ACCOUNTING FOR INCOME TAXES -
INTERIM PERIOD TAX REPORTING
December 2023
OVERVIEW
This whitepaper is the fifth in a series of whitepapers to be used as a resource in understanding
and analyzing the accounting for income taxes under FASB Accounting Standards Codification
(ASC) 740, “Income Taxes”. This whitepaper addresses income tax reporting for interim periods
within an annual period. This requires an understanding of how to calculate an estimated annual
effective tax rate (AETR), as well as identifying discrete items, which are not reflected in the AETR,
but rather reflected in the period incurred. This whitepaper does not address every aspect of
accounting for income taxes and should therefore be read in conjunction with ASC 740.
For ease of use, definitions for acronyms and titles for ASC topics and subtopics and other
literature referred to in this whitepaper are included in Appendix A. In addition, several terms with
specific meaning are used throughout this whitepaper. Those terms and the corresponding
definition are provided in Appendix B.
Financial Reporting Insights
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
TABLE OF CONTENTS
1. Introduction ......................................................................................................................................... 3
2. Determining the AETR ........................................................................................................................ 5
2.1 AETR definition ........................................................................................................................... 5
2.2 Estimating annual ordinary income (loss) ................................................................................... 5
2.3 Losses incurred in interim periods within a fiscal year ............................................................... 6
2.4 Effect of multiple jurisdictions ................................................................................................... 10
2.5 Computation of the AETR ......................................................................................................... 14
3. Items treated outside of the AETR (discrete items) ....................................................................... 14
3.1 Change in tax laws and rates after adoption of ASU 2019-12 ................................................. 15
3.2 Change in tax status ................................................................................................................. 15
3.3 Change in accounting principle ................................................................................................. 15
3.4 Change in beginning of year valuation allowance .................................................................... 16
3.5 Investment tax credits ............................................................................................................... 16
3.6 Interest and penalties................................................................................................................ 16
3.7 Changes in the recognition of a deferred tax asset related to outside basis differences ......... 16
4. Balance sheet impact ........................................................................................................................ 16
Appendix A: Acronyms ............................................................................................................................ 18
Appendix B: Definitions ........................................................................................................................... 18
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
1. Introduction
ASC 740-270-25-1
This guidance addresses the issue of how and when income tax expense (or benefit) is recognized
in interim periods and distinguishes between elements that are recognized through the use of an
estimated annual effective tax rate applied to measures of year-to-date operating results, referred
to as ordinary income (or loss), and specific events that are discretely recognized as they occur.
ASC 740-270-25-2
The tax (or benefit) related to ordinary income (or loss) shall be computed at an estimated annual
effective tax rate and the tax (or benefit) related to all other items shall be individually computed
and recognized when the items occur.
Glossary Ordinary Income (or Loss) Ordinary income (or loss) refers to income (or loss) from
continuing operations before income taxes (or benefits) excluding significant unusual or
infrequently occurring items. Discontinued operations and cumulative effects of changes in
accounting principles are also excluded from this term. The term is not used in the income tax
context of ordinary income versus capital gain. The meaning of unusual or infrequently occurring
items is consistent with their use in the definitions of the terms unusual nature and infrequency
of occurrence.
ASC 740-270 establishes the accounting and disclosures for income taxes during interim periods. ASC
740-270-25-1 to 25-2 codifies the key concepts related to interim period tax provisions, which are:
• Using an estimated annual effective tax rate (AETR) as the basis for recognizing income tax expense
or benefit on ordinary income.
• Reflecting any discrete items in the interim period that they occur.
ASC 740-270-05-3 defines an interim period as a component period of the annual reporting period, rather
than merely a time-period of less than a full year. Therefore, ASC 740-270 does not apply to “short
years," since they are not a component part of a larger annual period. Applying the provisions of ASC
740-270 to interim periods would not change the year-end tax provision; it is the method of recognizing or
allocating the annual tax provision to interim periods within the year. Therefore, an entity’s annual tax
provision would be the same whether it prepares interim financial statements or not.
At the end of each interim period, and entity would estimate its AETR for the full year and apply that rate
to the year-to-date results of operations as of the end of that interim period. For interim periods after the
first interim period of the year, the entity would subtract the previously recognized interim period ordinary
income tax expense (benefit) from the year-to-date estimated income tax expense (benefit) provision to
calculate the current period income tax expense (benefit). Inputs to the entity’s AETR include forecasted
full-year ordinary income and forecasted full-year current and deferred tax expense.
Case A has all of the following assumptions:
a. For the full fiscal year, an entity anticipates ordinary income of $100,000. All income is taxable in
one jurisdiction at a 50 percent rate. Anticipated tax credits for the fiscal year total $10,000. No
events that do not have tax consequences are anticipated. No changes in estimated ordinary
income, tax rates, or tax credits occur during the year.
