Definition Of Accounting Standards Codification

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Scope “Accounting Standards Codification (ASC) 740, Income Taxes addresses how companies should account for and report the effects of taxes based on income” as stated on the PWC article titled Scope of ASC 740. It provides guidance for recognizing and measuring tax positions taken or expected to be taken in a tax return that directly or indirectly affect amounts reported in financial statements. The standard requires recognition of the current and future income tax consequences of all entities included in the reporting entity’s financial statements. The codification applies to all financial statements prepared in accordance to the Generally Accepted Accounting Principles in the United States. It also applies to federal, state and…show more content…
According to the Lilly’s comment letter, the proposed change will cause unnecessary and unpredictable effective tax rates in companies. For instance, companies that offer a product rather than a sale this may be detrimental with a fluctuating tax rate. Estimation and reconciliation of the tax rate will not be benefited by this change, as the tax rate will become sensitive to intercompany sales. This proposed change would require companies to work more as they need to be paying close attention to the intercompany movement in inventory. A lot of companies do not see this as a good alternative as this change would only mean more work for them. The proposed change may cause the impression that earnings are being manipulated. Since different intercompany sales patterns can result in different income tax expense consequences in a specific reporting period, financial information users may suspect that companies could manipulate their after-tax income by altering supply chain activities to shift tax expense between reporting periods. The change will not only cause companies to have to work more, but their systems will have to be reformatted and adjusted to the new changes. Lilly expresses on their comment letter that should the proposed change be imposed, it should be done

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