What Is ASC 740-30 Intraperiod Tax Allocation?

The Financial Accounting Standards Board (FASB) issues the Accounting Standards Codification (ASC), the source of U.S. Generally Accepted Accounting Principles (GAAP) for non-governmental entities. Within this framework, ASC 740 provides guidance on how companies account for and report the effects of income taxes. This standard covers the recognition of tax assets and liabilities and disclosures in financial statements.

A component of this guidance, ASC 740-30, details the requirements for intraperiod tax allocation. This subtopic requires assigning a company’s total income tax expense or benefit to different components within its financial statements for a single reporting period. The objective is to report the tax consequences of events in the same part of the financial statements as the events themselves, providing a clearer picture of a company’s financial performance.

The Core Principle of Intraperiod Tax Allocation

Intraperiod tax allocation is the process of distributing a company’s total income tax provision for a given period across the various sections of its financial statements. The principle behind this requirement is to foster transparency by matching tax effects directly with the pretax income or loss that generated them. This provides financial statement users with a more insightful view of a company’s profitability from its different activities. This allocation is purely for financial statement presentation; it does not alter the total amount of tax a company owes.

Without this allocation, the financial picture could be distorted. For instance, if a company has steady income from its primary business but also sells off a segment at a large gain, the tax on that gain would be substantial. If this tax were combined with the tax on regular operating income, it would inflate the company’s overall effective tax rate, misleading an analyst.

The guidance in ASC 740-30 prevents this by requiring the tax expense related to continuing operations to be shown separately from the tax expense related to a discontinued operation. This separation allows stakeholders to more accurately assess the performance of the company’s ongoing business activities.

The Allocation Methodology

The allocation process is governed by a sequential method known as the “with and without” or incremental approach. This methodology ensures that the tax expense associated with core business activities is calculated first and presented as a standalone figure, with the tax effects of all other items allocated subsequently.

The first step is to calculate the company’s total income tax expense or benefit for the period, considering all sources of income and loss combined. This includes income from continuing operations, discontinued operations, and items in other comprehensive income. This total figure represents the consolidated tax amount to be allocated.

Next, the company calculates the tax expense or benefit solely on its income or loss from continuing operations, as if no other activities occurred. This amount is allocated to the “income from continuing operations” line on the income statement.

The final step involves allocating the remaining tax. The difference between the total tax expense and the tax on continuing operations is the incremental tax effect, which is then allocated to the other financial statement categories.

For example, consider a company with $500,000 in pretax income from continuing operations and a $100,000 pretax loss from a discontinued operation. Assuming a 21% tax rate, the total pretax income is $400,000, resulting in a total tax expense of $84,000. Following the methodology, the tax on continuing operations is calculated independently: $500,000 multiplied by 21% equals $105,000. The incremental amount—a tax benefit of $21,000 ($105,000 minus the total tax of $84,000)—is then allocated to the discontinued operation.

Application to Financial Statement Components

Once the total tax provision is allocated, the resulting amounts are presented in specific sections of the financial statements to ensure the tax impact is reported alongside the event itself.

The primary category for this allocation is continuing operations, which reflects the results of the company’s ongoing business activities. The tax expense or benefit shown here is analyzed by investors to determine the effective tax rate on core profitability.

Another category is discontinued operations. When a company disposes of a business segment, the gain or loss from that action is reported separately on the income statement, net of its specific tax effect. This presentation isolates the financial consequences of a strategic decision, preventing it from distorting the results of ongoing operations.

Other comprehensive income (OCI) is a category for gains and losses that have not yet been realized and are excluded from the main income statement. Common examples include unrealized gains or losses on certain investments. The tax effects associated with these items are recorded directly within the OCI section.

Finally, certain transactions are recorded as direct adjustments to shareholders’ equity, bypassing the income statement. A common example involves some tax effects related to employee share-based compensation, and the corresponding tax benefit or expense is also recorded directly in equity.

Treatment of Special Items

The allocation rules include guidance for handling complex tax items. Tax credits are allocated entirely to continuing operations, as most credits are generated by primary business activities. An exception exists if a tax credit is directly attributable to an activity outside of continuing operations, in which case it would be allocated there.

The treatment of net operating losses (NOLs) and related valuation allowances also requires specific allocation. When an NOL is generated, the resulting tax benefit is allocated to the source of the loss. If the loss arose from continuing operations, the benefit of carrying that loss to offset income is also allocated to continuing operations.

A valuation allowance is a reserve recorded against deferred tax assets when it is more likely than not that some of the asset will not be realized. According to ASC 740-10, if the release of a valuation allowance is due to income expected in future years from continuing operations, the benefit is allocated to continuing operations. This applies even if the original loss that created the deferred tax asset came from a now-discontinued operation.