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AGA Accounting Principles Committee MeetingAccounting for Income Taxes: Recent Developments and Current Issues August 18, 2015

American Gas AssociationAccounting Principles Committee

Accounting for Income Taxes:Recent Developments and Current Issues

David J. YankeeDeloitte Tax LLP

August 18, 2015

Copyright © 2015 Deloitte Development LLC. All rights reserved. 1

FASB developments• Balance sheet classification • Intra-entity transfer of assets • Investments in affordable housing credit projects• Employee share-based payment accounting

FERC reporting• Tax receivables — overpayments and refunds• Accounting method changes

Technical tax update• Tangible property regulations

Recent normalization private letter rulings

Accounting for Income Taxes:Recent Developments and Current Issues


FASB developments• Balance sheet classification • Intra-entity transfer of assets • Investments in affordable

housing credit projects• Employee share-based

payment accounting


FASB income tax projectTime line of key events

February 2013 — Financial Accounting Foundation (FAF) announced a Post-Implementation Review (PIR) of FASB Statement No. 109, Accounting for Income Taxes

November 2013 — FAF completed its PIR of Statement 109 and concluded:• Statement 109 adequately achieved its intended purposes, although

slightly complex• Investors struggle to assess cash tax effects• Stakeholders find the following to be operationally challenging:

– Intraperiod tax allocation– Accounting for intercompany transfers of assets– Indefinitely reinvested foreign earnings

December 2013 — FASB Response Letter to FAF PIR Report• Will evaluate the PIR Report findings



August 2014 — FASB added to its technical agenda a project to simplify the accounting for income taxes by eliminating:• Classification of deferred taxes between current and noncurrent• The exception to the income taxes accounting model that prohibits the

recognition of income tax consequences of intra-entity asset transfers

October 2014 — Board voted to issue an exposure draft

January 22, 2015 — Two Accounting Standards Updates (ASUs) proposed as part of the simplification initiative• Balance sheet classification • Intra-equity transfer of assets

May 29, 2015 — End of comment period for the proposed ASUs

FASB income tax projectTime line of key events (continued)


ASC 740• A DTA or DTL related to a temporary difference with respect to an asset

or liability is classified as current or noncurrent based on the classification of the related asset or liability– If not related to an asset or liability, classify based on the expected reversal

date of the temporary difference• By taxing jurisdiction, report net current DTA or DTL and net non-current

DTA or DTL

FERC guidance• All DTAs/DTLs are classified as non-current• DTAs and DTLs are not netted

FERC-GAAP difference• Reclassification of current portion of DTAs/DTLs and present net

DTAs/DTLs on a gross basis

Balance sheet classification of deferred taxesFERC-GAAP difference — current rules



Classify all deferred taxes as noncurrent• Jurisdictional netting still required

Transition guidance • Applies prospectively to all DTAs/DTLs (no restatement of prior periods)

Effective dates• Public business entities

– Annual periods, including interim periods within those annual periods, beginning after December 15, 2016

– Early adoption not permitted• All other entities

– One year later– Allowed to adopt early, but not before the effective date for public companies

and must adopt both issues if elect to early adopt

Balance sheet classification of deferred taxesFile Reference No. 2015-210


Question

SFAS 109 requires entities that prepare classified statements of financial position to separate deferred tax liabilities and assets into current and noncurrent amounts. Should entities reclassify the current portion of deferred tax liabilities or assets to current accounts, such as Account 174, Miscellaneous Current and Accrued Assets, or Account 242, Miscellaneous Current and Accrued Liabilities, for FERC accounting and financial reporting purposes?

ResponseNo. All deferred tax liabilities and assets shall be recorded in Accounts 190, 281, 282, or 283, as appropriate, and the current portion of those amounts shall not be reclassified to other accounts for FERC reporting purposes.

FERC guidanceAI93-5-000 — Accounting for Income Taxes16. CLASSIFICATION OF CURRENT PORTION OF DEFERRED INCOME TAXES



740-10-45-4 In a classified statement of financial position, an entity shall separate classify deferred tax liabilities and assets into a current amount and a as noncurrent amounts amount. Deferred tax liabilities and assets shall be classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. 740-10-45-5 Paragraph superseded by Accounting Standards Update 2015-XX. The valuation allowance for a particular tax jurisdiction shall be allocated between current and noncurrent deferred tax assets for that tax jurisdiction on a pro rata basis. 740-10-45-6 For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.

