Chapter 12 - Intraperiod Tax

Intraperiod tax
allocation
Allocation of income tax expense

or benefit for the year
This guidance addresses the requirements to
allocate total income tax expense or benefit.
Subtopic 740-10 defines the requirements for
computing total income tax expense or benefit
for an entity. As defined by those requirements,
total income tax expense or benefit includes
current and deferred income taxes

After determining total income tax expense or
benefit under those requirements, the
intraperiod tax allocation guidance is used to
allocate total income tax expense or benefit to
different components of comprehensive
income and shareholders equity.

Income tax expense or benefit for the year
shall be allocated among:
Continuing operations
Discontinued operations
Extraordinary items

Other comprehensive income
Items charged or credited directly to
shareholders equity.

The tax benefit of an operating loss carry forward
or carry back (other than for the exceptions
related to the carry forwards identified at the end
of this paragraph) shall be reported in the same
manner as the source of the income or loss in the
current year and not in the same manner as the
source of the operating loss carry forward or taxes

paid in a prior year or the source of expected
future income that will result in realization of
a deferred tax asset for an operating loss carry
forward from the current year. The only
exception is the tax effects of deductible
temporary differences and carry forwards that
are allocated to shareholders equity.

Changes in the beginning of the year
balance of a valuation allowance caused by
changes in judgment about the realization
of deferred tax assets in future years are
ordinarily allocated to continuing
operations.
Allocation to continuing
operations
This guidance addresses the allocation
methodology for allocating total income tax
expense or benefit to continuing operations.
The amount of income tax expense or
benefit allocated to continuing operations
may include multiple components.
operations
The tax effect of pretax income or loss from
current year continuing operations is
always one component of the amount
allocated to continuing operations.
operations
The tax effect of pretax income or loss from
continuing operations generally should be
determined by a computation that does not
consider the tax effects of items that are not
included in continuing operations.
operations
The exception to that incremental approach
is that all items (for example, extraordinary
items, discontinued operations, and so
forth) be considered in determining the
amount of tax benefit that results from a
loss from continuing operations and that
shall be allocated to continuing operations.
operations
That modification of the incremental
approach is to be consistent with the
approach in Subtopic 740-10 to consider
the tax consequences of taxable income
expected in future years in assessing the
realizability of deferred tax assets.
operations
Application of this modification makes it
appropriate to consider an extraordinary
gain in the current year for purposes of
allocating a tax benefit to a current-year
loss from continuing operations.
operations
The amount allocated to continuing
operations is the tax effect of the pretax
income or loss from continuing operations
that occurred during the year, plus or minus
income tax effects of:
operations
Changes in circumstances that cause a
change in judgment about the realization of
deferred tax assets in future years (see
paragraph 740-10-45-20 for a discussion of
exceptions to this allocation for certain
items).
operations
Changes in tax laws or rates
Changes in tax status
Tax-deductible dividends paid to shareholders
for dividends paid on unallocated shares held
by an employee stock ownership plan or any
other stock compensation arrangement).
operations
The remainder is allocated to items other
than continuing operation.
Allocations to items other than

continuing operations
Specific items outside of continuing
operations that require an allocation of
income tax expense or benefit.
It also establishes the methodology for
allocation.

That methodology differs depending on
whether there is only one item other than
continuing operations or whether there are
multiple items other than continuing
operations.

The tax effects of the following items
occurring during the year shall be charged
or credited directly to other comprehensive
income or to related components of
shareholders equity:

Adjustments of the opening balance of
retained earnings for certain changes in
accounting principles or a correction of an
error. Paragraph 250-10-45-8 addresses the
effects of a change in accounting principle,
including any related income tax effects.

Gains and losses included in comprehensive
income but excluded from net income (for
example, translation adjustments accounted
for under the requirements of Topic 830 and
changes in the unrealized holding gains and
losses of securities classified as available-forsale).

An increase or decrease in contributed
capital (for example, deductible
expenditures reported as a reduction of the
proceeds from issuing capital stock).

Expenses for employee stock options
recognized differently for financial
reporting and tax purposes. An employee
stock ownership plan and a stock option
plan are analogous.

Both are compensatory arrangements and
both sometimes result in tax deductions for
amounts that are not presently recognized
as compensation expense in the financial
statements under existing generally
accepted accounting principles (GAAP).

The tax benefits of both are reported as a
credit to shareholders equity.
Dividends that are paid on unallocated
shares held by an employee stock
ownership plan and that are charged to
retained earnings.

This is different from a tax deduction
received for the payment of dividends on
allocated shares held by an employee stock
ownership plan that represents, in
substance, an exemption from taxation of
an equivalent amount of earnings, cont.

Cont. for which the tax benefit shall be
recognized as a reduction of tax expense
and shall not be allocated directly to
shareholders equity.

Deductible temporary differences and carry
forwards that existed at the date of a quasi
reorganization.

All changes in the tax bases of assets and
liabilities caused by transactions among or
with shareholders shall be included in equity
including the effect of valuation allowances
initially required upon recognition of any
related deferred tax assets.

Changes in valuation allowances occurring
in subsequent periods shall be included in
the income statement.
Single item of allocation other

than continuing operations
If there is only one item other than
continuing operations, the portion of
income tax expense or benefit for the year
that remains after the allocation to
continuing operations shall be allocated to
that item.
Multiple items of allocation other

If there are two or more items other than
continuing operations, the amount that
remains after the allocation to continuing
operations shall be allocated among those
other items in proportion to their individual
effects on income tax expense or benefit for
the year.

