Wiley GAAP 2008

Concepts, Rules, and Examples

Evolution of Accounting for Income Taxes

The differences in the timing of recognition of certain expenses and revenues for income tax reporting purposes versus the timing under GAAP had always been a subject for debates in the accounting profession. The initial debate was over the fundamental principle of whether or not income tax effects of timing difference should be recognized in the financial statements. At one extreme were those who believed that only the amount of income tax currently owed (as shown on the income tax return for the period) should be reported as periodic income tax expense, on the grounds that potential changes in tax law and the vagaries of the entity's future financial performance would make any projection to future periods speculative. This was the “no allocation” or “flow‐through” position. At the other extreme were those who held that the matching principle demanded that reported periodic income tax expense be mechanically related to pretax accounting income, regardless of the amount of income taxes actually currently payable. This was the “comprehensive allocation” argument. The middle ground approach, known as “partial allocation,” acknowledged the need for some deferred income tax provision, but only when actual future income tax payments or benefits could be accurately predicted. This debate was settled in the late 1960s: comprehensive income tax allocation became GAAP.

The other key debate was over the measurement strategy ...