Income Taxes – Overall – Other Presentation Matters –Deferred Tax Accounts


Company has a net DTA of $750 as of the end of 20X1, as reflected below

Company expects the following reversals of the its DTAs/(DTLs) in 20X2• Accounts receivable – bad debt reserve $40 deductible• Fixed assets $100 taxable• Net operating loss (state) $50 deductible

Balance sheet classification of the DTAs/(DTLs) at the end of 20X1:

Balance sheet classification of deferred taxesCurrent and proposed accounting — example

Current guidance Proposed guidanceBalance sheet as of 12/31/20X1 DTA/(DTL) Current Non-current Current Non-

currentAccounts receivable –bad debt reserve 50 50 50

Fixed assets (1,000) (1,000) (1,000)Net operating loss (state) 200 50 150 200Total DTA/(DTL) ($750) $100 ($850) $0 ($750)



Company has a gross DTA of $250, a gross DTL of $1,000 and a valuation allowance related to the state NOL carryforward of $100 as of the end of 20X1.• None of the state NOL carryforward is expected to reverse in 20X2.

Under the current guidance, the valuation allowance is allocated between the current DTA and the non-current DTA on a pro rata basis. No allocation is necessary under the proposed guidance because the entire DTA would be classified as non-current.

Balance sheet classification of DTA valuation allowancesCurrent and proposed accounting — example

Current guidance Proposed guidanceBalance sheet as of 12/31/20X1 DTA/(DTL) Current Non-current Current Non-

currentAccounts receivable –bad debt reserve 50 50 50

Fixed assets (1,000) (1,000) (1,000)Net operating loss (state) 200 200 200Valuation allowance (100)) (20) (80) (100)Net DTA/(DTL) ($850) $30 ($880) $0 ($850)


Eliminate prohibition on recognition of income taxes paid for intra-entity transactions and the related deferred tax asset on differences between the tax basis of the assets in a buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements

The proposed Update would align the recognition of income tax consequences of intra-entity asset transfers with IFRS. • IAS 12, Income Taxes, requires recognition of current and deferred

income taxes resulting from an intra-entity asset transfer when the transfer occurs.

Intra-entity transfer of assets File Reference No. 2015-200



Historical guidance • ARB 51 and SFAS No. 109, paragraph 9(e)Current guidance• ASC 810-10-45-8 and ASC 740-10-25-3(e)Pending guidance• Proposed deletion of current ASC 740-10-25-3(e)

A prohibition on recognition of a deferred tax asset for the intra-entity difference between the tax basis of the assets in the buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements. Income taxes paid on intra-entity profits on assets remaining within the group are accounted for under the requirements of Subtopic 810-10.

• Proposed additional example of a temporary difference in ASC 740-10-25-20

The difference between the tax basis of the asset in the buyer’s tax jurisdiction and the cost of the asset reported in the consolidated financial statements as a result of an intra-entity asset transfer from one taxpaying entity to another taxpaying entity of the same consolidated group.

Intra-entity transfer of assets Historical, current and pending guidance


Intra-entity transfer of assets Sale of inventory example — current rules

Parent

Seller BuyerTax rate = 30% Tax rate = 40%

No DTA recorded pursuantto ASC 740-10-25-3(e)

Consolidated Financial Statements(debit = +, credit = <>)

Prepaid taxes $ 15DTA $ 0 Taxes payable ($ 15)Tax expense $ 0

Selling price $ 150Cost 100Margin $ 50Tax rate 30%Tax paid $ 15

Tax basis $ 150Book basis 100Difference – no DTA $ 50

Tax expense deferred(e.g., recorded as a prepaid)pursuant to ASC 810-10-45-8

Inventory



Intra-entity transfer of assets Sale of inventory example — pending guidance

Parent

Seller BuyerTax rate = 30% Tax rate = 40%

DTA and deferred tax benefit recognized

Consolidated Financial Statements(debit = +, credit = <>)

DTA $ 20 Taxes payable ($ 15)Tax benefit ($ 5)

Selling Price $ 150Cost 100Margin $ 50Tax rate 30%Tax paid $ 15

Tax basis $ 150Book basis 100Difference $ 50DTA $ 20

Current tax expense recognized

Inventory


Transition guidance • Entities would be required to apply the proposed amendments on a

modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption for the recognition of the income tax consequences of intra-entity asset transfers occurring before the effective date.


