FASB Clarifies Rules for Tax Relief

Accounting body will publish added guidance for booking income tax benefits under a new federal corporate tax law; Board also adds intangible asset...
Craig SchneiderNovember 11, 2004

FASB agreed yesterday to issue new guidelines requiring companies to book income tax benefits as a “special deduction” under a recently enacted federal tax law. The board’s interpretation will reduce corporate taxable income over time rather than as a one-time benefit.

On Wednesday, the Financial Accounting Standards Board decided to clarify the application of FASB Statement 109, Accounting for Income Taxes to the American Jobs Creation Act of 2004, which President Bush signed into law on October 22. The act provides a tax deduction for domestic manufacturers up to 9 percent of the lesser of “qualified production activities income,” or taxable income (after the deduction for the use of any net operating loss carryforwards), according to a FASB handout.

The board voted in favor of having the corporate tax break recognized as a “special deduction” for purposes of applying Statement 109. FASB preferred that to booking the benefit as a reduction in the statutory tax rate. The latter would have required companies to immediately adjust deferred income-tax balances at a different tax rate, yielding a one-time benefit or loss for earnings.

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Under the special-deduction approach, however, “you would account for the deduction when it is earned, which will be over time,” said G. Michael Crooch, a FASB board member.

FASB also decided to give companies extra time beyond the financial reporting period in which the act was signed to evaluate the new law’s effect on plans for reinvestment or repatriation of foreign earnings. The reason was that the law is not fully established. The act provides a period of 14 months for a U.S.-based enterprise to repatriate qualified earnings of controlled foreign companies at a special tax rate of 5.25 percent, instead of the traditional 35 percent.

Until the Treasury Department issues specific guidelines that govern the application of the repatriation provision, companies will be unable to evaluate its effect on their financials, Crooch explained. Companies, he said, will need more time to decide how to spend the money earned overseas — to build a manufacturing plant to help job growth or reinvest it with some other qualified expenditure, for instance.

The soon-to-be released FASB Staff Position on the matter will be exposed to public comment for 15 days.

Separately, FASB agreed to discuss a lingering issue concerning the determination of the useful life of renewable intangible assets under FASB Statement 142, Goodwill and Other Intangible Assets. Crooch said that FASB’s Emerging Issues Task Force noted “confusion between the guidance in FAS 141 (business combinations) for valuing intangibles, and 142,” which details whether certain intangibles have indefinite lives.

Since the EITF concluded that the matter couldn’t be resolved without amending the original literature, FASB will now address the problem. Crooch noted that since the staff basis its work on memos from the EITF, fixing the problem “won’t take all that long.”