Posted by Fred Lake

Tips for Accounting Method Change Procedures

Tips for Accounting Method Change Procedures

The IRS has issued a notice 2017-17 on 28th March 2017 and provide proposed procedures. These can be used in particular circumstances to request agreement to modify a method of account. This procedure is helpful to recognize income associated with the adoption of new recognition financial standards of account.

Moreover, the notice demanded comments on the anticipated procedures and various issues, such as different raised in the 2015-40 notice.  

The accounting method change procedures for financial calculations were introduced to recognize revenue from contracts with clients. The latest standards are active for the period of annual reporting starting after 15 December 2018, for several taxpayers. Though, publicly traded objects, particular not-for-profit objects and particular benefit plans for the employee should implement these standards for one year.

Accounting standards FASB update number 214-09, (Topic 606) Revenue from Agreements with Customers, applies an analysis of five-step to each agreement with customers to transfer services and goods. These are other than nonmonetary exchanges, guarantees, financial instruments, insurance and lease between entities in similar business lines. 

Account Method Change Procedure and Profits Recognition Principles  

Under federal tax principles, revenue is recognized with the use of all-event test under 451 section when taxpayers have:

  • A static right to receive the profit (typically the earliest of the time the revenue is earned, received and due).
  • The amount can be determined via reasonable accuracy.

In several circumstances, particular advance payments are received from provisions of services, goods, and several other eligible sources are deferred for 1 to 2 tax years. Changing the advance payments and revenue are recognized for taxes. These may constitute a particular change in the method of account that needs the consent of IRS. By filling 3115 form, Application for the modification in accounting procedure. 

In general, consent of the IRS is requested under the procedure of advance content described in Proc. Rev. 2015-13 that require 3115 form to be filled with the national office IRS by the change in the final day of the year, along with the fee payment of user outlined in Proc. Rev. 2017-1. 

However, modifications in the designation of the IRS are automatic (presently, Proc. In Rev. 2017-30) should be requested with the use of automatic consent process. It may not require a fee for the user and are trailed in duplicate with a timely filed (including postponements) federal tax return for the current year.     

Possible Tax Implications

Construction, manufacturing, entertainment and software taxpayers can be affected by the latest standards of revenue recognition because of the prevalence in specific industries. These regulations can be helpful for accounting methods and particular business practices.

The method of percentage-of-completion

  • Revenue from services
  • Returns and sales of goods
  • Income from bill & hold sales transactions
  • Revenue from the trade of warranties. Along with the impact on the timing of recognizing income, the current standards have particular implications for other business and tax areas.
  • Cash flow and tax payments planning because of the expected taxable acceleration income under the current rules
  • Revenue tax provisions that have to reflect extra temporary deferred taxes and differences. For instance, if the time of income recognition differs from tax and book purposes under the latest standards
  • Apportionment of state may need extra analysis to determine data of sales by state
  • Ancillary taxes, particularly for countries that may gross net worth and receipts
  • Alien subsidiaries profits and earning calculations and overseas tax credits
  • Agreements of transfer pricing, mainly things based on profit and revenue measures reported in monetary statements
  • Approval of compensation are associated with revenue
  • Proposed Automatic method of accounting and IRS Guidance
  • The IRS asked for comments in a 2015-40 notice on national tax accounting issues related to the adoption of current standards, such as:
  • The latest standards can be a permissible account method for national tax purposes
  • The kind of accounting procedure change requests is similar to result from adopting current standards
  • If your ongoing accounting change process sufficient accommodate these requests

The 2017-17 notice provides a proposed process for requesting harmony to accounting method change procedures to recognize revenue related to the adoption of current financial account revenue recognition. Moreover, noting that a few comments are received in response to the 2015-40 notice. The notice request comments on several implementations and technical issues.

Fred Lake
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