– Annual periods, including interim periods within those annual periods, beginning after December 15, 2016

– Early adoption not permitted• All other entities

– One year later– Allowed to adopt early, but not before the effective date for public companies

and must adopt both issues if elect to early adopt

Intra-entity transfer of assets File Reference No. 2015-200



Elective alternative reporting for investments in qualified affordable housing projects• Additional disclosure requirements for all investment in qualified

affordable housing projects irrespective of method of accounting

Transition guidance • Applies retrospectively to all periods presented


– Annual periods and interim reporting beginning after December 15, 2014– Early application permitted

• All other entities– Annual periods beginning after December 15, 2014, and interim periods

within annual periods beginning after December 15, 2015– Early application permitted

Investments in qualified affordable housing projectsASU 2014-01


Historical guidance • EITF No. 94-01, AICPA Statement of Position 78-9, Accounting for

Investments in Real Estate VenturesPrior guidance• ASC 323-740, ASC 970-323• Elective effective yield method for qualified affordable housing projects• Equity method or cost methodCurrent guidance• Amendments to ASC 323-740• Elective proportional allocation method for qualified affordable housing

projects• Equity method or cost methodFurther development• Amendments to ASC 810, Consolidation, by ASU 2015-02

Investments in qualified affordable housing projectsHistorical, current and pending guidance



ASU 2014-01 amends ASC 323-740 to expand the scope of theexception originally provided by EITF 94-1 to report the pretax lossfrom investments in certain affordable housing projects as part of thetax provision and to modify the allocation of the cost of the investment

Report pretax loss fromqualified investments as part of the income tax provision

Prior GuidanceEffective yield method

Amortize initial cost of investment to provide a constant effective yield over the period that the tax credits are allocated to the investor

Current GuidanceProportional amortization method

General – amortize initial cost of investment to in proportion to the tax credits and other benefits allocated to the investorPractical expedient – amortize initial cost of investment in proportion to the tax credits allocated to the investor

Elective reporting for qualified investments

Income (loss) before taxes (Loss)

Income taxes (Tax benefit)

Income (loss) Income

Investments in qualified affordable housing projects — summaryASU 2014-01


Prior requirements —for effective yield method

New requirements —for proportional amortization method

The availability (but not necessarily the realization) of the tax credits to the investor is guaranteed by creditworthy entity through a letter of credit, a tax indemnity agreement, or another similar arrangement

It is probable (higher threshold thanMLTN) that the tax credits allocable to theinvestor will be available

Not applicable The investor does not have the ability toexercise significant influence over theoperating and financial policies of the limited liability entity

Not applicable Substantially all of the projected benefitsare from tax credits and other tax benefits(e.g., tax benefits from operating losses of the investment)

The investor’s projected yield based solely on cash flows from guaranteed tax credits is positive

The investor's projected yield basedsolely on the cash flows from the taxcredits and other tax benefits is positive(no guarantee required)

The investor is a limited partner in the affordable housing project for both legal and tax purposes and the investor’s liability is limited to its capital investment

The investor is a limited liability investorin the limited liability entity for bothlegal and tax purposes, and the investor’s liability is limited to its capitalinvestment (same as prior requirement)

Criteria for elective alternative “net” income tax accountingInvestments in qualified affordable housing projects



EITF 94-1 — The SEC Observer commented that the SEC staff believesthat it would be inappropriate to extend the effective yield method ofaccounting to analogous situations

ASU 2014-01 — The Task Force also discussed whether the scope of the amendments in this Update should be extended to tax credit investments other than investments in qualified affordable housing projects. . . . The Task Force reached a consensus to limit the scope of the amendments in this Update to only investments in qualified affordable housing projects because it will more quickly address the concerns in practice about the income statement presentation of those investments.

