The Financial Accounting Foundation (FAF) concluded that the standard for accounting for income taxes adequately resolves the issues underlying its stated need, but that it may not have reduced the complexity. In summary, the FAF also indicated that investors have some difficulty understanding income tax information provided in the financial statements, their level of satisfaction with that information varies, and that stakeholders incur significant ongoing costs to comply with the standard.
Back in the 1990’s, the Financial Accounting Standards Board (FASB) introduced an accounting standard to address the accounting for income taxes. This standard requires companies to recognize the estimated amount of taxes payable or refundable for the current year, along with recognizing deferred tax liabilities and assets for future tax consequences of events that have been recognized in a company’s financial statement or tax returns. This standard applies to both public and private companies.
The FAF, which oversees the FASB, performed an independent, post-implementation review on the standard with the following objectives:
The FAF’s research indicates that accounting for income taxes remains complex, but it is still inconclusive if that is a result of the requirements of the standard, significant changes in the business environment and tax laws, or an increase in foreign operations by U.S. companies.
The FAF does not believe that the ongoing costs to comply with the standard are exclusive, but are a combination of the standard’s requirements, along with other factors such as the introduction of the Sarbanes-Oxley Act of 2002, an increase in the complexity of transactions that companies enter into, an increase in the complexity of U.S. and foreign tax laws, and an increase in business conducted in foreign jurisdictions by U.S. companies.
Subchapter S-corporations and other flow-through entities, such as partnerships, are not taxable entities. Instead, the tax consequences flow through to the shareholders or members. The shareholders or members then report their proportionate share of the company’s income or loss in their individual capacities. Under the accounting standard for income taxes, the current and deferred taxes are not reported at the company level. There are still some remaining states where the S-corporation status is not recognized.
The original standard on accounting for income taxes was FASB Statement No. 109, Accounting for Income Taxes and is now referred to as FASB ASC 740, Income Taxes.