When there are two or more items other than
continuing operations, the sum of the separately
calculated, individual effects of each item
sometimes may not equal the amount of income
tax expense or benefit for the year that remains
after the allocation to continuing operations.

The procedures to allocate the remaining amount
to items other than continuing operations are as
follows:
a. Determine the effect on income tax expense
or benefit for the year of the total net loss for
all net loss items.

b. Apportion the tax benefit determined in (a)
ratably to each net loss item.
c. Determine the amount that remains, that is, the
difference between the amount to be allocated
to all items other than continuing operations
and the amount allocated to all net loss items.

Apportion the tax expense determined in (c)
ratably to each net gain item.
Level of application
While ASC 740 does not explicitly state the level of
application of the intraperiod allocation rules,
implicitly those allocation rules should be applied at
the jurisdictional level when only one return is filed
within a jurisdiction, and at the tax-return level when
more than one tax return is filed within a jurisdiction
(e.g., where a consolidated tax return is not filed).
The basic model

When ASC 740 does not specifically allocate all
or a portion of the total tax expense to a specific
financial statement component or components, it
allocates taxes based on what often is referred to
as the with-and-without or incremental
approach. This basic approach can be
summarized in the following three steps:
The basic model

Step 1: Compute the total tax expense or
benefit (both current and deferred) for the
period.
The basic model

Step 2: Compute the tax effect of pretax
income or loss from continuing operations,
without consideration of the current-year
pretax income from other financial statement
components, plus or minus the tax effects of
the items that ASC 740 specifically allocates
to continuing operations.
The basic model

Step 3: Allocate among the other financial statement
components, in accordance with the guidance in ASC
740-20-45-12 through 45-14, the portion of total tax
that remains after allocation of tax to continuing
operations [the difference between the total tax expense
(computed in Step 1) and the amount allocated to
continuing operations (computed in Step 2).
Compute total tax expense or

benefit
The first step in the intraperiod allocation
process is to compute the total tax expense or
benefit (both current and deferred) recognized
in the financial statements.

benefit
This includes the tax effects of all sources of
income (or loss)that is, the tax effects
attributable to continuing operations, discontinued
operations, extraordinary items, items of other
comprehensive income, certain changes in
accounting principles, and the effects of valuation
allowance changes.

benefit
The only exceptions relate to:
1. Certain changes within the measurement period
for a business combination that affect
recognition of acquired tax benefits (ASC 805740-45-2),

benefit
2. Tax effects allocated to additional paid-in capital
when applying the exception to the basic
approach to allocating a change in valuation
allowance that is outlined in ASC 740-20-45-3,
3. The additional exception related to certain quasi
reorganizations articulated in ASC 852-740-45-3.
Compute tax attributable to

Tax effect of current-year income from pretax
Computing the tax effects to be allocated to continuing
operations begins with the quantification of the tax
effect for the year for continuing operations without
consideration of the tax effects (both current and
deferred) of current-year income from all other
financial statement components.
Other items specifically allocated

to continuing operations
In addition to the tax effect of the current-year
income from pretax continuing operations, ASC
740 specifically requires certain components of
total income tax expense or benefit for the year
to be included in the tax provision/(benefit) from
continuing operations.
Other items specifically allocated

to continuing operations
Changes in tax laws or an entitys

tax status
Adjustments to deferred tax balances are
necessary when tax laws or rates change (ASC
740-10-35-4) or an entitys tax status changes
(ASC 740-10-25-32 and ASC 740- 10-40-6).

tax status
All such deferred tax adjustments, including
those elements of deferred tax that relate to items
originally reported in other financial statement
components (such as OCI), are required to be
reflected entirely in continuing operations.

tax status
When a change in tax law is enacted with
retroactive effect, ASC 740-10-25-48 and ASC
740-10-45-16 specify that the tax effects (current
as well as deferred) of items excluded from
income from continuing operations arising
during the current year, cont.

tax status
Cont. but prior to the date of enactment,
should be adjusted to reflect the rate change as of
the enactment date, with the adjustment also
reflected in income fro continuing operations.
Change in indefinite reversal

assertion for foreign subsidiary
The tax effects that result from a change in an
entitys assertion about its intent to indefinitely
reinvest prior undistributed earnings of foreign
subsidiaries or foreign corporate joint ventures
that are permanent in duration should be reported
in continuing operations in the period in which
the change in assertion occurs.

Thus, if a company concluded that it could no
longer assert that it would indefinitely reinvest
its prior-years undistributed foreign earnings, it
would not be appropriate to backwards trace
the accrual of the tax consequences of the
previously accumulated foreign currency
translation adjustments within OCI

Even if that is where the amounts would have
been allocated if the company had never asserted
indefinite reinvestment of those earnings in those
prior periods.

It should be noted, however, that the tax effects
on currency translation adjustments (CTA)
arising in the current year are subject to the rules
of ASC 740-20-45-11(b).

That paragraph states that the tax effects of gains
and losses included in OCI, but excluded from
net income, that occur during the year should be
charged or credited directly to OCI.