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
b. Computation of the estimated annual effective tax rate applicable to ordinary income is as follows.
Tax at statutory rate
($100,000 at 50%)
$50,000
Less anticipated tax credits
(10,000)
Net tax to be provided
$40,000
Estimated annual effective tax rate ($40,000 ÷
$100,000)
40%
c. Tax credits are generally subject to limitations, usually based on the amount of tax payable before
the credits. In computing the estimated annual effective tax rate, anticipated tax credits are limited
to the amounts that are expected to be realized or are expected to be recognizable at the end of
the current year in accordance with the provisions of Subtopic 740-10.
Case A: Ordinary Income in All Interim Periods
The entity has ordinary income in all interim periods. Quarterly tax computations are as follows:
Ordinary Income
Tax
Reporting Period
Reporting
Period
Year to
Date
Estimated
Annual
Effective
Tax Rate
Year to
Date
Less
Previously
Reported
Reporting
Period
First Quarter
$20,000
$20,000
40%
$8,000
$8,000
Second Quarter
20,000
40,000
40%
16,000
8,000
8,000
Third Quarter
20,000
60,000
40%
24,000
16,000
8,000
Fourth Quarter
40,000
100,000
40%
40,000
24,000
16,000
Fiscal year
$100,000
$40,000
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
2. Determining the AETR
2.1 AETR definition
ASC 740-270-30-5
The estimated annual effective tax rate, described in paragraphs 740-270-30-6 through 30-8,
shall be applied to the year-to-date ordinary income (or loss) at the end of each interim period to
compute the year-to-date tax (or benefit) applicable to ordinary income (or loss).
ASC 740-270-30-6
At the end of each interim period the entity shall make its best estimate of the effective tax rate
expected to be applicable for the full fiscal year. In some cases, the estimated annual effective
tax rate will be the statutory rate modified as may be appropriate in particular circumstances. In
other cases, the rate will be the entity’s estimate of the tax (or benefit) that will be provided for
the fiscal year, stated as a percentage of its estimated ordinary income (or loss) for the fiscal
year (see paragraphs 740-270-30-30 through 30-34 if an ordinary loss is anticipated for the fiscal
year).
The AETR is the result of the estimated annual income tax expense divided by the estimated pretax
ordinary income. The ratio is then applied to the year-to-date results as of that interim period to measure
the year-to-date income tax expense. The AETR requires a best estimate of the annual ordinary income
and annual income tax expense (i.e., current and deferred taxes), which generally includes all expected
events to occur in the fiscal year that may affect the income tax expense. There are certain exceptions in
creating this estimate, which will be covered in Chapter 3.
The first step in calculating the AETR is estimating the ordinary income (loss) for the year.
2.2 Estimating annual ordinary income (loss)
ASC 740-270-20
Ordinary income (or loss)
Ordinary income (or loss) refers to income (or loss) from continuing operations before
income taxes (or benefits) excluding significant unusual or infrequently occurring items.
Discontinued operations and cumulative effects of changes in accounting principles are
also excluded from this term. The term is not used in the income tax context of ordinary
income versus capital gain. The meaning of unusual or infrequently occurring items is
consistent with their use in the definitions of the terms unusual nature and infrequency of
occurrence.
Unusual Nature
The underlying event or transaction should possess a high degree of abnormality and be
of a type clearly unrelated to, or only incidentally related to, the ordinary and typical
activities of the entity, taking into account the environment in which the entity operates
Infrequency of Occurrence
The underlying event or transaction should be of a type that would not reasonably be
expected to recur in the foreseeable future, taking into account the environment in which
the entity operates
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Ordinary income is defined in ASC 740-270-20 as income or loss from continuing operations before
income taxes or benefits, excluding significant unusual or infrequently occurring items. Ordinary income
also excludes discontinued operations and cumulative effects of changes in accounting principles. The
term “ordinary income” is not to be confused with the same phrase used in the income tax context of
“ordinary income versus capital gain.” To determine if an event or transaction would be considered
unusual or infrequent in nature may require judgment of the facts and circumstances, as well as the
entity’s history with similar types of situations. For instance, some non-operating transactions such as
gains or losses from the disposal of a fixed asset may be considered unusual depending on the entity’s
history of disposals and the type of fixed asset. If an entity is constantly replacing machinery in its
manufacturing facility, then disposals may not be unusual or infrequent. If, however, the entity rarely
replaces machinery and it replaces a significant amount of machinery as part of a manufacturing upgrade,
that action may be considered unusual and infrequent. Transactions or events that do not meet the
ordinary income definition would be evaluated as discrete items to be recognized as they occur and not in
the AETR calculation.
2.3 Losses incurred in interim periods within a fiscal year
ASC 740-270-25-9
The tax effects of losses that arise in the early portion of a fiscal year shall be recognized only
when the tax benefits are expected to be either:
a. Realized during the year:
b. Recognizable as a deferred tax asset at the end of the year in accordance with the provisions
of Subtopic 740-10.
