tax revenue recognition

Revenue Recognition: Tax Impact of the New Standard was presented by Mary Duffy of Andersen Tax in Washington DC and Jessica Hawn of Andersen Tax in Chicago. In this presentation, the speakers summarized the tax impact of the new revenue recognition standard with a discussion on tax principles for revenue recognition, revenue recognition examples, and key tax implications of the new standard.

The presentation began with an opening question, “Why does tax matter?” as well as several answers such as

-Tax rules generally do not follow the GAAP rules.

– Changes to the accounting for book purposes may identify or generate a need to make a change in method of accounting for tax purposes or impact the computation of the Schedule M (book/tax difference) or impact deferred tax assets/liabilities

The speakers discussed tax principles for revenue recognition including

• Sale of goods -Revenue is generally earned when the benefits and burdens of ownership pass to the customer
• Services –Revenue is generally considered recognized when the performance of services is complete
• Licenses –Over the period the licensee has the right to use the property
• Long term contracts –As costs are incurred

They continued by discussing advanced payments which are generally taxable upon receipt and have limited deferral allowed. They also provided information on long-term contracts and tax treatment of contract inducement costs which are generally capitalizable for tax purposes only to the extent all of the below are met:

• External costs (not internal labor/overhead)
• Contract term exceeds 12 months
• Contract is not terminable at will
• Amount is not de Minimis ($5,000 Or less)

The presentation provided examples of revenue recognition such as separate performance obligations and advanced payments, contingent consideration and long term contracts.

The speakers continued presenting with a discussion on key tax implications of the new standard.

This included the impact on cash taxes such as the potential acceleration of taxable income

-Advanced Payments under Rev. Proc. 2004 -34 or Treas. Reg. sec. 451 -5

• Deferral in the year of receipt limited to the extent of deferral for financial reporting purposes
• Generally, tax deferral CANNOT exceed deferral for financial reporting purposes
• Book income change forces tax income change

This also included the changes in tax accounting methods such as

-Generate a need to change tax accounting methods

-Analysis of new revenue recognition standard may highlight a need to change tax accounting methods

-Cumulative catch -up adjustments (section 481 (a) adjustments)

-Voluntary change from Proper accounting methods -Automatic

The speakers spoke on creating or changing existing temporary differences and changes in accounting for income taxes such as the cumulative effect adjustment on adoption.

Duffy and Hawn concluded the presentation by discussing tax impacts: get plugged in now. The speakers encourage the audience to

Get plugged in as soon as possible to ensure input into:

• Potential changes to systems needed to capture data for tax
• Potential changes in book accounting that may
• Create book/tax differences
• Inadvertently result in a change in accounting method (without IRS consent)
• Require obtaining IRS consent to change from prior book -driven method to an alternative method