As a result, it is important to distinguish the tax
effects of the change in assertion between
current-year and prior years items.
Changes in the valuation

allowance
General Rules
ASC 740-10-45-20 discusses the proper
intraperiod allocation for changes in valuation
allowances. In addition, ASC 740-20-45-3, and
ASC 740-10-55-38 set forth various rules for
allocation of the benefits of previouslyunrecognized losses and loss carryforwards.

allowance
General Rules
Under these rules, the intraperiod allocation
depends on whether the benefit of the loss or
deduction is recognized or realized in the year in
which it is generated and whether the income to
allow for the realization of the loss relates to the
current year or future years.

allowance
These rules can be summarized as follows:
When there is an increase or decrease in the valuation
allowance applicable to which cause the assessment
of the likelihood of realization of these assets by
income in future years to change, the effect is
reflected in continuing operations. This is true except
for the initial recognition of source-of-loss items.

allowance
When income in the current year allows for the
release of a valuation allowance, the resulting
benefit is allocated to the current-year component
of income that allows for its recognition (except
for the initial recognition of source-of-loss items).

allowance
When the tax benefit of a loss in the current year
is recognized, it is allocated to the component
that generated the loss regardless of the financial
statement source of the taxable income that
allows for its recognition.

allowance
This principle is the same whether the source of
income is (a) taxable income in the current year,
(b) taxable income in a prior year to which the
current-year loss can be carried back, or (c)
taxable income that is expected to occur in future
years.

allowance
A question may arise with respect to the allocation
of a previously unrecognized tax benefit that could
be recognized in the current year based on either:
(1) changes in estimates about future taxable
income (which would allocate the benefit to
continuing operations) or

allowance
(2) a component of income in the current year
other than continuing operations.

allowance
Because the determination of tax allocated to continuing
operations is made first (primacy of continuing
operations) and because we generally would regard all
income from projections of taxable income in future
years to be attributed to continuing operations, valuation
allowance changes usually are recorded in continuing
operations.

allowance
In making this determination, we believe that
changes in judgment regarding the projections
of future-year income should be attributed to
continuing operations, even when the change in
estimate about the future is affected by another
financial statement component.
Source-of-loss items
The initial recognition, regardless of when it
occurs, of the tax benefits of certain deductible
differences and carryforwards is classified on
the basis of the source of loss that generates
them rather than on the basis of the source of
income that utilizes, or is expected to utilize
them.
The initial recognition of tax benefits for the
items listed below should be allocated directly
to the related components of shareholders
equity regardless of the source of income that
allows for their realization:
Increases or decreases to contributed capital
Certain deductions for employee stock options
recognized differently for financial reporting and
tax purposes. We also believe that the tax effects of
favorable and unfavorable adjustments relating to
such deductions resulting from changes in
assessments of uncertain tax positions should be
recorded in equity
Tax-deductible dividends on unallocated
shares held by an ESOP (such dividends are
charged to retained earnings)
Deductible temporary differences and
carryforwards that existed at the date of a
quasi reorganization
Determining which deferred tax asset

was realized in order to source the
release of a valuation allowance
The general rules for allocating the effects of
changes in valuation allowances apply to most
changes in valuation allowances.

However, because of the source-of-loss exceptions for
the initial recognition of certain tax benefits and
because a deductible temporary difference may reverse
and be utilized on a tax return but be replaced with
another deductible temporary difference within the
same year (thus not realizing a tax benefit)

The determination of which carryforward or
deductible temporary difference produced a
realized tax benefit during the year may
become important when applying the
intraperiod allocation rules.

This subsection explores the ordering rules that
should be applied when addressing the
question, Which deferred tax asset produced a
recognizable tax benefit?
Recognition of a tax benefit for carryforwards

and other deductible temporary differences
(ASC 740-10-55-37)
When there are both DTAs at the beginning of
the year and DTAs arising in the current year
from sources other than continuing operations,
a change in the valuation allowance must be
sourced to the assets that gave rise to the
change.

(ASC 740-10-55-37)
In determining whether the reversal of a
particular deductible temporary difference or
carryforward provided a benefit, one must
consider the interaction of originating
temporary differences with loss and other
carryforwards.

(ASC 740-10-55-37)
Just because a net operating loss carryforward
was utilized (used on the tax return), it does not
mean that a benefit was realized (provided
incremental cash tax savings).

(ASC 740-10-55-37)
ASC 740-10-55-37 indicates that the reversal of
a DTD as a deduction or through the use of a
carryforward does not constitute realization
when reversal or utilization resulted because of
the origination of a new DTD.

(ASC 740-10-55-37)
This is because the DTA that has been utilized
has simply been replaced by the originating
DTA without providing for realization.

(ASC 740-10-55-37)
Accordingly, ASC 740-10-55- 37 indicates that
the source of the benefit of the originating
DTD would not be the component of income in
which the originating DTD arose; rather, it
would take on the source of the deduction or
carryforward that it replaced.