ASC 740-270-25-10
An established seasonal pattern of loss in early interim periods offset by income in later interim
periods shall constitute evidence that realization is more likely than not unless other evidence
indicates the established seasonal pattern will not prevail.
ASC 740-270-25-11
The tax effects of losses incurred in early interim periods may be recognized in a later interim
period of a fiscal year if their realization, although initially uncertain, later becomes more likely than
not. When the tax effects of losses that arise in the early portions of a fiscal year are not
recognized in that interim period, no tax provision shall be made for income that arises in later
interim periods until the tax effects of the previous interim losses are utilized.
Entities often do not generate income ratably during the annual period. For example, a retailer may
generate a substantial portion of its income in the fourth quarter. Another example would be an
amusement park in a colder climate that may only open during the spring and summer. In such cases, the
relationship between the actual year-to-date ordinary income or loss and the estimated annual ordinary
income or loss may vary throughout the year. In these situations, specific considerations need to be
evaluated to appropriately recognize the interim income tax expense or benefit. ASC 740-270-25-9 to 25-
11 provides guidance on when to recognize benefits of losses incurred during earlier periods of a fiscal
year.
If an entity has incurred year-to-date losses or projects an estimated annual ordinary loss, the entity
needs to consider further when the estimated tax benefit should be included in the AETR. The tax effects
of losses that arise in early interim periods should be recognized only if the tax benefits are more likely
than not (MLTN) of being realized during the year (i.e., though ordinary income expected to be generated
in later interim periods) or in a future year (i.e., through recognition of a deferred tax asset with no
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valuation allowance). The tax benefits of such losses would be considered when estimating the annual
effective tax rate. Such tax benefits arising from losses in earlier interim periods should only be
recognized in the interim reporting period and considered in the estimation of the AETR when the tax
benefits are meet the threshold of MLTN to be realized.
Further, adoption of ASU 2019-12, Simplifying the Accounting for Income Taxes, requires entities to
recognize the tax benefit of a year-to-date loss based on the AETR, regardless of whether the year-to-
date ordinary loss exceeds the anticipated ordinary loss for the fiscal year. ASU 2019-12 is effective no
later than fiscal years which began after December 15, 2021, and interim periods within fiscal years that
began after December 15, 2022.
The following table illustrates the treatment within the AETR when losses are expected in interim periods.
Considerations Related to Recognition within the AETR
Losses incurred in interim
periods–realization of tax
benefits is MLTN
The expected tax benefit for losses in the interim reporting periods
would be recognized in such periods, since the entity expects that
realization of the related tax benefits is MLTN. See Example 2-1.
Losses incurred in interim
periods–realization of tax
benefits is not MLTN
The expected tax benefit for losses in the interim reporting periods
would not be recognized in such periods, since the entity does not
expect the tax benefit to be realized either during the year or as a
deferred tax asset at the end of the year (i.e., realization is not
MLTN). See Example 2-2.
Losses incurred in interim
periods–partial realization of tax
benefits is MLTN
The AETR would consider the portion of the ordinary losses that
meet the MLTN criteria for realization. See Example 2-3.
The examples below highlight different scenarios for recognition of tax benefits, which depends on
whether the realization of the tax benefits is considered MLTN. Conclusions on realization of tax benefits
require judgement and are dependent on the specific facts and circumstances.
ABC Company incurred ordinary losses in the first two quarters of the fiscal year ended December 31,
20X2. For the full fiscal year, ABC Company anticipates ordinary income of $100,000. ABC Company is a
retailer and earns most of its income during the last quarter of the year, and it has operated with a history
of profitability for over 15 years. Therefore, ABC Company’s seasonal earnings patterns provide evidence
that realization of tax benefits of year-to-date losses and anticipated tax credits is MLTN. ABC Company’s
income is taxable in one jurisdiction at a 25% rate which may be offset by anticipated tax credits of
$10,000. The estimated annual tax expense represents the tax at the statutory rate of $25,000 ($100,000
at 25%) less the anticipated tax credits of $10,000 for a total net estimated tax of $15,000. Therefore, the
AETR is 15%.
ABC Company recognizes the following income tax expense (benefit) in each of the fiscal quarters in the
year ended December 31, 20X2:
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Ordinary Income
Income Tax Expense
Reporting
Period
Year to
Date
AETR
Year to
Date
Less
Previously
Provided
Reporting
Period
First Quarter
($10,000)
($10,000)
15%
($1,500)
$ -
($1,500)
Second Quarter
(10,000)
(20,000)
15%
(3,000)
(1,500)
(1,500)
Third Quarter
25,000
5,000
15%
750
(3,000)
3,750
Fourth Quarter
95,000
100,000
15%
15,000
750
14,250
Fiscal year
$100,000
$ -
15%
$ -
$ -
$15,000
ABC Company recognizes the tax benefits of the losses incurred in the first and second quarters of its
fiscal year because it believes that the evidence is MLTN that the tax benefits of the losses in such
quarters would l be realized.
