Chapter 11 — Income Tax Accounting
ASC 718-740 discusses the accounting for income taxes associated with
share-based payment awards. ASC 718-740-25-2
states, in part, that the “cumulative amount of
compensation cost recognized for [awards] that
ordinarily would result in a future tax deduction
under existing tax law [is] considered to be a
deductible temporary difference in applying [ASC
740].” Accordingly, entities recognize DTAs and
related tax benefits on the basis of cumulative
compensation cost recorded for awards that
ordinarily would result in future tax deductions.
This guidance applies irrespective of whether an
award is classified as equity or a liability. If
the cost of an award that will ordinarily result
in a deduction for tax purposes is capitalized
(e.g., as part of inventory or a fixed asset), the
capitalized cost also becomes part of the tax
basis of the asset.
For awards that would not ordinarily result in future tax deductions, the
cumulative amount of compensation cost recognized
in the financial statements would be treated as a
permanent difference and would be an item (or part
of an item) that reconciles the entity’s statutory
tax rate to its effective tax rate. For public
entities, disclosure of this reconciliation is
required by ASC 740-10-50-12. Any capitalized cost
of an award that would not ordinarily
result in a future deduction would not be
treated as part of the tax basis of the asset.
The DTA associated with share-based payment awards (apart from any required
valuation allowance) is computed by applying the applicable tax rate to the
cumulative amount of compensation cost recognized in the financial statements (i.e.,
the gross temporary difference) and, for equity-classified awards, is not
subsequently affected by changes in the entity’s stock price. An entity should not
remeasure or write off the DTA as a result of a change in its stock price. For
example, even if an entity’s stock price has declined so significantly that a stock
option award’s exercise is unlikely to occur or that the intrinsic value on the
exercise date will most likely be less than the cumulative compensation cost
recognized in the financial statements, the DTA is not adjusted. However, for
share-based payment awards classified as liabilities, the measurement of the DTA
does implicitly take into account the entity’s current stock price since liability
awards are remeasured at the end of each reporting period. The DTA resulting from
compensation cost on liability awards would change as the fair-value-based measure
of the awards changes.
The cumulative amount of compensation cost recognized in the financial
statements may be greater or less than the amount
of actual tax deductions for share-based payment
awards (e.g., the tax deduction determined when a
restricted stock award vests or when a stock
option award is exercised). Differences in such
amounts are referred to as excess tax benefits
(when the amount of the deduction exceeds the
compensation cost recognized in the financial
statements) and tax deficiencies (when the amount
of the deduction is less than the compensation
cost recognized in the financial statements). In
accordance with ASC 718-740-35-2, the excess tax
benefits and tax deficiencies are recognized as
decreases or increases to current tax expense or
benefit in the period the excess tax benefit or
tax deficiency arises (i.e., the period in which
the tax deduction arises or the period in which an
option’s expiration occurs). This results in a
permanent difference between the amount of
cumulative compensation for financial reporting
purposes and the deduction taken for income tax
purposes and has an impact on an entity’s
effective tax rate in the period in which the
excess or deficiency arises.
For additional information about the accounting for income taxes associated with
share-based payment awards, see Chapter 10 of
Deloitte’s Roadmap Income
Taxes.