What about “similar investments”?Proportional amortization method


A reporting entity that invests in a qualified affordable housing project shall disclose information that enables users of its financial statements to understand the following:• The nature of its investments in qualified affordable housing projects• The effect of the measurement of its investments in qualified affordable

housing projects and the related tax credits on its financial position and results of operations

Investments in qualified affordable housing projectsDisclosure requirements — ASC 323-740-50-1



To meet the objectives in the preceding paragraph, a reporting entity may consider disclosing the following:• The amount of affordable housing tax credits and other tax benefits

recognized during the year• The balance of the investment recognized in the statement of financial

position• Proportional amortization method – the amount recognized as a

component of income tax expense (benefit)• Equity method – the amount of investment income or loss included in

pretax income• Any commitments or contingent commitments including the amount of

equity contributions that are contingent commitments and the year or years in which contingent commitments are expected to be paid

• The amount and nature of impairment losses during the year resulting from the forfeiture or ineligibility of tax credits or other circumstances

Investments in qualified affordable housing projectsDisclosure considerations — ASC 323-740-50-2


August 2014 — the FAF issued its PIR Report on Statement 123(R), Share-Based Payment

October 2014 — the FASB added a project to improve the accounting for share-based payment to employees

June 2015 — exposure draft issued• Comments due August 14, 2015• Accounting and financial reporting issues addressed

– Accounting for minimum statutory withholding requirements– Accounting for forfeitures– Accounting for income taxes– Classification in the statement of cash flows– Classification of awards with repurchase features

Improvements to employee share-based payment accountingFile Reference No. 2015-200



Accounting for income taxes upon vesting or settlement of awards• All excess tax benefits and tax deficiencies would be recognized as

income tax expense or benefit in the income statement. – Prospective transition method

• An entity also would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.– Removal of the requirement to delay recognition of an excess tax benefit until

the tax benefit is realized.– Modified retrospective transition method with a cumulative-effect adjustment

recognized in equity

Presentation of excess tax benefits on the statement of cash flows• Excess tax benefits would not be separated from other income tax cash

flows and, thus, would be classified along with other cash flows as an operating activity.– Retrospective transition method

Improvements to employee share-based payment accountingProposed amendments to ASC 718-740

FERC reporting• Tax receivables —

overpayments and refunds• Accounting method changes



Issues — in what account(s) should the following tax receivables be recorded?• IRS settlement results in a refund to be received• Overpayment of estimated taxes to be applied to next year’s taxes• Overpayment of estimated taxes to be settled through tax-sharing

agreement

Considerations• Is the account included in rate base?

– Formula rate templates

FERC audits — finding and recommendations

FERC reportingTax receivables — overpayments and refunds


Relevant accounts• 143 Other accounts receivable• 165 Prepayments• 236 Taxes accrued

FERC 2014 Report on Enforcement (Docket No. AD07-13-008)• Division of Audits and Accounting (DAA) continues to examine

accounting that populates formula rate recovery mechanisms used in determining billings to wholesale customers. In recent formula rate audits, DAA observed certain patterns of noncompliance in the following areas:– Tax Prepayments — incorrectly recording tax overpayments not applied to a

future tax year’s obligation as a prepayment leading to excess recovery through working capital

FERC reportingTax receivables — overpayments and refunds



Instructions to Statement of Income for the Year• 13. Enter on page 122 a concise explanation of only those changes in

accounting methods made during the year which had an effect on net income, including the basis of allocations and apportionments from those used in the preceding year. Also, give the appropriate dollar effect of such changes.

• Pages 122-123 = Notes to Financial Statements

FERC audit report — findings and recommendations

FERC reportingChanges in tax methods of accounting

Technical tax update• Tangible property regulations



December 2003 — Treasury/IRS request for comments

August 2006 — proposed tangible property regulations issued

March 2008 — re-proposed tangible property regulations issued

December 2011 — temporary tangible property regulations issued (originally effective January 1, 2012) • December 2012 — effective date of temporary regulations amended to January

1, 2014

September 2013 • Final regulations — amounts paid to acquire, produce, or improve tangible

property and the treatment of materials and supplies • Proposed regulations — dispositions of tangible property• January 2014 — implementation guidance

August 2014 — final regulations issued regarding dispositions• September 2014 — implementation guidance

Tangible property regulationsTimeline of key events affecting all taxpayers


August 2011 — Rev. Proc. 2011-43 issued providing a safe harbor method of electric transmission and distribution network assets• Three-year transition rule regarding how to determine units of linear property• Waiver of scope limitations for filing Form 3115s for the first two years ending

after December 30, 2010

November 2011 — Industry Director Directive (IDD) issued regarding IRS examinations of costs to maintain, replace or improve electric T&D assets incurred in pre-2010 tax years

