 (60,000)

Q3 (160,000) (280,000) 37.50% (105,000) (99,000) (45,000) (54,000)

Q4 80,000 (200,000) 37.50% (75,000) (99,000) 24,000

Y/E (200,000)$ (75,000)$

Interim Reporting


periods – Example (cont.)


Tax benefit at statutory rate ($280,000 at 30%) (84,000)$

Tax Credits (15,000)

Net tax benefit (99,000)$

Estimated annual effective rate -35.36%

Because the Q3 year-to-date ordinary loss exceeds the anticipated ordinary loss for the fiscal year,

the tax benefit recognized for the year-to-date loss is limited to the amount that would be

recognized if the year-to-date ordinary loss were the anticipated ordinary loss for the fiscal year.

The limitation is computed as follows:

Interim Reporting

• Exceptions to the use of the ETR approach– Jurisdictions with pretax losses for which no tax

benefit can be recognized

• When a company operates in a jurisdiction that has generated ordinary losses on a year-to-date basis or on the basis of the results anticipated for the full fiscal year and no benefit can be recognized on those losses, ASC 740-270-30-36(a) requires the company to exclude that jurisdiction’s income (or loss) from the overall ETR calculation.

• A separate ETR should be computed and applied to ordinary income (or loss) in that jurisdiction. Assuming the reason for no benefit is a full valuation allowance, the separate ETR for that jurisdiction would be zero.


Interim Reporting

• Multiple Jurisdictions – Ordinary Loss in a

Jurisdiction with no realized tax benefit


Interim Reporting

• Reliability of estimates

– When a company operates in a jurisdiction

where a “reliable estimate” of the translated

effective tax rate cannot be made, ASC 740-

270-30-36 (FIN 18, paragraph 22b) requires

the company to exclude the ordinary income

(or loss) in that jurisdiction and the related tax

(or benefit) attributable to “ordinary” income in

that jurisdiction from the overall estimate of

the ETR and interim period tax (or benefit).


Interim Reporting

• Reliability of estimates– ASC 740-270-25-3 (FIN 18, paragraph 8, footnote 7) states that

if a “reliable estimate” of the ETR cannot be made, the actual tax rate for the year-to-date may represent the most appropriate estimate of the annual rate.

– The footnote continues: “If an enterprise is unable to estimate a part of its ‘ordinary’ income (or loss) or the related tax (or benefit) but is otherwise able to make a reliable estimate, the tax (or benefit) applicable to the item that cannot be estimated shall be reported in the interim period in which the item is reported.”

– This footnote makes it clear that the effective rate approach must be used to the extent that, but only to the extent that, a reliable estimate can be made.


Current Developments Involving

Interim Reporting

• ASU 2016-09: Recognize windfall and shortfall tax benefits in tax expense

• Change will likely result in greater effective tax rate volatility

• Discrete interim reporting required to record the tax effect in the period in which they occur.

• Change: Recognition of tax consequences of intra-entity transfers (except transfers of inventory) in tax expense even though the pre-tax profits are eliminated in consolidation

• Companies should consider the impact on forecasting effective tax rate


Impact of Accounting Standard Developments

Contact Information


John Monahan

Tax Partner

[email protected]

(303) 226-7013









Oil & Gas Specific Issues & Concluding

Discussion on Practical Consideration

Patrick Hanley

December 8, 2016

Current Issues for

Oil & Gas Companies

• Valuation Allowances

• Section 382 Ownership Changes

• Cancellation of Debt Income (CODI)

• Error vs. Estimate

• Other


Other Provision Considerations

• Understanding GAAP Treatment

• Tax Basis Balance Sheet

• Controls

• IPO Readiness


Q & A


THANK YOU!


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