The IRS has released a new automatic method change procedure (Rev. Proc. 2018-29
) for taxpayers that are implementing changes related to the new financial accounting standards for revenue recognition, ASC 606. It does not provide guidance for changes that may be required because of the amendments to Section 451 made by the Tax Cuts and Jobs Act (TCJA).
On May 28, 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) announced new accounting standards for revenue recognition. Publicly-traded entities, some not-for-profit entities and employee benefit plans are required to adopt these new standards for years beginning after Dec. 15, 2017. All other entities are required to adopt ASC 606 for years beginning after Dec. 15, 2018.
On March 28, 2017, the IRS issued Notice 2017-17
, which included a proposed revenue procedure under which a taxpayer could request automatic consent to change its method of accounting for recognizing revenue when it is required to make a change for financial accounting purposes under ASC 606. Rev. Proc. 2018-29 was issued in response to the comments to that notice.
Rev. Proc. 2018-29 modifies Rev. Proc. 2018-31
, which is the newly released comprehensive list of accounting method changes that are eligible for automatic consent (see our Tax Flash
). Rev. Proc. 2015-13
contains the actual procedures for requesting consent for both automatic and non-automatic accounting method changes.
Rev. Proc. 2018-29 states that the IRS intends to issue separate guidance with procedures for making method changes to implement the modifications to revenue recognition in Sections 451(b) and (c) provided by the TJCA. See, for example, Notice 2018-35
, which provides transitional guidance on advance payments (see our Tax Flash
Summary of the new automatic change
Rev. Proc. 2018-29 adds a new section 16.11 to Rev. Proc. 2018-31 entitled “Changes in the timing of recognition of income due to the New Standards.” This change applies to taxpayers that wish to change their method of accounting for (1) identifying performance obligations, (2) allocating transaction price to those performance obligations, and/or (3) considering performance obligations satisfied. A change in method of accounting may only be requested under this procedure if the proposed method is otherwise permissible for federal income tax purposes and the change is being made for the year in which the taxpayer adopts ASC 606.
The automatic procedure does not apply to the following changes that may be a part of the taxpayer’s implementation of the new revenue recognition standards:
- A change in the manner in which the taxpayer identifies contracts or determines the transaction price, e.g., the inclusion or exclusion of variable consideration
- A change made in a year different from the year in which ASC 606 is adopted
- A change in method which does not comply with Section 451 or other guidance
- Any change which is otherwise listed in Rev. Proc. 2017-30 or its successor
- Any change related to income from long-term contracts under Section 460, unless the contracts are exempt from the use of the percentage-of-completion method for certain home construction contracts and small taxpayers.
When making a change under this revenue procedure, a taxpayer may choose to implement the change either with a Section 481(a) adjustment or on a cut-off basis, but must apply that choice to all changes under the automatic change. If the taxpayer is a member of a consolidated group, then it must implement changes related to intercompany transactions on a cut-off basis, but may choose how to implement the change for all other transactions.
Taxpayers are not required to file a duplicate copy under section 6.03(1)(a) of Rev. Proc. 2015-13 with the IRS in Covington, Ky. The revenue procedure also provides a waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, which generally states that taxpayers are not allowed to file a method change for the same item if they changed that item in the past five taxable years (the “five-taxable-year limitation”). Thus, providing the waiver means this change may be filed under the automatic procedures by taxpayers that have changed their method of revenue recognition within the past five taxable years.
Taxpayers that have already filed a Form 3115 under the non-automatic procedures in Rev. Proc. 2015-13 have a limited time period in which to notify the IRS if they intend to use the transition rule to convert the request to change under this new automatic procedure.
The IRS is requesting comments on additional changes that taxpayers anticipate needing to request because of the new standards and guidance that would helpful in implementing those changes. The Service also requests comments on future guidance to be issued under amended Section 451.
Rev. Proc. 2018-29 is effective immediately, but may only be relied upon for a taxpayer’s first, second or third taxable year ending on or after May 10, 2018.
The guidance has been much anticipated, particularly for taxpayers working through their quarterly provisions. Companies should begin analyzing the impact of ASC 606 on their methods for recognizing revenue for federal income tax purposes. It appears that taxpayers that have different accounting periods between book and tax are not eligible under the automatic procedures. Companies with different book and tax years must determine whether they must file under the non-automatic procedures.
The procedures reiterate that taxpayers may not simply follow their book methods, but must use a permissible method for federal income tax. However, the consent provided in these procedures is not a determination that the new method, including the allocation method, is permissible for federal tax purposes. It is also not a determination that the amount of income to be included under the new ASC 606 standards is correct.
The ability to choose between implementing changes with a Section 481(a) adjustment or on a cut-off basis is welcome flexibility. Businesses should carefully analyze whether they have the appropriate documentation and resources to do a complete Section 481(a) adjustment for all required changes or whether a cut-off basis is required or desired.
Surprisingly, the procedures do not allow a change in the manner of determining the transaction price, including variable consideration. As a result, companies may need to consider how to track additional information necessary to capture the book/tax differences for provision and compliance, and may decide that system changes are required.
Companies that need to make changes in method of accounting for long-term contracts under Section 460 must consider filing under the non-automatic procedures. This may impact many taxpayers in the construction, aerospace and defense, and custom manufacturing industries, as these industries generally are subject to the percentage of completion method in Section 460.
Similarly, taxpayers that are currently deferring advance payments under Rev. Proc. 2004-34 should consider whether changes to the timing of recognizing advance payments must be filed under the simplified procedure in section 16.10 of Rev. Proc. 2018-31, as those changes may be ineligible to file under the new section 16.11. Section 16.10 provides the automatic procedure for a taxpayer using Rev. Proc. 2004-34 to change its method of accounting if the taxpayer changes the manner in which it recognizes advances payments in revenues in their applicable financial statements.
Additionally, Rev. Proc. 2018-29 does not include changes to conform to the new provisions in tax reform. For example, taxpayers that must implement ASC 606 in 2019 may find they have to file a change to conform to the revised Section 451 in 2018 and again to comply with ASC 606 changes in 2019.
For more information contact:
Partner, Accounting Methods
Washington National Tax Office, Grant Thornton LLP
+1 202 861 4140
Managing Director, Accounting Methods
Washington National Tax Office, Grant Thornton LLP
+1 202 521 1523
Manager, Accounting Methods
Washington National Tax Office, Grant Thornton LLP
+1 202 521 1555
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