This free, guided checker walks your finance team through the key decision points for ASC 740 Income Tax Provision Assessment. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
ASC 740 follows a balance sheet approach: a temporary difference is the gap between the tax basis of an asset or liability and its reported amount that will produce taxable or deductible amounts in future years.
Complete a full book-to-tax basis comparison under ASC 740-10-25-20 before concluding on the provision.
Official guidance: FASB Accounting Standards Codification
Use enacted tax law and rates only. The effect of a change in tax law or rates is recognized in the period that includes the enactment date, not when the change is announced or becomes effective.
Remeasure deferred tax balances using enacted rates under ASC 740-10-30-8.
Official guidance: FASB Accounting Standards Codification
ASC 740-10-25-3 lists limited exceptions, including goodwill that is not deductible for tax purposes and outside basis differences in foreign subsidiaries that meet the indefinite reversal criteria of ASC 740-30-25-17.
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Official guidance: FASB Accounting Standards Codification
ASC 740-10-25-6 applies a two-step model: first assess whether the position is more likely than not to be sustained on technical merits; only positions that pass are measured, at the largest benefit that is greater than 50 percent likely of being realized on settlement.
Record a liability for the unrecognized tax benefit under ASC 740-10-25-6 and continue the provision on that basis.
Official guidance: FASB Accounting Standards Codification
Realizability is assessed by jurisdiction and by the character of income. Future reversals of existing taxable temporary differences are one of the four sources of taxable income in ASC 740-10-30-18.
Deferred tax liabilities cover the deferred tax assets - no valuation allowance assessment is needed; recognize the provision as measured (ASC 740-10-30-5).
Official guidance: FASB Accounting Standards Codification
The four sources are not equal in weight: objective evidence such as reversing taxable differences and carrybacks is more reliable than projected future income, which is difficult to rely on when the entity has cumulative losses. Identify the character and timing of each source and match it to the deferred tax assets it can support by jurisdiction. A common misapplication is relying on future income projections while ignoring that indefinite-lived deferred tax liabilities may not reverse in time to absorb expiring assets.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
Cumulative losses in recent years are significant objective negative evidence that is difficult to overcome with projections of future income alone. Consider all four sources of taxable income in ASC 740-10-30-18.
Recognize the provision as measured; no valuation allowance is required (ASC 740-10-30-5(e)). Negative evidence outweighs positive evidence - size the valuation allowance under ASC 740-10-30-5(e).
Official guidance: FASB Accounting Standards Codification
Size the valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized, which can be a portion rather than all of the assets in a jurisdiction. Test each category of deferred tax asset against the sources of taxable income that can absorb it, and allow only the excess. A frequent error is recording an all-or-nothing allowance when part of the assets is supported by reversing taxable differences or carrybacks.
Record a partial valuation allowance against only the unsupported deferred tax assets under ASC 740-10-30-5(e). Record a full valuation allowance against the deferred tax assets in the jurisdiction under ASC 740-10-30-5(e).
Official guidance: FASB Accounting Standards Codification
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