FASB ASC 740

Definition

FASB ASC 740 is the Financial Accounting Standards Board's Accounting Standards Codification that addresses accounting for income taxes. This standard provides guidelines on how to recognize, measure, and disclose the effects of income taxes on financial statements, focusing on temporary differences between the tax base of an asset or liability and its reported amount in the financial statements.

5 Must Know Facts For Your Next Test

1. FASB ASC 740 requires companies to recognize a deferred tax asset or liability for all temporary differences and operating loss carryforwards.
2. The standard emphasizes the need for companies to assess the likelihood of realizing deferred tax assets through a valuation allowance, if necessary.
3. Under FASB ASC 740, companies must provide detailed disclosures about their income taxes, including current tax expense, deferred tax expense, and effective tax rates.
4. The guidance outlines how to account for uncertain tax positions by requiring a two-step approach to determine if an uncertain tax position should be recognized.
5. FASB ASC 740 also stipulates that changes in tax laws or rates must be recognized in the period they are enacted, impacting the measurement of deferred tax assets and liabilities.

Review Questions

• How does FASB ASC 740 define and treat temporary differences in financial accounting?
  • FASB ASC 740 defines temporary differences as discrepancies between the tax basis of an asset or liability and its carrying amount in financial statements. The standard mandates that companies recognize deferred tax assets and liabilities for all temporary differences. This recognition ensures that financial statements accurately reflect the future tax consequences of current transactions, ultimately leading to better transparency for stakeholders.
• What are the key requirements for recognizing deferred tax assets under FASB ASC 740?
  • Under FASB ASC 740, companies must recognize deferred tax assets for all temporary differences and operating loss carryforwards. However, they must also assess the likelihood of realizing these assets by determining if a valuation allowance is needed. If it’s more likely than not that some portion of the deferred tax asset will not be realized, a valuation allowance must be established to reduce its carrying amount. This approach ensures that only realizable benefits are reflected in financial statements.
• Evaluate how FASB ASC 740 impacts financial reporting and decision-making regarding income taxes.
  • FASB ASC 740 significantly impacts financial reporting by establishing clear guidelines on how to account for income taxes. This includes recognizing deferred tax assets and liabilities based on temporary differences and ensuring transparency through detailed disclosures. The standard also influences decision-making by requiring companies to carefully evaluate their uncertain tax positions and potential changes in tax laws. By fostering better understanding and reporting of tax-related issues, FASB ASC 740 aids stakeholders in making informed decisions based on more accurate financial information.

Related terms

Temporary Differences: Temporary differences are differences between the tax basis of an asset or liability and its carrying amount in the financial statements that will result in taxable or deductible amounts in future periods.

Deferred Tax Assets:

Deferred tax assets are amounts that can reduce future taxable income due to temporary differences or carryforwards, representing the tax benefit expected to be realized in the future.

Deferred Tax Liabilities:

Deferred tax liabilities are amounts that reflect taxes payable in the future due to temporary differences that will result in taxable income when they reverse.