ABC Company incurred ordinary losses in first two quarters of the fiscal year ended December 31, 20X2.
For the full fiscal year, ABC Company anticipates ordinary income of $100,000. ABC Company is not in
an industry with established seasonal earning patterns, nor does it have a history of profitability.
Therefore, its earnings patterns do not provide evidence that realization of the tax benefit of the year-to-
date loss and of anticipated tax credits is MLTN. All income is taxable in one jurisdiction at a 25% rate
which may be offset by anticipated tax credits of $10,000. The estimated annual tax expense represents
the tax at the statutory rate of $25,000 ($100,000 at 25%) less the anticipated tax credits of $10,000 for a
total net estimated tax of $15,000. Therefore, the AETR is 15%.
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ABC Company recognizes the following income tax expense (benefit) in each of the fiscal quarters in the
year ended December 31, 20X2:
Ordinary Income
Income Tax Expense
Reporting
Period
Year to
Date
AETR
Year to
Date
Less
Previously
Provided
Reporting
Period
First Quarter
($10,000)
(10,000)
15%
$
$ -
$-
Second Quarter
(10,000)
(20,000)
15%
-
-
-
Third Quarter
25,000
5,000
15%
750
-
750
Fourth Quarter
95,000
100,000
15%
15,000
750
14,250
Fiscal year
$100,000
$ -
15%
$ -
$ -
$15,000
ABC Company does not recognize the tax benefits of the losses incurred in the first and second quarters
of its fiscal year because it did not have sufficient evidence to conclude that the tax benefits of the losses
in such quarters would be realized. Thus, the entity recognizes income tax expense only in the third and
fourth quarter of its fiscal year.
ABC Company incurred losses in the first three quarters of its fiscal year ended December 31, 20X2. For
the full fiscal year, ABC Company anticipates an ordinary loss of $100,000. ABC Company operates
entirely in one jurisdiction where the tax rate is 25%. Thus, the anticipated tax benefit for the year would
be $25,000. However, ABC Company determined that the tax benefit for the projected loss for the year of
$100,000, is limited to $20,000, as the remainder would not meet the MLTN threshold for recognition as a
deferred tax asset at the end of the year. Therefore, the adjusted AETR is 20% ($20,000 tax benefit
divided by $100,000 estimated annual ordinary loss), and the benefit that can be recognized for the year
is limited to $20,000.
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ABC Company recognizes the following income tax expense (benefit) in each of the quarters of the year
ended December 31, 20X2:
Ordinary Income
Income Tax Benefit
Reporting
Period
Year to
Date
AETR
Year to
Date
Less
Previously
Provided
Reporting
Period
First Quarter
($15,000)
($15,000)
20%
($3,000)
$-
($3,000)
Second Quarter
(25,000)
(40,000)
20%
(8,000)
(3,000)
(5,000)
Third Quarter
(25,000)
(65,000)
20%
(13,000)
(8,000)
(5,000)
Fourth Quarter
(35,000)
(100,000)
20%
(20,000)
(13,000)
(7,000)
Fiscal year
($100,000)
$ -
20%
$ -
$ -
($20,000)
ABC Company recognized tax benefit in each quarter based on its adjusted AETR of 20% since it had
determined that a benefit of $20,000 was MLTN to be realized on ABC Company’s expected loss for the
year of $100,000.
2.4 Effect of multiple jurisdictions
ASC 740-270-generally requires a single AETR which is equal to the entity’s expected global income tax
divided by the expected global ordinary income. ASC 740-270-30-36 provides two exceptions to
calculating a global AETR as follows.
1. The entity expects an ordinary loss for the year or has a year-to-date ordinary loss and no tax
benefit can be recognized (i.e., the tax benefit will not be used against current-year future interim
period income or in a future year) in a single jurisdiction. The expected and year-to-date ordinary
loss as well as unrecognized tax benefit for this jurisdiction would be excluded from the overall
AETR.
2. The entity is unable to estimate an AETR in a particular foreign jurisdiction. One reason for this
may be that the entity operates in a volatile economy and the foreign currency translation effects
make it difficult to estimate an AETR. The expected ordinary income or loss or related tax or
benefit for the foreign jurisdiction that is unable to make an estimate would be excluded from the
AETR and interim period tax or benefit. The related tax or benefit would be recognized once the
ordinary income or loss is reported in the interim period.
The following three-part example is sourced from Example 5 in ASC 740-270-55.
