FASB ASC Guide > FASB ASC 740 – Income Taxes
The Financial Standards Accounting Board (FASB) released Accounting Standards Codification 740 (ASC 740) to address uncertainty in income taxes. Many companies had taken aggressive positions that the IRS could challenge and needed to disclose this to investors, as if they lost the suit and could not take the deduction it could have an effect on the financials. Likely, income tax expense would go up and net income down when compared to what was reported. Looking back on the history of tax, people will go to great lengths to minimize their taxes.
How does ASC 740 work?
Lets say that a company takes a tax deduction that they think the IRS could challenge and potentially win. If it passes a certain threshold made by the FASB, then this must be disclosed in the footnotes to the financial statements. This is kind of an interesting situation to be in, because it gives the IRS a great tool to see which companies they may like to audit themselves. If they see one company with a very large number of uncertain tax positions, it would make them a good candidate to audit and potentially increase tax revenues. If a company is audited that has not disclosed the deductions they lost, they can be ‘dinged’ for not having disclosed them. Whether the IRS actually does any of this is not known.
Check out more high level explanations of the FASB ASC in our Guide to the Accounting Standards Codification!