Income Tax Provision (ASC 740)

ASC 740 is a set of accounting and reporting standards regarding effects of income taxes that result from a company's activities during the current and preceding years. 

In recent years, accounting for income taxes (ASC 740) has especially become a major concern for public companies, considering income taxes has been one of the PCAOB’s top areas of focus. Complying with ASC 740 is a particularly complex challenge for public companies, since it involves significant tax and financial reporting requirements. 

ASC 740 governs accounting for income taxes and requires businesses to analyze and disclose income tax risks. This Financial Accounting Standards Board Topic establishes standards of financial accounting and reporting for the effect of income taxes on a company’s financial results. 

ASC 740 provides a way to recognize a company’s income tax expense for financial reporting (under U.S. generally accepted accounting principles (GAAP) by measuring the differences between the tax bases of assets and liabilities and the carrying amounts of assets and liabilities recognized for financial reporting. ASC 740 also provides standards for measuring, recognizing and reporting uncertain tax positions.

The accounting for income taxes principles and requirements applies to domestic, foreign, public and private entities in the preparation of financial statements in accordance with U.S. GAAP. Non-profit organizations with activities that are subject to income taxes are also subject to ASC 740. However, the level of complexity and disclosures in applying these standards significantly increases for public companies.

Businesses that have financial statement audits are required to be compliant with the accounting for income tax standards. The types of businesses that have audited financial statements typically include publicly traded companies, pre-IPO companies, venture backed start-up organizations, and closely held companies.

For companies whose stock is public traded on a listed exchange, the SEC requires the audit and submission of financial statements. Quarterly filings are required to inform investors and potential investors as to a company’s financial performance, and be verified by professional opinion from a CPA firm that the financials are presented fairly. Significant analysis is done for the income tax accounting for the annual filing and scope is typically limited for the quarterly filings.

For companies that are not publicly traded, the stakeholders (banks or venture capitalists) may require an audit be performed, because the auditor gives an independent opinion on whether the financial health of the company, as reported by management, is a fair presentation of its position (assets, liabilities, and equity), results (revenues, expenses, profit) and liquidity (cash flow). This is important when companies are not necessarily managed by their owners.

Public companies must comply with the rules of the Sarbanes-Oxley Act of 2002 (SOX), which require internal controls over the income tax function. Controls around accounting for income taxes have been a source of material weakness in many public companies that have led to the restatement of their financial statements.

Generally, tax internal controls under SOX must meet the following three objectives:

1. Independence – Generally derived through the use of an independent tax expert
2. Completeness – Yearly and quarterly provisions must capture all of the company’s key issues
3. Accuracy – Company’s CFO and controller must adequately review and understand the tax calculation and this calculation must be accurate

Simply put, CM is an industry leader in the ASC 740 arena. Many tax professionals can effectively process business tax returns; however, this does not qualify them to do income tax accounting. This type of tax provisions requires CPA professionals to have a deeper knowledge of tax law, financial accounting rules, and the proper disclosures for the overlap of these areas.

The very last thing a publicly-traded company would like to do is to file a restatement of their financial statements. The need to restate financial figures can result from accounting errors, noncompliance with generally accepted accounting principles (GAAP), fraud, misrepresentation, or a simple clerical error. 

Restatements could lead to lawsuits from investors, considering they would have already relied on the originally filed information to make their investments. In recent years, the top two reasons companies must issue a restatement are due to either revenue recognition or income tax accounting. Many tax professionals assume they can help their clients and in turn get them in a lot of trouble with regulators.

CM’s CPAs have garnered tremendous respect from other CPA audit firms, who often turn to us for guidance and additional opinions. Our deep knowledge of ASC 740 gives our clients greater peace of mind, as they trust we will work with their auditors and that we are completely in their corner. 

CM’s clients include corporations that are required to have audited financial statements and the industries we serve include R&D start-up organizations, medical device and therapeutics, manufacturers, distributors, suppliers, technology and software companies.

We serve clients throughout Southern California and in other regions of the U.S. and in many cases, we act as an outsourced tax department for companies that don’t have in-house tax expertise.

You may be a CFO who is fortunate to have the resources of a sophisticated internal tax department that can produce tax accrual work papers that can be audited by your independent outside auditors. However, if your company does not have this level of tax expertise, CM has the knowledge and capabilities to prepare your global income tax provisions, analyze uncertain tax positions, and prepare the related footnote disclosures in your company’s financial statements in accordance with ASC 740 and U.S. GAAP.

Ultimately, our experienced team has extensive expertise in this complex area of tax law and we help companies comply with ASC 740 requirements that withstand the scrutiny of outside auditors.