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
The following Cases illustrate the guidance in paragraph 740-270-30-36 for accounting for income taxes
applicable to ordinary income if an entity is subject to tax in multiple jurisdictions:
1. Ordinary income in all jurisdictions (Case A)
2. Ordinary loss in a jurisdiction; realization of the tax benefit not more likely than not (Case B)
3. Ordinary income or tax cannot be estimated in one jurisdiction (Case C).
Cases A, B, and C assume that an entity operates through separate corporate entities in two countries.
Applicable tax rates are 50 percent in the United States and 20 percent in Country A. The entity has no
unusual or infrequently occurring items during the fiscal year and anticipates no tax credits or events that
do not have tax consequences. (The effect of foreign tax credits and the necessity of providing tax on
undistributed earnings are ignored because of the wide range of tax planning alternatives available.). For
the full fiscal year, the entity anticipates ordinary income of $60,000 in the United States and $40,000 in
Country A. The entity is able to make a reliable estimate of its Country A ordinary income and tax for the
fiscal year in dollars. Computation of the overall estimated annual effective tax rate in Cases B and C is
based on additional assumptions stated in those Cases.
Case A: Ordinary Income in All Jurisdictions
Computation of the overall estimated annual effective tax rate is as follows:
Anticipated ordinary income for the fiscal year:
In the United States
$ 60,000
In Country A
40,000
Total
$ 100,000
Anticipated tax for the fiscal year:
In the United States ($60,000 at 50% statutory rate)
$ 30,000
In Country A ($40,000 at 20% statutory rate)
8,000
Total
$ 38,000
Overall estimated annual effective tax rate ($38,000/$100,000)
38%
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Quarterly tax computations are as follows:
Ordinary Income
Tax
Reporting
Period
United
States
Country
A
Total
Year to
Date
Overall
Estimated
Annual
Effective
tax rate
Year to
Date:
Less
Previously
Reported
Reporting
Period
First
Quarter
$5,000
$15,000
$20,000
$20,000
38%
$7,600
$ -
$7,600
Second
Quarter
10,000
10,000
20,000
40,000
38%
15,200
7,600
7,600
Third
Quarter
10,000
10,000
20,000
60,000
38%
22,800
15,200
7,600
Fourth
Quarter
35,000
5,000
40,000
100,000
38%
38,000
22,800
15,200
Fiscal
year
$60,000
$40,000
$100,000
$38,000
Case B: Ordinary Loss in a Jurisdiction, Realization of the Tax Benefit Not More Likely than Not
In this Case, the entity operates through a separate corporate entity in Country B. Applicable tax rates in
Country B are 40 percent. Operations in Country B have resulted in losses in recent years and an
ordinary loss is anticipated for the current fiscal year in Country B. It is expected that the tax benefit of
those losses will not be recognizable as a deferred tax asset at the end of the current year; accordingly,
no tax benefit is recognized for losses in Country B, and interim period tax (or benefit) is separately
computed for the ordinary loss in Country B and for the overall ordinary income in the United States and
Country A. The tax applicable to the overall ordinary income in the United States and Country A is
computed as in Case A of this Example.
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Quarterly tax provisions are as follows.
Ordinary Income (Loss)
Tax
Reporting
Period
United
States
Country
A
Combined
Excluding
Country B
Country
B
Total
Combined
Excluding
Country B
Country
B
Total
First
Quarter
$5,000
$15,000
$20,000
($5,000)
$15,000
$7,600
$ -
$7,600
Second
Quarter
10,000
10,000
20,000
(25,000)
(5,000)
7,600
-
7,600
Third
Quarter
10,000
10,000
20,000
(5,000)
15,000
7,600
-
7,600
Fourth
Quarter
35,000
5,000
40,000
(5,000)
35,000
15,200
-
15,200
Fiscal
Year
$60,000
$40,000
$100,000
($40,000)
$60,000
$38,000
$ -
$38,000
Case C: Ordinary Income or Tax Cannot Be Estimated in One Jurisdiction
In this Case, the entity operates through a separate corporate entity in Country C. Applicable tax rates in
Country C are 40 percent in foreign currency. Depreciation in that country is large and exchange rates
have changed in prior years. The entity is unable to make a reasonable estimate of its ordinary income for
the year in Country C and thus is unable to reasonably estimate its annual effective tax rate in Country C
in dollars. Accordingly, tax (or benefit) in Country C is separately computed as ordinary income (or loss)
occurs in Country C. The tax applicable to the overall ordinary income in the United States and Country A
is computed as in Case A of this Example.
Quarterly computations of tax applicable to Country C are as follows.