(ASC 740-10-55-37)
The specific example in ASC 740-10-55-37 refers only
to deferred revenue, but the reference to ASC 740-2045-3 makes it clear that the same rationale applies
when an origination or increase of a DTD during the
year allows for the utilization of a deduction or
carryforward which originated in equity
Applying the intraperiod allocation general

rule for ordering to stockbased
compensation
Under the general rule for ordering tax benefits,
items included in continuing operations
generally are considered to enter into tax
computations before items included in other
components.

compensation
The tax deduction that corresponds to the
recognized book compensation cost is
accounted for in continuing operations under
ASC 740.

compensation
Complexities arise when considering the
windfall tax benefit recorded in additional paidin capital (APIC).

compensation
ASC 718-20-55-20
provides that the tax benefit and credit to
APIC for a windfall tax benefit should not be
recorded until the deduction reduces income
taxes payable.

compensation
ASC 718-20-55-20
In some cases, an entity may have currentyear windfall tax benefits and NOL (or tax
credit) carryforwards from earlier years, both
of which are available to offset taxable
income in the current year.
Two approaches would be acceptable to

determine the order in which tax attributes
should be considered:
1.) With-and-without approach:
Follow the with-and-without intraperiod tax
allocation approach as described in ASC 74020-45-7, which would result in windfall tax
benefits being utilized last.
That is, a windfall benefit would be recognized

in APIC only if an incremental benefit was
provided after considering all other tax
attributes presently available to the entity.
Two approaches would be acceptable to

determine the order in which tax attributes
should be considered:
2.) Tax law ordering approach:
Apply the tax law. That is, allocate the
benefit based on provisions in the tax law
that identify the sequence in which those
amounts are utilized for tax purposes.

compensation
An entity should treat its decision to adopt
either approach as an accounting policy
decision, which should be followed
consistently.
Step 3: Allocate the remaining portion of

tax expense or benefit to other
components
The portion of total tax that remains after allocation of
tax to continuing operations (the difference between the
total tax expense (computed in Step 1 above) and the
amount allocated to continuing operations (computed in
Step 2 above) is then allocated among the other financial
statement components in accordance with the guidance
in ASC 740-20-45-14.

components
The tax effects excluded from continuing
operations will relate to current or deferred
taxable income or deductions arising from
revenue and expense items recognized in other
components in the current year.

components
ASC 740-20-45-12 states:
If there is only one item other than continuing
operations, the portion of income tax expense
or benefit for the year that remains after the
allocation to continuing operations is allocated
to that item.

components
ASC 740-20-45-14 states:
If there are two or more items other than continuing
operations, the amount that remains after the
allocation to continuing operations shall be allocated
among those other items in proportion to their
individual effects on income tax expense or benefit
for the year.

components
ASC 740-20-45-14 states:
When there are two or more items other than
continuing operations, the sum of the separately
calculated, individual effects of each item sometimes
may not equal the amount of income tax expense or
benefit for the year that remains after the allocation to

components
ASC 740-20-45-14 states:
In those circumstances, the procedures to allocate the
remaining amount to items other than continuing
operations are as follows:
a. Determine the effect on income tax expense or
benefit for the year of the total net loss for all net
loss items.

components
b. Apportion the tax benefit determined in (a)
ratably to each net loss item.
c. Determine the amount that remains, that is, the
difference between (1) the amount to be allocated
to all items other than continuing operations and
(2) the amount allocated to all net loss items.

components
d. Apportion the tax expense determined in (c)
ratably to each net gain item.
Determining the individual effects on

income tax expense or benefit
We believe that the individual effects on income
tax expense or benefit of a specific financial
statement component represent that components
incremental tax effect (on a jurisdiction-byjurisdiction basis) on consolidated tax expense or
benefit.

Accordingly, we believe that this amount should be
quantified by means of comparing the difference between
the total tax expense or benefit computed for the year that
includes all sources of income and loss and the total tax
expense or benefit for the year computed with all sources
of income and loss except for the financial statement
component being quantified.

While that amount may not be the amount that
ultimately is allocated to the respective financial
statement component, it represents the individual
incremental effect of the item for purposes of
applying the allocation procedure outlined in
ASC 740-20-45-14.

All items (other than continuing operations)
should be given equal priority for purposes of
intraperiod tax allocation, unless there is specific
guidance that provides otherwise.
Intraperiod allocation for equity items

other than items of comprehensive
income
ASC 740 and ASC 718 specifically allocate to
shareholders equity the tax effects of changes during
the year of the following items:
Cumulative effect adjustments to beginning retained
earnings for changes in accounting principle or error
correction (ASC 740-20-45-11(a));

income
Increases or decreases in contributed capital
(ASC 740-20-45-11(c));
Expenses for employee stock options
recognized differently for financial reporting
and tax purposes (ASC 740-20-45-11(d));

income
Income tax benefits relating to dividends and
dividend equivalents that are charged to retained

earnings and are paid to employees for equity that
is classified as nonvested equity shares, as
nonvested equity share units, and as outstanding
equity share options (ASC 718-740-45-8 through
45-12;

income
Deductible temporary differences and
carryforwards that existed, but for which a
valuation allowance was required, at the date of
a quasi reorganization (ASC 740-20-45-11(f));

income
Tax effects credited directly to retained earnings
resulting from deductible dividends paid on
unallocated shares held by an ESOP and
charged to retained earnings (ASC 740-20-4511(e)); and

income
Changes in the tax bases of assets and liabilities
caused by transactions among or with shareholders,
including the effect of valuation allowances initially
required upon recognition of any related deferred tax
assets. Changes in valuation allowances occurring in
subsequent periods shall be included in the income
statement (ASC 740-20-45-11(g)).
Items of other comprehensive income

Certain gains and losses are included in
comprehensive income but excluded from net
income. Such items, when recognized, are reflected
directly in OCI, a component of shareholders equity.
Generally, the tax effect of gains and losses recorded
in OCI should also be recorded in OCI (ASC 740-2045-11(b)).

