Earlier this week, the Financial Accounting Standards Board released a proposed Accounting Standards Update (ASU) calling for significant changes in income tax disclosures by public and nonpublic companies.
Perhaps the most significant issue to note is that the comment deadline on the proposal is relatively soon: September 30. Therefore, to avoid a rush trying to analyze the impact of the standard through discussions with your tax department and other business units, your audit firm, and audit committee – and to have sufficient time to draft a constructive comment letter and/or participate in industry association letters, accounting, finance and audit professionals would be well advised to add FASB’s income tax disclosure proposal to your summer reading list.
New Disclosures on Undistributed Foreign Earnings
As noted in FASB’s press release, the proposal, entitled Income Taxes (Topic 740): Disclosure Framework-Changes to the Disclosure Requirements for Income Taxes, “would both modify existing disclosure requirements and provide additional disclosure requirements for income taxes.”
The proposed disclosures include new requirements to:
- explain the circumstances that caused a change in assertion about the indefinite reinvestment of undistributed foreign earnings, and
- disclose the aggregate of cash, cash equivalents, and marketable securities held by foreign subsidiaries
Disaggregation: domestic vs. foreign
FASB’s proposal would also require disaggregating certain income tax information between foreign and domestic entities. As outlined in KPMG’s Defining Issues, FASB proposes revamped income tax disclosures, the proposed disaggregated disclosures (domestic vs. foreign) include:
- income (or loss) from continuing operations before income tax expense (or benefit),
- income tax expense (or benefit) from continuing operations, and
- income taxes paid
Impact of enacted tax law changes
As outlined in FASB in Focus summary published by FASB on the income tax proposal, all entities would be required to provide:
- a description of an enacted change in tax law that is probable to have an effect on the reporting organization in a future period.
Additional disclosures for public business entities
The proposal would require additional disclosures for public entities – technically, “public business entities” as that term is defined in FASB’s Master Glossary in the Accounting Standards Codification – including:
- Within the reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period, settlements using existing deferred tax assets separate from those that have been or will be settled in cash.
- The line items in the statement of financial position in which the unrecognized tax benefits are presented and the related amounts of such unrecognized tax benefits. If the unrecognized tax benefits are not presented in the statement of financial position, those amounts should be disclosed separately.
- The amount and explanation of the valuation allowance recognized and/or released during the reporting period.
- The total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards.
Tie-in to Disclosure Framework, Materiality Proposals
FASB’s proposed standard on income tax disclosures is part of the accounting standard-setters broader Disclosure Framework project, and relates to last year’s proposals issued by FASB relating to materiality and disclosures. (See our post last year: FASB’s materiality proposal: a big deal.)
FASB states: “The proposal includes language designed to promote an entity’s use of discretion that reinforces that the entity can assess the applicability of disclosure requirements on the basis of whether the resulting information is material, thereby improving the effectiveness of the notes to financial statements.”
KPMG notes, “The proposal aligns with the FASB’s proposed changes to the definition of materiality, which would replace the current definition with a reference to the U.S. Supreme Court definition.”
In meeting its objectives of reducing unnecessary or duplicative disclosure as part of its disclosure framework project, FASB’s income tax proposal references last year’s proposed Concept Statement on qualititative characteristics of financial information, and describes certain disclosure requirements that are reduced or eliminated in the income tax proposal:
- The proposed Concepts Statement would limit disclosure of future-oriented information to that which is used as inputs to measurements in the financial statements or in the notes to financial statements.
- As a result, the amendments in this proposed Update would eliminate the requirement for all entities to (1) disclose the nature and estimate of the range of the reasonably possible change in the unrecognized tax benefits balance in the next 12 months or (2) make a statement that an estimate of the range cannot be made.
Additionally, FASB notes the following additional impacts for public business entities (nonpublic as specified), in that the proposed amendments would:
- modify the existing rate reconciliation requirement for public business entities to be consistent with U.S. Securities and Exchange Commission (SEC) Regulation S-X 210.4-08(h), Rules of General Application—General Notes to Financial Statements: Income Tax Expense – which requires separate disclosure for any reconciling item that amounts to more than 5 percent of the amount computed by multiplying the income before tax by the applicable statutory federal income tax rate.
- reduce diversity in practice by explicitly requiring (1) a public business entity to disclose the amounts of federal, state, and foreign 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 and (2) an entity other than a public business entity to disclose the total amounts of federal, state, and foreign carryforwards (not tax effected) and their expiration dates.
- require disclosure of the amounts of deferred tax assets for federal, state, and foreign carryforwards (tax effected) before the valuation allowance. Those amounts would be further disaggregated by time period of expiration for each of the first five years after the reporting date and a total for any remaining years.
- require an entity to disclose the 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.
SEC Disclosure Action
In related news, the SEC recently released its own proposal relating to disclosures; see our post: SEC issues proposal on disclosure effectiveness: aimed at four types of fixes.