Foreign Currency Amounts
Translated Amounts in Dollars
Reporting
Period
Ordinary Income
In Reporting
Period
Tax (At 40%
Rate)
Ordinary Income
In Reporting
Period
Tax
First quarter
FC 10,000
FC 4,000
$ 12,500
$ 3,000
Second quarter
5,000
2,000
8,750
1,500
Third quarter
30,000
12,000
27,500
9,000
Fourth quarter
15,000
6,000
16,250
4,500
Fiscal year
FC 60,000
FC 24,000
$ 65,000
$ 18,000
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2.5 Computation of the AETR
The estimated annual effective tax rate is an entity’s best estimate and would include federal, state and
foreign income taxes, as applicable. The AETR would also include any other items that would affect the
entity’s AETR, such as tax credits and changes in valuation allowances related to current year events. At
the end of each interim period, the interim tax expense or benefit would be calculated by applying the
AETR to the year-to-date results of operations. The entity would then add the tax effect, if any, of discrete
items to compute the total year-to-date interim tax provision. For quarters later than the first quarter, the
previously recognized interim period income tax is subtracted from the year-to-date interim tax provision
to calculate the current interim period tax provision. Due to this multi-step calculation, any specific interim
period may not have a predictable connection to the pre-tax income or AETR of the interim period.
The AETR and related annual ordinary income are an entity’s best estimates as of each interim period.
As with all estimates, they may be subject to change when more current and reliable information
becomes available. Further, ASC 740-270-30-18 states that if a reliable estimate cannot be made, the
entity should use the actual year to date effective tax rate.
ASC 740-270-20-3 provides an exception for an entity that may be unable to estimate a portion of its
ordinary income (loss) or related tax (benefit) but is able to estimate the remainder of its income and
related tax effect. In that case, an entity may report the actual tax or benefit applicable to the portion of
income that cannot be estimated, as a discrete item in the interim period, outside of the AETR.
3. Items treated outside of the AETR (discrete items)
ASC 740-270 includes guidance on common discrete items to exclude from the estimated annual
effective rate calculation. The explicit discrete items included in the guidance are:
• Change in tax law and rates-after adoption of ASU 2019-12 (see Section 3.1)
• Change in tax status (see Section 3.2)
• Change in accounting principle (see Section 3.3)
• Change in beginning of year valuation allowance (see Section 3.4)
Ordinary Income
Tax
Reporting
Period
United
States
Country
A
Combined
Excluding
Country C
Country
C
Total
Combined
Excluding
Country C
Country
C
Total
First
Quarter
$5,000
$15,000
$20,000
$12,500
$32,500
$7,600
$3,000
$10,600
Second
Quarter
10,000
10,000
20,000
8,750
28,750
7,600
1,500
9,100
Third
Quarter
10,000
10,000
20,000
27,500
47,500
7,600
9,000
16,600
Fourth
Quarter
35,000
5,000
40,000
16,250
56,250
15,200
4,500
19,700
Fiscal
year
$60,000
$40,000
$100,000
$65,000
$165,000
$38,000
$18,000
$56,000
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• Investment tax credits (see Section 3.5)
• Interest and penalties (see Section 3.6)
• Change in the recognition of a deferred tax asset related to outside basis differences (see Section
3.7)
3.1 Change in tax laws and rates after adoption of ASU 2019-12
ASC 740-270-25-5
The effects of new tax legislation shall not be recognized prior to enactment. The tax effect of a
change in tax laws or rates on taxes currently payable or refundable for the current year shall be
reflected in the computation of the annual effective tax rate beginning in the first interim period that
includes the enactment date of the new legislation. The effect of a change in tax laws or rates on a
deferred tax liability or asset shall not be apportioned among interim periods through an
adjustment of the annual effective tax rate.
ASC 740-270-25-6
The tax effect of a change in tax laws or rates on taxes payable or refundable for a prior year
shall be recognized as of the enactment date of the change as tax expense (benefit) for the
current year.
See Section 2.3 for the effective date of ASU 2019-12. ASC 740-10-45-15 states that the effect of
adjustments to deferred tax balances resulting from changes in tax laws or rates would be included in
income from continuing operations in the period in which the new legislation is enacted. ASC 740-270-25-
5 to 25-6 describes how to measure the required adjustment The impact of the change in tax law or rates
on current year taxes payable (refundable) would be reflected in the calculation of the AETR beginning in
the first interim period which includes the enactment date. Conversely, the effect of such change in tax
laws or rates on deferred tax assets and liabilities would be considered a discrete item and recognized
within income from continuing operations in the interim period that includes the enactment date and would
not be allocated to subsequent interim periods by an adjustment of the estimated annual effective tax
rate. Retroactive changes in tax laws or rates are also considered discrete items, and the effect would
also be recognized separately in income from continuing operations in the interim period that includes the
enactment date. Similar to the treatment of the deferred tax assets, the impact of changes in tax laws and
rates on prior year taxes payable or refundable balances would be recognized as a discrete item (i.e., as
income tax expense (benefit) in the current year in the period that includes the enactment date).