September 2012 — Rev. Proc. 2012-39 extended the restriction-free period to change to the safe harbor method by one year (i.e., first three years ending after December 30, 2010)

May 2013 — IDD regarding IRS examination of taxpayers eligible to use Rev. Proc. 2011-43 safe harbor

Tangible property regulationsTimeline of key events affecting electric T&D property



January 2014 — Rev. Proc. 2014-16 extended the restriction-free period to change to the safe harbor method by one year (i.e., first four years ending after December 30, 2010)

September 2014 — IDD issued • Extended the transition rule regarding how to determine units of linear

property to the first six years ending after December 30, 2010• IRS examinations of costs to maintain, replace or improve electric T&D

assets incurred in pre-2010 tax years

Tangible property regulationsTimeline of key events affecting electric T&D property (continued)


April 2013 — Rev. Proc. 2001-43 issued providing a safe harbor method for electric generation assets• Safe harbor method for determining whether expenditures to maintain,

replace, or improve electric generation property must be capitalized under IRC Section 263(a) or are deductible under IRC Section 162

• Lists of unit of property and major components of units of property

June 2013 — Industry Director Directive issued regarding IRS examinations of costs to maintain, replace or improve electric generation assets incurred in pre-2012 tax years

July 2015 — Industry Director Directive issued • Agents should not challenge a taxpayer's treatment of its expenditures

when substantially all of a major component (or of a unit of property that has no major components) has been replaced and properly capitalized.

• For this purpose, the term "substantially all" means 80 percent or more.

Tangible property regulationsTimeline of key events affecting electric generation property



Safe harbor method for gas transmission and distribution assets

Clarification to Rev. Proc. 2011-43 (electric transmission and distribution)

Capitalization guidanceExpected near-term key events*

* Posted on August 11, 2015

Recent normalization private letter rulings• Formula rates• Like-kind exchanges



Various formula rate templates employed for FERC or state ratemaking purposes• Rates set annually with a true-up adjustment

Formula rate deferred tax normalization rulingsPLRs 201531010, 201531011, 201531012 and 201532018 — facts, example


Consistency requirement• Use of 13-month averaging for plant and beginning-of-year / end-of-year

averaging for DTLs is sufficient– Both rate base elements are determined by averaging and both are

determined over the same period of time– Tax basis of relinquished property became tax basis of replacement property

Future test period• Projected revenue requirement — future test period requiring use of the

proration formula– The addition of the true-up increases the ultimate accuracy of the rates but

does not convert a future test period into a historical test period • Actual revenue requirement (for true-up adjustment) — historical test

period

May correct the formula rates without sanctions subject to specific terms

Formula rate deferred tax normalization rulingsPLRs 201531010, 201531011, 201531012 and 201532018 — holdings



Exchange of regulated storage and transmission assets for regulated distribution assets• Tax treatment

– Insignificant taxable gain recognized– Gain deferral– Tax basis of relinquished property became tax basis of replacement property

• Regulatory accounting– Replacement property recorded at the same regulatory book value as the

relinquished property– Prior to the exchange, ADIT balance reflected the deferral of federal income

taxes attributable to claiming accelerated depreciation with respect to the relinquished property as required by the normalization rules

Issue — treatment of the ADIT balance recorded with respect to the relinquished property for ratemaking and regulatory reporting purposes

Deferred tax normalization requirementsLike-kind exchanges — PLRs 201532024 and 201532025 — facts


The disposal of the relinquished property from the regulatory books of account are the functional equivalent of a retirement of the property• ADIT balance must be adjusted to reflect the disposition of the

relinquished property– The required adjustment is the removal of the ADIT balance with respect to

the relinquished property from the regulated books of account• The amount of the depreciation-related ADIT balance originally created

with respect to the relinquished property is not considered attributable to the replacement property

Prospective treatment of the ADIT balance attributable to the replacement property as though it had been actually generated by those assets will not be consistent with the normalization requirements

Deferred tax normalization requirementsLike-kind exchanges — PLRs 201532024 and 201532025 — holdings




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