These gains and losses include:
Foreign currency translation gains and losses reflected in
the CTA account within OCI for foreign operations using
a foreign functional currency or the foreign currency
transaction gain or loss on a non-derivative instrument
Unrealized gains and losses on AFS debt and equity
securities

These gains and losses include:
Net unrecognized gains and losses and unrecognized
prior service cost related to pension and other
postretirement benefit arrangements
The effective portion of the gain or loss on a
derivative instrument designated and qualifying as a
cash flow hedge instrument
Cumulative translation adjustments

(CTA)
Some pretax transaction gains and losses (ASC
830-20-35-2) and all translation adjustments are
recorded directly in the CTA account. In
addition, ASC 830-20-45-5 requires the tax
effects of these items to be attributed to the
CTA account, subject to intraperiod allocation.

(CTA)
Allocation to the CTA account is required for
both current and deferred taxes on transaction
gains and losses recorded in the CTA account
and for deferred taxes on translation
adjustments.

(CTA)
With respect to deferred taxes provided by a parent or
investor for an outside basis temporary difference,
the method of allocating the tax effect on the current
year change in this outside basis temporary difference
between continuing operations and other items (such
as CTA) must be considered. Although several
alternatives exist, the method chosen should be
consistently applied.

(CTA)
Amounts that are ultimately allocated to CTA include:
1. The capital gain or loss effect of revaluation of
contributed capital;
2. The effect of exchange rate changes on beginning-ofyear deferred taxes provided on unremitted earnings;
and

(CTA)
Amounts that are ultimately allocated to CTA
include:
3. The effects of changes in the valuation
allowance and changes in tax-planning actions
that are not appropriately allocated to

(CTA)
The computation will also require appropriate
consideration of foreign withholding taxes and
limitations on utilization of foreign tax credits.
Unrealized gains and losses on

available-for-sale debt and equity
securities (ASC 320)
ASC 320 requires that investments classified as
available-for-sale be carried at fair value.
This would generally result in temporary differences
because the laws in most tax jurisdictions defer the
recognition of gains and losses from investments
until the investments are sold.
Unrealized gains and losses on

available-for-sale debt and equity
securities (ASC 320)
ASC 320 reflects pretax changes in market value
as other comprehensive income.
ASC 740-20-45-11(b), requires that the tax
effects of pretax changes to OCI occurring
during the year be recorded net against the pretax
changes in OCI.
Appreciation on available-for-sale (AFS)

securities when there is a
valuation allowance
When there is a valuation allowance applicable
to beginning-of-year deferred tax assets and
there is a change in circumstances during the
year that causes the assessment of the likelihood
of realization in future years to change, the effect
is reflected in continuing operations.
Appreciation on available-for-sale (AFS)

securities when there is a
valuation allowance
However, if the reversal of the valuation allowance is
directly related to the appreciation of the companys
available-for-sale portfolio during the current year
(current-period income) and not to expectations of
taxable income in future periods, the reversal of the
valuation allowance is recorded in OCI.
Disproportionate tax effects lodged in

OCI
How tax effects become lodged in OCI
The tax effects reflected directly in OCI are
determined pursuant to ASC 740s intraperiod
allocation rules. Under this incremental approach,
subsequent adjustments to deferred taxes originally
charged or credited to OCI are not necessarily
reflected in OCI.

OCI
Specific circumstances in which subsequent adjustments
are not reflected in OCI, but instead are reflected in
continuing operations, include:
A change in enacted tax rates (because ASC 740-1045-15 requires that the effect of a tax law change on
deferred tax assets and liabilities is reflected in
continuing operations).

OCI
A change in the valuation allowance for beginningof-year deferred tax assets that results from a change
in circumstances that causes a change in judgment
about the realizability of deferred tax assets in future
years (because ASC 740-10-45-20 requires that this
type of change in valuation allowance be reflected
entirely in continuing operations).

OCI
In certain circumstances, the application of
the exception to the with-andwithout
approach described in ASC 740-20-45-7
may also result in a disproportionate tax effect
in OCI.

OCI
As a result of these requirements, the tax effect
lodged in OCI will not necessarily equal the net
deferred tax asset or liability that is recognized
in the balance sheet for the temporary
differences related to the pretax items recorded
in OCI.
Clearing disproportionate tax effects

lodged in accumulated other
comprehensive income
A common question when a distortion exists in
OCI is, What, if anything, should be done about
the reconciling items that remain in OCI as a
result of the change in valuation allowance or
change in tax rate effects having been charged or
credited to continuing operations?

ASC 740 is silent as to the disposition of a
disproportionate tax effect lodged in OCI. We
believe that the OCI balance must be eliminated
when the circumstances upon which it is
premised cease to exist.

