INTRAPERIOD ALLOCATION

Intraperiod allocation addresses the requirement to allocate total income tax expense or benefit (current and deferred) among:

    • Continuing operations 

    • Discontinued operations 

    • Extraordinary items 

    • Other comprehensive income 

    • Items charged or credited directly to shareholders’ equity.

 

The intraperiod allocation rules should be applied to each tax paying component (an individual entity or group of entities that is consolidated for income tax purposes) in each tax jurisdiction.

 

There can be significant complexities associated with applying the Intraperiod Allocation rules due to the number of tax paying components in the financial statements along with the number of items of allocation in addition to continuing operations.

CONTINUING OPERATIONS

The method for allocating tax expense or benefit to continuing operations differs depending on whether the company is reporting pretax income or loss from continuing operations.

Pretax Income from Continuing Operations

If a company reports pretax income from continuing operations, the tax expense is calculated without consideration of items not included in continuing operations. This is referred to as the incremental or “without” approach.

Pretax Loss from Continuing Operations

If a company reports a pretax loss from continuing operations and income from another item of allocation such as discontinued operations or extraordinary items, the tax expense is calculated with consideration to all items not included in continuing operations. The total tax effect for all items of allocation is calculated and then allocated between the loss from continuing operations and other items of allocation that are sources of current year income.

Other Items Included in Expense or Benefit from Continuing Operations

The amount of tax expense or benefit allocated to continuing operations specifically includes the income tax effects of:

    • • Changes in circumstances that cause a change in judgment about the realization of deferred tax assets in future years 

    • • Changes in tax laws or rates 

    • • Changes in tax status

    • • Tax-deductible dividends paid to shareholders

The tax expense or benefit associated with these items will always be reported to continuing operations.

Changes in Permanent Reinvestment Assertion

The tax expense arising from a change in a company’s permanent reinvestment assertion is generally allocated to continuing operations.

DISCONTINUED OPERATIONS

Income or loss from discontinued operations are reclassified out of pretax income or loss and combined into a single line as a separate component of income before extraordinary items. Discontinued operations are presented net of income tax expense or benefit.

EXTRAORDINARY ITEMS

Gains and losses due to unusual and infrequent items are reported separately in the income statement net of income tax expense or benefit.

OTHER COMPREHENSIVE INCOME

Tax effects related to following components of Other Comprehensive Income (OCI) are recorded to OCI

    • Available for Sale Securities

    • Currency Translation Adjustments

    • Certain pension and post-retirement items: Net unrecognized gains and losses and unrecognized prior service cost

    • Certain derivative instruments: The portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge instrument.

Available for Sale Securities

Securities classified as Available for Sale Securities (AFS) are marked-to-market as of the balance sheet date.  Unrealized gains and losses from AFS securities are excluded from continuing operation and instead recorded as a component of OCI.  The unrealized gains and losses will typically create deferred tax consequences due to the tax basis being on a cost basis.  Accordingly, the deferred consequences related to AFS securities are recorded to OCI.

 

The deferred taxes associated with AFS securities are typically tracked either on a security-by-security basis or on a portfolio approach for each tax paying component of the financial statements.

Currency Translation Adjustments

Changes in the tax accounts arising solely due to foreign exchange rate changes are accounted for as currency translation adjustments (CTA),  a component of OCI rather than as a component of continuing operations.

Foreign VAs and CTA

A foreign entity that has recorded a VA will reflect changes in the VA that arise due to the effects of CTA on the underlying deferred balances, in CTA.  

 

However, changes in circumstances that cause a change in judgment about the need for a VA will be recorded to continuing operations.

Available for Sale Securities and VAs

DTAs that arise from unrealized losses on AFS securities are often unrealized capital loss carryforwards. Under U.S. tax law, a capital loss can only be offset by capital gains. Accordingly, the Company must assess the need for a VA against a DTA related to AFS securities. A conclusion that a VA is needed against an unrealized capital loss DTA would be recorded to OCI along with any changes arising due to mark to market adjustments in the current period.  


However, changes in circumstances that cause a change in judgment about the need for a VA will be recorded to continuing operations.

ITEMS CHARGED OR CREDITED DIRECTLY TO SHAREHOLDER'S EQUITY

Excess benefits from share-based compensation are recorded to APIC in the period in which taxes payable is reduced by the excess deduction.

SINGLE ITEM OF ALLOCATION OTHER THAN CONTINUING OPERATIONS

Any amount not allocated to continuing operations is allocated to the remaining item of allocation.

MULTIPLE ITEMS OF ALLOCATION OTHER THAN CONTINUING OPERATIONS

If a company has multiple items of allocation other than continuing operations, the process can become complex, particularly if there are losses or VAs. The company should consult with its auditor regarding its process based on its specific facts and circumstances.

ASC 740-20-45-14 If there are two or more items other than continuing operations, the amount that remains after the allocation to continuing operations shall be allocated among those other items in proportion to their individual effects on income tax expense or benefit for the year. When there are two or more items other than continuing operations, the sum of the separately calculated, individual effects of each item sometimes may not equal the amount of income tax expense or benefit for the year that remains after the allocation to continuing operations. In those circumstances, the procedures to allocate the remaining amount to items other than continuing operations are as follows:

a. Determine the effect on income tax expense or benefit for the year of the total net loss for all net loss items. 

b. Apportion the tax benefit determined in (a) ratably to each net loss item. 

c. Determine the amount that remains, that is, the difference between the amount to be allocated to all 

 

 

 

 

 

 

© 2019 Tax Prodigy, LLC The training provided by Tax Prodigy Provision Academy is general information only and is not, by means of this publication or recording, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication/recording does not substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified advisor. TAX PRODIGY, LLC shall not be responsible for any loss sustained by any person who relies on this publication.

  • LinkedIn
  • Facebook
  • Twitter
  • YouTube
  • Instagram
PA Official Logo 1.png