3.2 Change in tax status
A change in an entity’s tax status occurs when a non-taxable entity (e.g. a partnership) becomes a
taxable entity (e.g. a corporation) or vice versa, ASC 740-10-25-32 to 25-34 state that a voluntary change
in an entity’s tax status would be recognized on the approval date granted by the taxing authority or on
the filing date if approval is not required. ASC 740-10-45-19 requires that the deferred tax effects of a
change in tax status be included in income from continuing operations. The effect of this change on
existing deferred tax assets and liabilities would be considered a discrete item and recognized in income
from continuing operations in the interim period that includes the approval or filing date, as appropriate.
3.3 Change in accounting principle
ASC 740-270-30-38 states that the tax expense or benefit related to the cumulative effect of a change in
accounting principle would be presented in the same manner as within the annual financial statements.
Income tax expense or benefit reduces or increases the related cumulative effect of a change in
accounting principle and is presented on a separate line below income from continuing operations within
the financial statements. ASC 740-270-30-12 and ASC 740-25-2 state that the income tax expense
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(benefit) applicable to a cumulative effect of a change in accounting principle would be recognized as a
discrete item in the interim period of the change and excluded from the AETR calculation.
3.4 Change in beginning of year valuation allowance
Entities are required to reconsider whether a full or partial valuation allowance is required against existing
deferred tax assets as of the end of each interim reporting period. Under ASC 740-270-25-4 a change in
the valuation allowance may be reflected either in the AETR or recognized discretely when the change
occurs, depending on whether the change is caused by current year or future year income. Entities
would reflect a change in the beginning of the year valuation allowance within the AETR when the change
relates to either deductible temporary differences and carryforwards expected to originate during the
current year or when it relates to current year income. However, changes in judgement about the
realizability of the beginning of the year deferred tax asset based on expected income in future years
would be excluded from the AETR and instead recognized as a separate discrete item in the interim
period of the change.
3.5 Investment tax credits
ASC 740-270-30-14 to 30-15 discusses the treatment of changes in investment tax credits within interim
tax provisions. The treatment of these investment tax credits in the AETR depends on the accounting
method elected by the entity. If an entity elects the deferral method, the net benefit from the investment
tax credits would be excluded from the AETR.
3.6 Interest and penalties
ASC 740-10-25-56 requires accrual of interest commencing with the first period in which the interest
would begin accruing according to the provisions of the relevant tax law. ASC 740-10-25-57 requires that
statutory penalties be recorded either when the entity initially takes the position or expects to take the
position that is expected to result in such penalty. If a penalty was not initially recognized when the
position was taken, a penalty would subsequently be recognized in the period when the entity changed its
judgement about whether the position would result in a penalty. Interest and penalties would be excluded
from the AETR calculation and accounted for separately from continuing operations as it occurs, even if
the entity has elected to treat interest and penalties as a part of tax expense.
3.7 Change in the recognition of a deferred tax asset related to outside basis
differences
Outside tax basis differences are differences in the book basis and tax basis of an investment in a
subsidiary or a corporate joint venture. A deferred tax asset would be recognized for the excess of the tax
basis over the financial reporting basis for an investment that is essentially permanent in duration only if it
is apparent that the temporary difference will reverse in the foreseeable future. Changes in the
recognition of this type of deferred tax asset would be excluded from the AETR if the underlying
subsidiary is included in discontinued operations. In this case, the benefit recognized for the deductible
outside basis difference generally would be accounted for as a discrete event and generally is recognized
in discontinued operations. If the underlying subsidiary is recognized in continuing operations, the entity
would reflect the beginning of the year impact of the change as a discrete item while including the impact
on current year earnings within the AETR.
4. Balance sheet impact
ASC 740-270 outlines the guidance on calculating income taxes for interim periods. In other words, it
prescribes an income statement approach, and it does not address the measurement and presentation of
deferred tax assets and liabilities or other balance sheet tax accounts in interim periods. Absent of any
specific guidance, an entity should adjust its income tax balance sheet accounts during interim periods in
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a methodical and rationale manner that aligns the income statement approach of ASC 740-270 or balance
sheet approach of ASC 740-10, considering significant changes in deferred tax balances by jurisdiction.
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
Appendix A: Acronyms
Acronym
Definition
AETR
Annual Effective Tax Rate
ASC
FASB Accounting Standards Codification
FASB
Financial Accounting Standards Board
MLTN
More Likely Than Not
Appendix B: Definitions
Several terms with specific meaning are used throughout this whitepaper. Those terms and the
corresponding definitions based on the FASB’s Master Glossary of the Codification are provided in the
table that follows.
Term
Definition
Carrybacks
Deductions or credits that cannot be utilized on the tax return during a year that
may be carried back to reduce taxable income or taxes payable in a prior year.
An operating loss carryback is an excess of tax deductions over gross income
in a year; a tax credit carryback is the amount by which tax credits available for
utilization exceed statutory limitations. Different tax jurisdictions have different
rules about whether excess deductions or credits may be carried back and the
length of the carryback period.