Presumably, the pretax items in OCI ultimately
will be cleared to income (perhaps in an
indefinite, distant future period).

related to unrealized gains and
losses of available-for-sale debt and
equity securities (ASC 320)
When there is a disproportionate tax effect relating to
AFS securities, the question arises as to whether the
necessity to clear tax effects is determined on an itemby-item (individual investment) or an aggregate
portfolio basis. The following subsections discuss each
of these two approaches in more detail.
Item-by-item approach:
Portion of the disproportionate tax effect is
assigned to each individual investment in an
unrealized gain or loss position at the effective
date of the change.
When one of those individual investments is sold
or is impaired on an other than temporary basis
in accordance with ASC 320, the assigned
portion of the reconciling item is removed from
the available-for-sale component of OCI and
charged or credited to income from continuing
operations.
In this way, the tax effect that related to items of
accumulated OCI that was charged or credited
entirely to continuing operations is offset by
charges or credits to income from continuing
operations in later periods, as the individual
investments are sold or impaired on an other
than temporary basis.
Aggregate portfolio approach:

Under the aggregate portfolio approach, the
disproportionate tax effect remains intact as long
as the investment portfolio remains.
Aggregate portfolio approach:

Thus, if an entity with unrealized gains and
losses on equity securities elects the aggregate
approach, there presumably will be no need to
completely clear the disproportionate tax effect
from accumulated OCI as long as the entity
holds an available-for-sale portfolio.
Comparing the two approaches:

The item-by-item approach obviously requires
considerably more time and effort to implement.
Comparing the two approaches:

Given the absence of authoritative guidance and the
fact that either approach will produce out-of-period
tax effects, proponents of the aggregate portfolio
approach argue that the item-by-item approach does
not pass a reasonable costbenefit test and therefore is
inconsistent with the FASBs rationale for prohibiting
backwards tracing in the first place.

related to pension and OPEB plans
(ASC 715)
When there is a disproportionate tax effect
relating to pension and OPEB plans accounted
for under ASC 715, the question arises as to
when it would be appropriate to clear the
disproportionate tax effect lodged in AOCI.

(ASC 715)
Disproportionate tax effect lodged in AOCI
should be eliminated when the circumstances
upon which it is premised cease to exist.

(ASC 715)
As it relates to pension and OPEB plans,
because the plan is what gives rise to the DTA,
we believe that the disproportionate effect
should not be cleared until the plan has been
terminated

(ASC 715)
Because the unit of account is the pension or
OPEB plan itself, we do not believe that a prorata approach to clearing the disproportionate
effects related to an individual plan would be an
appropriate alternative.
Allocation of items of other

comprehensive income in an outside
basis temporary difference
As with other temporary differences, the allocation
of deferred taxes between continuing operations
and other items, such as other comprehensive
income, must be considered with respect to
deferred taxes provided by a parent or investor for
the outside basis temporary difference.
Dividends
ASC 740-20-45-8(d) requires that the benefit of
tax-deductible dividends be reflected in
Dividends
This general rule includes the tax effects of taxdeductible dividends on unallocated ESOP
shares that are accounted for under ASC 718, as
such dividends are not charged to retained
earnings (ASC 718-740-45-7).
Dividends
However, ASC 740-20-45-11(e), provides an
exception for tax-deductible dividends on
unallocated shares held by an ESOP charged to
retained earnings.
In this case, the corresponding tax effect also is
reflected in retained earnings.
Dividends
In addition, ASC 718-740-45-8 through 45-12 concludes

that, when an income tax benefit is realized from
dividends or dividend equivalents that are charged to
retained earnings and are paid to employees for equityclassified non-vested equity shares, non-vested equity
share units, and outstanding equity share options, the tax
benefit should be recognized as an increase in additional
paid-in capital (APIC) if the related awards are expected
to vest.
Dividends
However, if the related awards are not expected
to vest, the dividends or dividend equivalents are
recognized as compensation costs.
Dividends
Change in forfeiture estimates requires a
reclassification of dividends and dividend
equivalents between retained earnings and
compensation expense and a corresponding
reclassification of the related tax benefits
between APIC and income tax from continuing
operation
Dividends
ASC 718-740-45-8 through 45-12 retains the
requirement in ASC 718-20-55-20 that income
tax benefits of dividends and dividend
equivalents should not be recognized (in APIC or
in the income tax provision when a change in
vesting estimates occurs) until the deduction
reduces income tax payable.
Restating prior-period presentation for discontinued
operations revised June 2015
In the period when operations meeting the criteria in
ASC 205-20-45-1 for discontinued operations are
disposed of or classified as held-for-sale, prior years
results are segregated retroactively between
continuing and discontinued operations in
accordance with ASC 205-20-45-3 through 45-5.
Restating prior-period presentation for
discontinued operations revised June 2015
When this occurs, a new allocation of tax
expense or benefit to continuing operations
must be determined for the current and prior
years.
Restating prior-period presentation for
discontinued operations revised June 2015
There may be, in prior years financial
statements restated to reflect the discontinued
operations, one or more items other than
continuing operations and the operations now
presented as discontinued.
ASC 740-270-45-8 specifies that the amount of tax
to be allocated to discontinued operations should be
the difference between the tax originally allocated to
continuing operations and the tax allocated to the
restated amount of continuing operations.
This often will result in a different amount than
would result from a complete reapplication of the
intraperiod allocation rules; however, it may be
simpler to apply as amounts of tax allocated to other
components of income (loss) recognized in the prior
years are not restated.
Recording previously unrecognized

deferred tax effects of outside basis
differences of subsidiaries
A question arises as to the intraperiod allocation
of a deferred tax expense/benefit in the following
situation: The entitys discontinued operation is
in a subsidiary with an outside basis difference.

