On July 26, 2016, the FASB issued a proposed Accounting Standards Update (ASU)¹ that would modify or eliminate certain disclosure requirements related to income taxes as well as establish new requirements. Comments on the proposed ASU were due by September 30, 2016, and feedback was received and discussed at the FASB’s meeting on January 25, 2017. The proposed ASU had not been publicly readdressed, however, since the enactment of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017.

At its meeting on November 14, 2018, the FASB discussed comments received on the proposed ASU and reached several tentative decisions related to many of the proposed ASU’s disclosure requirements. The Board also discussed whether additional disclosures should be considered as a result of the Act. The Board’s tentative decisions, organized by topic, are summarized below.

Tax Cuts and Jobs Act

The Board tentatively concluded that the existing guidance in ASC 740² adequately addressed the Act’s provisions; however, the Board requested that the FASB staff perform further research related to the Act’s deemed repatriation transition tax (the “transition tax”) to determine whether additional disclosure may be warranted. (See the Indefinitely Reinvested Foreign Earnings section below for more information on the transition tax.)

Change in Tax Law

The proposed ASU initially required all entities to disclose an enacted tax law change if it is probable that such a change would affect an entity in the future. Stakeholders expressed concerns that this language was potentially too broad, and the Board discussed the possibility of modifying the disclosure requirement to provide such disclosure if that change would have a “significant effect [on the entity] in a future period.” However, the Board ultimately determined that the disclosure requirement was unnecessary and voted to remove the proposed paragraph (ASC 740-10-50-22) from the proposed ASU.

Disaggregation

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

• The amount of pretax income (or loss) “from continuing operations . . . disaggregated between domestic and foreign.”³
• The amount of “income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign.”⁴
• 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 total income taxes paid.”

The Board ultimately voted to retain the disaggregated presentation of income (or loss) from continuing operations and the amount of income tax expense (or benefit), but it voted to remove the disaggregation requirement related to income taxes paid. On the basis of stakeholders’ feedback regarding concerns about current divergence in practice in reporting income or loss from continuing operations disaggregated between foreign and domestic amounts, the Board also voted to clarify that the amount of pretax income (or loss) from continuing operations presented in the disaggregation should be on a “preconsolidated” basis. Some Board members expressed concerns that “preconsolidated” is not defined in U.S. GAAP and could cause diversity in practice. We expect that a question will be added to the revised proposed ASU to ascertain whether stakeholders believe the term is operable or requires further clarification.

Connecting the Dots In practice, some entities disaggregate and push elimination entries made in arriving at consolidated pretax income (loss) back to the respective components, while others disregard such elimination entries and report the components before elimination entries. For more information, see Section 6.27A of Deloitte’s A Roadmap to Accounting for Income Taxes.

Indefinitely Reinvested Foreign Earnings

The Act introduced the concept of the “transition tax,” which required U.S. shareholders to pay a tax on certain undistributed and previously untaxed foreign earnings and profits after 1986. The transition tax has significantly reduced the amount of untaxed foreign earnings held by entities with foreign operations as taxes have been (or will be) paid on all post-1986 earnings. As a result, the Board voted to remove the proposed disclosure requirement in ASC 740-30-50-3 from the proposed ASU which would have required an explanation of any change to an indefinite reinvestment assertion made during the year, including the circumstances that caused such a change and the amount of earnings to which the change in assertion related.

While not included in the proposed ASU, but for reasons similar to those noted above, the Board voted to remove the existing disclosure requirement in ASC 740-30-50-2(b) to disclose the “cumulative amount of each type of temporary difference” when a “deferred tax liability is not recognized because of the exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.”

The proposed ASU also would have required entities’ disclosure of the aggregate of cash, cash equivalents, and marketable securities held by their foreign subsidiaries to provide users with additional information to help them predict the likelihood of future repatriations and the associated tax consequences related to foreign indefinitely reinvested earnings. The Board similarly voted to remove this requirement from the proposed ASU.

Unrecognized Tax Benefits

The Board voted to remove the proposed disclosure requirement for entities to disclose, in the tabular reconciliation of the total amount of unrecognized tax benefits required by proposed 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).

