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Heads Up — FASB proposes updates to income tax disclosure requirements

Published on: Jul 29, 2016

Download PDFVolume 23, Issue 22

by Paul J. Vitola Jr., Karen Wiltsie, and Cort Yoder, Deloitte & Touche LLP

On July 26, 2016, the FASB issued a proposed ASU1 that would modify or eliminate certain disclosure requirements related to income taxes as well as establish new requirements. Comments on the proposed ASU are due by September 30, 2016.

The proposal is part of the FASB’s disclosure framework project, which is intended to “improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements.”

In March 2014, the FASB issued a proposed concepts statement2 on its conceptual framework for financial reporting. The Board later decided to test the guidance in that proposal by considering the effectiveness of financial statement disclosures related to inventory, income taxes, fair value measurements, and defined benefit pensions and other postretirement plans. The proposed ASU is the result of the application of the guidance in the proposed concepts statement to income taxes.

Key Provisions of the Proposed ASU

Scope

Although many of the amendments would apply to all entities that are subject to income taxes, certain amendments would apply only to public business entities.

As part of the proposal, the FASB decided that it would also replace the term “public entity,” as defined in the glossary in ASC 740-10,3 with “public business entity,” as defined in the FASB Accounting Standards Codification (ASC) Master Glossary. The definition of a public business entity includes certain types of entities that the definition of a public entity under ASC 740 does not include. Thus, the disclosure requirements in ASC 740 that currently apply only to public entities would apply to other entities as well.

Indefinitely Reinvested Foreign Earnings

The proposed ASU would require all entities to explain any change to an indefinite reinvestment assertion made during the year, including the circumstances that caused such change in assertion. All entities would also be required to disclose the amount of earnings for which there was a change in assertion made during the year. In addition, all entities would be required to disclose the aggregate of cash, cash equivalents, and marketable securities held by their foreign subsidiaries.

Such information is intended to give financial statement users information that will help them predict the likelihood of future repatriations and the associated income tax consequences related to foreign indefinitely reinvested earnings.

Unrecognized Tax Benefits

The proposed ASU would modify the disclosure requirements for a public business entity related to unrecognized tax benefits. It would also add a requirement for entities to disclose, in the tabular reconciliation of the total amount of unrecognized tax benefits required by ASC 740-10-50-15A(a), settlements disaggregated by those that have been (or will be) settled in cash and those that have been (or will be) settled by using existing deferred tax assets (e.g., settlement by using existing net operating loss or tax credit carryforwards).

A public business entity would also be required to provide a breakdown (i.e., a mapping) of the amount of total unrecognized tax benefits shown in the tabular reconciliation by the respective balance-sheet lines on which such unrecognized tax benefits are recorded. If an unrecognized tax benefit is not included in a balance-sheet line, such amount would be disclosed separately. In addition, a public business entity would be required to disclose the total amount of unrecognized tax benefits that are offset against existing deferred tax assets for net operating loss and tax credit carryforwards.

Under the guidance currently in ASC 740-10-50-15(d), all entities must disclose details of tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The proposed ASU would eliminate this disclosure requirement.

ASC 740-10-55-217 (as amended) would provide an example of the applicability of these disclosure requirements.

Operating Loss and Tax Credit Carryforwards

Currently, entities are required to disclose the amount and expiration dates of operating losses and tax credit carryforwards for tax purposes. Historically, there has been diversity in practice related to this disclosure requirement. The proposed ASU would reduce this diversity by requiring a public business entity to disclose the total amount of:

  • Federal, state, and foreign gross net operating loss and tax credit carryforwards (i.e., not tax effected) by period of expiration for each of the first five years after the reporting date and a total for any remaining years.
  • Federal, state, and foreign deferred tax assets related to net operating loss and tax credit carryforwards (i.e., tax effected) before any valuation allowance.
Editor's Note

Editor’s Note

Generally, an entity should measure a deferred tax asset in accordance with the recognition and measurement criteria in ASC 740. While the proposed ASU uses the term “deferred tax asset,” it is unclear whether it refers to a deferred tax asset measured under the ASC 740 criteria or simply the tax-effected amount of the net operating loss and tax credit carryforwards as reflected on the income tax returns
as filed.