The entity has not previously recorded a deferred tax
liability or asset for the outside basis difference, for one
of three possible reasons:
An excess outside book-over-tax basis difference
related to an investment in a foreign subsidiary was
not recorded as a deferred tax liability because of the
indefinite reversal criteria of ASC 740-30-25-17.

An excess outside book-over-tax basis
difference related to an investment in a
domestic subsidiary was not considered a
taxable temporary difference because the
entity expected that the difference would
reverse without tax effect (ASC 740- 30-25-7).

A deferred tax asset was not recognized for a
deductible temporary difference because it was
not apparent that the excess outside tax basis
would reverse in the foreseeable future (ASC
740-30-25-9).

Consistent with ASC 740-30-25-10, the entity
should record a deferred tax asset or liability for
the outside basis difference when its expectation
has changed and, in any event, no later than the
date on which the component of the entity is
classified as held-for-sale.

There are precedents in practice that support
intraperiod allocation of the related tax benefit or
expense to either discontinued operations or

We would not object to allocation to either
component, provided that appropriate disclosures
were made and that the approach chosen was
followed consistently.
Complexities in accounting for windfall

benefits under ASC 718
Windfall tax benefits have assumed a single tax
rate applicable in all periods when calculating the
windfall tax benefit resulting from the settlement
of a stock-based compensation award.

Entities may receive certain tax deductions that
impact their effective tax rate and thus the
incremental tax benefit of the excess tax
deduction.

IRC Section 199 provides an entity with a
permanent tax deduction related to its qualified
production activities.

In accordance with ASC 740-10-55-147 through
55-148, the deferred tax asset that an entity
records for the book compensation cost should
not be adjusted to reflect an IRC Section 199
deduction that the entity is likely to receive.

However, the IRC Section 199 deduction affects
the incremental tax benefit of the excess tax
deduction when using the with-and-without
approach to calculate the windfall tax benefit.
Tax effect of changes in accounting

principle
The cumulative effect adjustment from an accounting
change generally will be included as an adjustment to
beginning retained earnings.
ASC 740-20-45-11(a) requires that the tax effect of
the cumulative effect adjustment should also be
recorded as an adjustment to beginning retained
earnings.

principle
But the tax effects to be recorded are the effects
that would have been recorded if the newly
adopted accounting method had been used in
prior years. Presumably, hindsight would not be
used in this determination.

principle
Therefore, we believe that the tax effect of a
cumulative effect of a change in accounting
principle that is reported as an adjustment to
beginning retained earnings is an adjustment of
cumulative income tax expense from prior periods
and not an allocation of the current periods tax
expense.

principle
For example, assume that an entity has a change
in accounting principle that results in a
cumulative increase in prior-year financial
reporting income that is to be reported as a
cumulative effect adjustment to beginning
retained earnings.

principle
Such an increase also would have resulted in an increase
in taxable temporary differences as of that date. The
resulting deferred tax liability should be established by
taking into account the deferred tax balances at the
beginning of the year and the enacted tax rates expected
to be in effect when those temporary differences reverse
(as determined under ASC 740-10-30-8).

principle
Accordingly, if the taxable temporary differences
would have allowed for a lesser valuation
allowance at the beginning of the year on
previously recorded deferred tax assets, the
valuation allowance release also would be
included in the cumulative effect.

principle
Although a change in accounting principle also may
yield a revised estimate of future pretax book
income, generally there will be no impact on taxable
income. In any event, a change in expectation
coincident with a change in accounting should not be
considered part of the change in accounting.

principle
If the cumulative effect is required to be reported
as a component of net income, it would be subject
to the intraperiod allocation rules. In calculating
such cumulative effect, the intraperiod allocation
rules would be applied to each prior period.
Miscellaneous intraperiod issues

Income tax consequences of issuing convertible
debt with a beneficial conversion feature
An entity may issue a convertible debt security
with a nondetachable conversion feature. The
nondetachable conversion feature is not
accounted for separately under ASC 470.

However, when an entity issues a convertible
debt security with a nondetachable conversion
feature that is in-the-money, ASC 470-20-255 requires the conversion feature to be
accounted for separately.

This type of conversion feature is defined as a
beneficial conversion feature and is recognized
and measured separately by allocating to
additional paid-in capital a portion of the
proceeds equal to the intrinsic value of the
conversion feature.

That intrinsic value is calculated at the
commitment date as the difference between the
conversion price and the fair value of the
common stock or other securities into which the
security is convertible, multiplied by the number
of shares into which the security is convertible.

The convertible security is recorded at par, and a
discount is recognized for the amount that is
allocated to additional paid-in capital. For tax
purposes, the tax basis of the convertible debt
security is the entire proceeds received at issuance
of the debt. Thus, the book and tax bases of the
liability are different.

ASC 740-10-55-51 addresses whether a deferred
tax liability should be recognized for that basis
difference and indicates that:
1. The recognition of a beneficial conversion feature
creates a difference between the book basis and tax
basis (basis difference) of a convertible debt
instrument,

2. That basis difference is a temporary difference for
which a deferred tax liability should be recorded
under ASC 740, and
3. The effect of recognizing the deferred tax liability
at the date of issuance should be charged to equity
in accordance with ASC 740-20-45-11(c).

As the discount created by the recognition of the
beneficial conversion feature is amortized, which
in certain circumstances is over a period shorter
than the contractual life of the debt instrument, the
temporary difference reverses. The effect of that
reversal is a component of the deferred tax
provision for the period(s).

