Areas of Consideration within FASB’s Proposed Changes to Income Tax Disclosures

On March 25, the FASB issued the proposal, Proposed Accounting Standards Update (Revised) - Income Taxes (Topic 740): Disclosure Framework - Changes to the Disclosure Requirements for Income Taxes. This proposal is part of the overall larger disclosure framework project. The objective of this particular, proposed ASU is to “improve the effectiveness of disclosures in the financial statements” for all entities that are required to make income tax disclosures.

The objective of these proposal requirements is to provide financial statements users with information about the following:

• An explanation of how income taxes affect financial statement line items and assumptions that a reporting entity makes in determining those line items;
• The income tax components of different jurisdictions, tax issues, or scheduled expiration that are measured differently or could affect prospects for net cash flows differently;
• Cause of the changes in financial statement line items related to income taxes;
• The difference between expectations based on statutory rates and the effective rate; and
• Acceptable alternative accounting policies or methods.

This proposal impacts nearly every entity that applies U.S. GAAP. If it were to be put into effect, it would require all entities to disclose pre-tax income or loss from continuing operations differentiated between foreign and domestic operations, income tax expense and benefit from continuing operations and income taxes paid by tax jurisdiction, and cash taxes paid during interim periods by tax jurisdiction. It would also remove disclosures related to undistributed earnings of subsidiaries and corporate joint ventures.

Specifically, the following income tax disclosures have been added for public companies in the proposal:

1. Income (or loss) from continuing operations before income tax expense (or benefit) and before intra-entity eliminations disaggregated between federal, state, and foreign;
2. Income tax expense (or benefit) from continuing operations disaggregated between federal, state, and foreign;
3. Income taxes paid disaggregated between federal, state, and foreign;
4. 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;
5. The amount and explanation of the valuation allowance recognized and/or released during the reporting period;
6. The total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards;
7. A reconciliation between the amount of reported total income tax expense (or benefit) from continuing operations and the amount computed by multiplying the income (loss) from continuing operations before tax by the applicable statutory federal or national income tax rate, showing the reporting currency amount of each of the underlying causes for the difference (consistent with SEC Regulation S-X); and
8. The amounts of federal, state, and foreign carryforwards (tax effected before any valuation allowance) by time period or expiration for each of the first five years after the reporting date, a total for any remaining years, and a total for carryforwards that do not expire.

A lot of concern exists within the details of how companies will effectively implement some of the proposed disclosures. Particularly, due to remaining differences between the FASB’s proposed disclosures and those already required by the SEC. As such, the proposed disclosures could result in information that is not currently available to the public being made available.

One such concern is the proposed requirement to report pretax book income before intra-entity eliminations which should also be reported separately between domestic and foreign operations. This creates a few concerns that entities should be aware of or thinking through as to how to handle. One concern pertains to the ability to sort through the entity’s understanding and detail of how the intra-entity eliminations may relate to foreign versus domestic operations as opposed to eliminations being at the segment or operating levels of the entity. An entity may not have the ability to track pre-tax income due to data limitations at this granular level. If this is the case, perhaps entities would need to add disclosures on assumptions used to make the eliminations and get to the disclosed pre-tax income balances.

In addition, if the results of the entity’s new disclosures require the additional reporting and assumptions being made, would the results benefit financial statement readers or would the results give readers a view of foreign operations that may not accurately reflect the results of said operations? This also flies directly in the face of existing requirements within ASC 740-10- 25-3(e), for which recognition of deferred tax assets is prohibited for “intra-entity differences between the tax basis in the buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements.” The results may mislead investors showing balances different from actual segment reporting in which intra-entity eliminations are necessary in order to accurately report results of operations.

According to the proposal, application of the standard is to be made on a prospective basis. Respondents generally agree with this approach given the fact that reason for the changes is based on giving financial statement readers decision-useful information for which investing decisions can be made. For this reasoning, prior-year restatement would not be necessary nor useful.

The deadline to submit comments on the proposal was May 31, 2019. That said, entities should start contemplating how these and any other proposals may best be handled by existing systems and whether system upgrades and enhancements are necessary. Kaplan Professional Education is here to assist your company by educating your personnel on the many other issues to be considered within this FASB proposal, as well as provide guidance and practical application in a number of other accounting topics. Our team of instructors are subject matter experts with many years of experience to provide a unique experience to learning within a broad range of topics in accounting, auditing, tax, ethics, information technology, governmental and not-for-profit, and behavioral skills and leadership seminars.

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