CPAs on the “auditing and accounting” side of the profession have been studying FASB Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” since it’s issuance last year. It turns out, though, that not only CPAs dealing with A&A issues have concerns—the IRS now has issued a notice asking for guidance of the impact of ASU 2014-09 on accounting methods for tax purposes in Notice 2015-40.
An accounting method, for purposes of federal incomes taxes, is defined as something that affects the timing of recognition, but not the ultimate amount recognized, of either an item of income or deduction for federal tax purposes. Under IRC §446 a taxpayer is to compute its taxable income under the method of accounting used in keeping its books and records, subject to additional federal tax law requirements and limitations.
IRC §451 and Reg. §1.451-1(a) provide that a taxpayer using the accrual method of accounting must accrue income for tax purposes when the right to receive income is fixed and the amount can be determined with reasonable accuracy (otherwise known as the all events test).
Finally, a taxpayer seeking to change its method of accounting (that is, the timing of recognition of an item of income or deduction) must obtain the IRS’s consent for such a change. In most cases the cumulative differences existing at the date of change are taken into income (or deducted) as a §481(a) adjustment, though for some changes the IRS allows or mandates a “cut-off” treatment where only transactions that begin after the effective date of the change are accounted for under the new methods.
The Financial Accounting Standards Board and the International Accounting Standards Board announced last year the culmination of their long-running revenue project. While implementation has since been pushed back a year, the coming changes are meant to harmonize revenue recognition treatments under FASB and IASB rules.
The IRS points out a fact that those in the A&A realm have known for quite a while—these new rules will have significant impacts for many entities. As the notice points out:
The new standards for the timing of income for financial accounting purposes may affect the timing of income for tax accounting purposes for many taxpayers, such as taxpayers (1) presently using the percentage of completion method, (2) deriving income from the provision of services, (3) engaging in bill and hold transactions for the sale of goods, (4) accounting for sales and returns of goods, and (5) earning income from warranties. The new standards may affect some industries more than others. Commenters on the new standards have noted that the software, entertainment, manufacturing, and construction industries may be particularly affected because the new standards may change the timing of income recognition for financial accounting purposes significantly for these industries.
As most taxpayers are going to be using their accounting books and records as a starting point for preparing the federal tax returns, major changes to those books and records clearly are going to impact the basic mechanics of return preparation. While, in theory, tax return treatments could continue as they have before, the IRS clearly anticipates that many will want/demand that tax rules not be radically different from the accounting rules.
So the IRS notes:
The new standards raise a number of substantive and procedural issues for the IRS, including whether the new standards are permissible methods of accounting for federal income tax purposes, the types of accounting method change requests that will result from adopting the new standards, and whether the current procedures for obtaining IRS consent to change a method of accounting are adequate to accommodate those requests.
The notice provides that the IRS considering issuing guidance in this area and want to obtain comments on the scope, substance and form of the guidance.
The specific comments requested are:
- To what extent do the new standards deviate from the requirements of §451? How may they affect deferral of income?
- What industry and/or transactionspecific issues may arise as a result of the new standards that might be addressed in future guidance?
- What types of changes in methods of accounting do taxpayers anticipate requesting?
- Do taxpayers anticipate requesting changes in methods of accounting prior to the effective dates of the new standards?
- Should taxpayers be required to use the automatic consent accounting method change procedures or the advance consent procedures to request permission to change a method of accounting under the new standards, and why?
- Which accounting method changes under the new standards, if any, should be allowed using a cutoff method instead of a ￼ § 481(a) adjustment, and why?
- Will advance or automatic consent procedures or other procedural guidance (such as Rev. Proc. 200434, 200422 I.R.B. 991) need to be modified and if so, how?
- What transition procedures may be helpful?
- What related accounting method changes do taxpayers anticipate requesting that may appropriately be made on a single Form 3115, Application for Change in Accounting Method?
The IRS is requesting that comments be provided to the agency by September 16, 2015. Presumably any guidance would be issued after that date and, as well, would likely take into account any changes or revisions that might be made to the ASU.