The Board voted to retain the proposed disclosure requirement for public business entities 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. However, the Board voted to remove the requirement to disclose an unrecognized tax benefit that is not included in a balance-sheet line separately since it was unclear to which unrecognized tax benefit the requirement would now be relevant.

Connecting the Dots Before the issuance of ASU 2016-09,5 excess tax benefits associated with share-based compensation were not recognized until such time as they reduced income taxes payable resulting in, essentially, off-balance-sheet deferred tax assets. When there were uncertain tax positions with respect to the amount of such unrecognized excess tax benefits, there would be an income tax uncertainty related to the off-balance-sheet item. Upon the issuance of ASU 2016-09, such off-balance-sheet excess tax benefits and related uncertain tax positions no longer exist.

The Board further affirmed the decision to remove the current requirement in ASC 740-10-50-15(d) to disclose the 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. As a result, the proposed ASU will eliminate this existing disclosure requirement.

Valuation Allowances

The Board voted to affirm the proposed disclosure requirement to require public business entities to explain any valuation allowance recognized or released during the year along with the corresponding amount.

Rate Reconciliation

The Board voted to affirm the proposed amendment to ASC 740-10-50-12, which 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).⁶ 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 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).

Some Board members questioned whether 5 percent is still an appropriate threshold given the decrease to the U.S. statutory rate as a result of the Act; thus, the Board may raise this question to stakeholders in the revised proposed ASU.

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 (not tax effected) by time period of expiration for each of the first five years after the reporting date and a total for any remaining years.”
• “[D]eferred tax assets for federal, state, and foreign [net operating loss and tax credit] carryforwards (tax effected) before the valuation allowance.”

The Board ultimately determined that disclosing the not-tax-effected amounts of federal, state, and foreign gross net operating loss and tax credit carryforwards did not provide decision-useful information and voted to remove this disclosure requirement. The Board concluded that disclosure of the tax-effected amounts of federal, state, and foreign deferred tax assets related to net operating loss and tax credit carryforwards was useful and voted to retain that proposed disclosure requirement with a modification to also disclose the valuation allowance associated with such amounts.

While the Board voted to require public business entities to provide the tax-effected amounts of federal, state, and foreign deferred tax assets related to net operating loss and tax credit carryforwards rather than the not-tax-effected amounts, on the basis of feedback received from nonpublic entities, the Board voted to retain the proposed disclosure requirement for nonpublic entities in ASC 740-10-50-8A to provide such disclosure on a not-tax-effected basis.

Interim Disclosure Requirements

The proposed ASU did not contain changes to interim disclosure requirements. However, the Board voted to add an interim disclosure requirement to disclose income taxes paid for all interim periods presented.

Next Steps

The Board requested that the staff update the proposed ASU to reflect the changes described above. It is expected that the Board will issue a revised proposed ASU for public comment, although there was no discussion of the anticipated timing of such issuance.

Connecting the Dots The Board further discussed the possibility of bifurcating the proposed disclosures between those that should be re-exposed in the revised proposed ASU and those that could be included in a final ASU.

Summary of Decisions Reached

Each question presented in the FASB meeting handout and the Board’s summary of tentative decisions with respect to those questions are reproduced below (emphasis added):

 ____________________

1 FASB Proposed Accounting Standards Update, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes.

2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

3 Represents an existing disclosure requirement for public business entities under SEC Regulation S-X, Rule 4-08(h).

4 See footnote 3.

5 FASB Accounting Standards Update No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

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

7 See the Tax Cuts and Jobs Act section above for discussion of additional research to be performed related to the transition tax.

8 Represents an existing disclosure requirement for public business entities under SEC Regulation S-X, Rule 4-08(h).

9 See footnote 8.

10 The proposed amendment to ASC 740-10-50-15A was affirmed, but the proposed requirement to disclose separately an unrecognized tax benefit that is not included in a balance-sheet line was removed, as it was unclear what such an unrecognized tax benefit would be.

11 Represents an existing disclosure requirement for public business entities under SEC Regulation S-X, Rule 4-08(h).