Carryforwards
Deductions or credits that cannot be utilized on the tax return during a year that
may be carried forward to reduce taxable income or taxes payable in a future
year. An operating loss carryforward is an excess of tax deductions over gross
income in a year; a tax credit carryforward is the amount by which tax credits
available for utilization exceed statutory limitations. Different tax jurisdictions
have different rules about whether excess deductions or credits may be carried
forward and the length of the carryforward period. The terms carryforward,
operating loss carryforward, and tax credit carryforward refer to the amounts of
those items, if any, reported in the tax return for the current year.
Current Tax
Expense (or Benefit)
The amount of income taxes paid or payable (or refundable) for a year as
determined by applying the provisions of the enacted tax law to the taxable
income or excess of deductions over revenues for that year.
Deductible
Temporary
Difference
Temporary differences that result in deductible amounts in future years when
the related asset or liability is recovered or settled, respectively. See Temporary
Difference.
Deferred Tax Asset
The deferred tax consequences attributable to deductible temporary differences
and carryforwards. A deferred tax asset is measured using the applicable
enacted tax rate and provisions of the enacted tax law. A deferred tax asset is
reduced by a valuation allowance if, based on the weight of evidence available,
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Term
Definition
it is more likely than not that some portion or all of a deferred tax asset will not
be realized.
Deferred Tax
Consequences
The future effects on income taxes as measured by the applicable enacted tax
rate and provisions of the enacted tax law resulting from temporary differences
and carryforwards at the end of the current year.
Deferred Tax
Expense (or Benefit)
The change during the year in an entity's deferred tax liabilities and assets. For
deferred tax liabilities and assets acquired in a purchase business combination
during the year, it is the change since the combination date. Income tax
expense (or benefit) for the year is allocated among continuing operations,
discontinued operations, and items charged or credited directly to shareholders'
equity.
Deferred Tax
Liability
The deferred tax consequences attributable to taxable temporary differences. A
deferred tax liability is measured using the applicable enacted tax rate and
provisions of the enacted tax law.
Event
A happening of consequence to an entity. The term encompasses both
transactions and other events affecting an entity.
Income Tax
Expense (or Benefit)
The sum of current tax expense (or benefit) and deferred tax expense (or
benefit).
Income Taxes
Domestic and foreign federal (national), state, and local (including franchise)
taxes based on income.
Income Taxes
Currently Payable
(Refundable)
See Current Tax Expense (or Benefit).
Tax Consequences
The effects on income taxes—current or deferred—of an event.
Tax Position
A position in a previously filed tax return or a position expected to be taken in a
future tax return that is reflected in measuring current or deferred income tax
assets and liabilities for interim or annual periods. A tax position can result in a
permanent reduction of income taxes payable, a deferral of income taxes
otherwise currently payable to future years, or a change in the expected
realizability of deferred tax assets. The term tax position also encompasses, but
is not limited to:
a. A decision not to file a tax return
b. An allocation or a shift of income between jurisdictions
c. The characterization of income or a decision to exclude reporting
taxable income in a tax return
d. A decision to classify a transaction, entity, or other position in a tax
return as tax exempt
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ACCOUNTING FOR INCOME TAXES - INTERIM PERIOD TAX REPORTING DECEMBER 2023
Term
Definition
e. An entity's status, including its status as a pass-through entity or a tax-
exempt not-for-profit entity.
Tax-Planning
Strategy
An action (including elections for tax purposes) that meets certain criteria (see
paragraph 740-10-30-19) and that would be implemented to realize a tax benefit
for an operating loss or tax credit carryforward before it expires. Tax-planning
strategies are considered when assessing the need for and amount of a
valuation allowance for deferred tax assets.
Taxable Income
The excess of taxable revenues over tax deductible expenses and exemptions
for the year as defined by the governmental taxing authority.
Taxable Temporary
Difference
Temporary differences that result in taxable amounts in future years when the
related asset is recovered or the related liability is settled. See Temporary
Difference.
Temporary
Difference
A difference between the tax basis of an asset or liability computed pursuant to
the requirements in Subtopic 740-10 for tax positions, and its reported amount
in the financial statements that will result in taxable or deductible amounts in
future years when the reported amount of the asset or liability is recovered or
settled, respectively. Paragraph 740-10-25-20 cites examples of temporary
differences. Some temporary differences cannot be identified with a particular
asset or liability for financial reporting (see paragraphs 740-10-05-10 and 740-
10-25-24 through 740-10-25-25), but those temporary differences do meet both
of the following conditions:
a. Result from events that have been recognized in the financial statements
b. Will result in taxable or deductible amounts in future years based on
provisions of the tax law.
Some events recognized in financial statements do not have tax consequences.
Certain revenues are exempt from taxation and certain expenses are not
deductible. Events that do not have tax consequences do not give rise to
temporary differences.
Valuation Allowance
The portion of a deferred tax asset for which it is more likely than not that a tax
benefit will not be realized.
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permission.
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