Accounting for Tax Effects of Transactions among or with Shareholders and Revenue Recognition on Equipment Sold and Subsequently Repurchased Subject to an Operating Lease
This month's column lists new EITF consensuses adopted January 18, 1996 (see the sidebar below). In addition, earlier consensuses on accounting for tax effects of transactions among or with shareholders and revenue recognition on equipment sold and subsequently repurchased subject to an operating lease are summarized. The summaries are presented in the order of importance from broad to narrow applicability.
ISSUE NO. 94-10
Issue no. 94-10, Accounting by a Company for the Income Tax Effects of Transactions among or with Its Shareholders under FASB Statement no. 109, addresses whether such tax effects should be included in the income statement or in the equity section of the balance sheet in the separate financial statements of the company affected.
Some transactions among shareholders affect the tax attributes of the company itself. For example, in general, if more than 50% of the stock of a company changes hands within a specified period, future utilization of any existing net operating loss carryforwards of the company may be limited or prohibited. A valuation allowance not otherwise needed now may be required for that deferred tax asset or the deferred tax asset may need to be written off. Certain transactions with shareholders (that is, transactions between a company and its shareholders) have the same effect.
Other transactions among shareholders may change the tax bases of the assets and liabilities of the company. For example, an investor purchases 100% of a company's outstanding stock in a transaction that is treated as a purchase of assets for tax purposes but does not "push down" the purchase price for financial reporting purposes to the acquired company. The acquired company's financial reporting bases of its assets and liabilities do not change but the tax bases of its assets and liabilities are adjusted and, consequently, the deferred tax liabilities and assets also are adjusted accordingly. This issue does not address transactions among or with minority shareholders of a subsidiary or shareholder transactions that involve a change in the tax status of a company (such as a change from nontaxable S corporation status to taxable C corporation status).
The Task Force reached a consensus that changes in valuation allowances due to changed expectations about the realization of deferred tax assets caused by transactions among or with shareholders should be included in the income statement. The Task Force also reached a consensus that a writeoff of a preexisting deferred tax asset that an entity can no longer realize as a result of a transaction among or with its shareholders similarly should be charged to the income statement. The Task Force observed that the same net effect results from eliminating a deferred tax asset and increasing a valuation allowance to 100% of the amount of the related deferred tax asset.
The Task Force also reached a consensus that the tax effects of all changes in the tax bases of assets and liabilities caused by transactions among or with shareholders should be included in equity. If transactions among or with shareholders result in recognition of deferred tax assets from changes in the tax bases of assets and liabilities, the effect of valuation allowances initially required on recognition of those deferred tax assets also should be included in equity. Changes in valuation allowances occurring in subsequent periods should be included in the income statement. …