Deferred taxes are also required for other types of
convertible debt instruments such as convertible debt
instruments that:
(1) may be partially or wholly settled in cash and are
accounted for under ASC 470,
(2) provide for certain contingent payments, and
(3) have call options (see Chapter TX 3 for additional
discussion).

The intraperiod allocation guidance described
above for convertible debt instruments with a
beneficial conversion feature should also apply
to the tax effects from these other types of
convertible debt instruments.
Changes in tax basis resulting from a

taxable exchange between entities
under common control
Certain transfers of net assets or exchanges of
shares between entities under common control
result in a change in the reporting entity that
receives the net assets.
In a taxable transfer/exchange, new tax bases are
established for the assets of one of the entities.

Because a new basis is not established for book
purposes, taxable temporary differences may be
reduced or eliminated, and deductible temporary
differences may be increased or created.

Based on the guidance in ASC 740-20-45-11(g),
we believe that, as of the transfer/exchange
date, the tax effects attributable to any change in
tax basis (net of valuation allowance, if
necessary) should be charged or credited to
contributed capital.

If a valuation allowance is provided against the deferred
tax assets at the combination date, any subsequent
release of the valuation allowance should be reported as
a reduction of income tax expense and reflected in
continuing operations, unless the release is based on
income recognized during the same year and classified
in a category other than continuing operations.

Similarly, if the reporting entity can no longer
realize a preexisting deferred tax asset as a
result of a transaction among or with its
shareholders, ASC 740-10-45-21 requires that
the write-off be recorded as part of income tax
expense.
Presentation of the tax effects of the sale

of stock of a subsidiary
Computing gain or loss on the sale of a subsidiary
If the sale of a subsidiary is structured as an asset sale

(e.g., an asset acquisition or a share acquisition treated
as an asset acquisition), the seller will reflect a gain or
loss on the sale of the assets in pretax income and will
recognize any current taxes, as well as the reversal of
any deferred taxes related to the business, in the tax
provision.

If the transaction is structured as a stock sale
(e.g., a third party purchases 100 percent of
the parents stock in the subsidiary), the tax
effects of the parent include the realization of
any basis difference that exists on the parents
investment in subsidiaries being sold.

If the transaction is structured as a stock sale
(e.g., a third party purchases 100 percent of
the parents stock in the subsidiary), the tax
effects of the parent include the realization of
any basis difference that exists on the parents
investment in subsidiaries being sold.

In addition, the historical tax bases of the
subsidiarys individual assets and liabilities
generally transfer to the buyer.

Under the first approach, the pretax book
gain or loss would be computed based on the
parents carrying value of the subsidiary,
including the deferred tax assets and
liabilities of the entity being sold.

This view reflects the fact that the acquirer,
by agreeing to buy the stock of the entity (and
receiving the tax carryover basis), also is
buying the future deductions or future taxable
income inherent in the entity.
Exception to the basic model

ASC 740-20-45-7
General application of ASC 740-20-45-7
provides an exception to the with and

without approach to intraperiod tax
allocation.

ASC 740-20-45-7
That paragraph states that all items (e.g., extraordinary
items, discontinued operations, and so forth) should be
considered for purposes of determining the amount of
tax benefit that results from a loss from continuing
operations and that should be allocated to continuing
operations.

ASC 740-20-45-7
We believe that all items means all items

below the line, including gains and losses
recognized in other comprehensive income and
taxable amounts recognized in additional paidin capital.

ASC 740-20-45-7
In this regard, we believe the amortization of an
unrecognized loss out of AOCI would constitute a
source of other income and would be aggregated with
all other below-the-line gains and losses for
purposes of determining whether there is a net gain
from sources other than continuing operations.

ASC 740-20-45-7
Similarly, an other-than-temporary impairment
(OTTI) recognized for previously unrealized
losses on securities would constitute a source
of other comprehensive income.

ASC 740-20-45-7
To the extent that income in another component
represents a source of income that enables realization
of the tax benefit of the current-year loss in continuing
operations, the tax rate used to determine the amount
of benefit in continuing operations should be based on
the rate that is applicable to that other component.

Chapter 12 - Intraperiod Tax

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Chapter 12 - Intraperiod Tax

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Intraperiod tax

Allocation of income tax expense

Allocation of income tax expense

Allocation of income tax expense

Allocation of income tax expense

Allocation of income tax expense

Allocation of income tax expense

Allocation of income tax expense

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Allocations to items other than

Single item of allocation other

Multiple items of allocation other

Multiple items of allocation other

Multiple items of allocation other

Multiple items of allocation other

Multiple items of allocation other

The basic model

The basic model

The basic model

The basic model

Compute total tax expense or

Compute total tax expense or

Compute total tax expense or

Compute total tax expense or

Compute tax attributable to

Other items specifically allocated

Other items specifically allocated

Changes in tax laws or an entitys

Changes in tax laws or an entitys

Changes in tax laws or an entitys

Changes in tax laws or an entitys

Change in indefinite reversal

Change in indefinite reversal

Change in indefinite reversal

Change in indefinite reversal

Change in indefinite reversal

Change in indefinite reversal

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Changes in the valuation

Determining which deferred tax asset

Determining which deferred tax asset

Determining which deferred tax asset

Determining which deferred tax asset

Recognition of a tax benefit for carryforwards