12 January 2016 New FASB guidance on classifying and measuring financial instruments has income tax accounting implications The Financial Accounting Standards Board (FASB) issued final guidance1 that will change how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option (FVO) that are attributable to their own credit. The new guidance also changes certain disclosure requirements and other aspects of current US GAAP. It does not change the guidance for classifying and measuring investments in debt securities and loans. This Alert discusses certain income tax accounting implications of the new guidance. For details on other changes contained in the guidance, please see the attached To the Point article. The remeasurement of a financial instrument at fair value generally creates a temporary difference between the reporting basis and the tax basis of the instrument under ASC 740, Income Taxes, because the tax basis generally remains unchanged. This difference requires recognition of deferred taxes. Unrealized losses can give rise to deferred tax assets (DTAs), which must be assessed for realizability. Under the new guidance, entities will have to assess the realizability of a DTA related to an AFS debt security in combination with the entity's other DTAs. The new guidance eliminates one method that is currently acceptable for assessing the realizability of DTAs related to AFS debt securities. That is, an entity will no longer be able to consider its intent and ability to hold debt securities with unrealized losses until recovery, which may not be until maturity, akin to a tax planning strategy. Under this method, a valuation allowance currently wouldn't be necessary for DTAs on unrealized losses, even when there is significant negative evidence (e.g., recent cumulative losses) related to the realizability of other DTAs because the specific DTAs are expected to reverse as time passes. — For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting
1 Accounting Standards Update 2016-01, Financial Instruments — Overall — Recognition and Measurement of Financial Assets and Financial Liabilities. Document ID: 2016-0074 | |||||||