As discussed previously, a public business entity would also be required to disclose the total amount of unrecognized tax benefits that are offset against existing deferred tax assets for net operating loss and tax credit carryforwards.

In addition, the proposed ASU would modify the disclosure requirement related to net operating loss and tax credit carryforwards for entities other than public business entities. An entity other than a public business entity would be required to disclose the total gross amounts of federal, state, and foreign net operating loss and tax credit carryforwards (i.e., not tax effected) along with their expiration dates.

ASC 740-10-55-218 through 55-222 (as amended) would provide an example of the applicability of these disclosure requirements.

Rate Reconciliation

ASC 740-10-50-12 currently requires a public business entity to disclose a reconciliation of the reported amount of income tax expense (or benefit) from continuing operations to the amount of income tax expense (or benefit) that would result from multiplying the pretax income (or loss) from continuing operations by the domestic federal statutory tax rate. The proposed ASU would amend the requirement for a public business entity to disclose the income tax rate reconciliation in a manner consistent with SEC Regulation S-X, Rule 4-08(h).4 As amended, ASC 740-10-50-12 would continue to require a public business entity to disclose a reconciliation of the reported amount of income tax expense (or benefit) from continuing operations to the amount of income tax expense (or benefit) that would result from multiplying the pretax income (or loss) from continuing operations by the domestic federal statutory tax rate. However, the amendment would modify the requirement to disaggregate and separately present components in the rate reconciliation that are greater than or equal to 5 percent of the tax at the statutory rate in a manner consistent with the requirement in Rule 4-08(h).

Government Assistance

As a result of deliberations on its November 2015 proposed ASU5 on government assistance, the FASB decided to require an entity to disclose certain information related to assistance received from a governmental unit that reduces the entity’s income taxes. Accordingly, the proposed ASU on income tax disclosures would require all entities that receive income tax-related government assistance to disclose a “description of a legally enforceable agreement with a government, including the duration of the agreement and the commitments made with the government under that agreement and the amount of benefit that reduces, or may reduce, its income tax burden.” This disclosure requirement would apply only when the government determined whether, under such agreement, the entity would receive assistance and, if so, how much it would receive even if it met the applicable eligibility requirements. In the absence of a specific agreement between the entity and the government, the entity would not be required to disclose this information if the entity obtained the government assistance because it met eligibility requirements that apply to all taxpayers.

Other Income Tax Disclosure Requirements

The proposed ASU would require all entities to disclose the following:

  • The amount of pretax income (or loss) from continuing operations disaggregated by foreign and domestic amounts.
  • The amount of income tax expense (or benefit) from continuing operations disaggregated by foreign and domestic amounts.
  • The amount of income taxes paid disaggregated by foreign and domestic amounts. A further disaggregation would be required for any country that is significant to the total amount of income taxes paid.
  • An enacted tax law change if it is probable that such change would have an effect on the entity in the future.

In the determination of pretax income (or loss), foreign income tax expense (or benefit), or foreign income taxes paid, “foreign” refers to any country outside the reporting entity’s home country.

In addition, the proposal would require public business entities to explain any valuation allowance recognized or released during the year along with the corresponding amount.

The proposed ASU is also aligned with the guidance in the FASB’s proposed ASU6 on assessing the materiality of disclosures, which allows an entity to consider materiality when assessing income tax disclosure requirements.

Transition Guidance and Effective Date

The proposed ASU’s amendments would be applied prospectively. The FASB will determine an effective date for the final guidance after it has considered feedback from stakeholders.

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1 FASB Proposed Accounting Standards Update, Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes.

2 FASB Proposed Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements.

3 FASB Accounting Standards Codification Subtopic 740-10, Income Taxes: Overall.

4 SEC Regulation S-X, 4-08(h), “Income Tax Expense.”

5 FASB Proposed Accounting Standards Update, Disclosures by Business Entities About Government Assistance.

6 FASB Proposed Accounting Standards Update, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material.

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