IRS considers tax impact of revenue recognition standard

The US tax office is consulting on the impact the revenue recognition standard – as agreed by its own standard setter, the Financial Accounting Standards Board and the International Accounting Standards Board – on the way in which companies account for tax

Both standard setters agreed upon a converged standard last year, IFRS 15, Revenue from Contracts With Customers, originally intended to come into force in 2017 but which this has now been deferred until 2018 to give some companies more time to prepare for the different system requirements for implementation of the standard.

In its Notice 2015-40, the IRS has asked for comments on the impacts of IFRS 15, due in by 16 September 2015.

US Income Tax Regulations require that taxable income is computed under the method of accounting the taxpayer regularly uses to compute income in keeping the taxpayer’s books. A taxpayer is also expected to maintain accounting records that include the taxpayer’s regular books of account and other records and data necessary to support the entries on the taxpayer’s books of account and on the taxpayer’s return.

In its consultation, the IRS says that 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 presently using the percentage of completion method, deriving income from the provision of services, engaging in bill and hold transactions for the sale of goods, (4) accounting for sales and returns of goods, and earning income from warranties.

The US tax authority also observed that the new standards may affect some industries more than others, highlighting that commentators 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.

‘Accounting method changes for federal income tax purposes require the permission of the Internal Revenue Service (IRS),’ the consultation points out.

Further, the IRS says that the new rules ‘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 IRS’ consultation is here

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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