Industry Insights

Proposed Changes to Income Tax Disclosures

September 2016

In July, the Financial Accounting Standards Board (FASB) proposed numerous modifications to existing income tax disclosure requirements. The proposal also would replace the term “public entity” with “public business entity” (PBE) in Topic 740, Income Taxes, and differentiate disclosure requirements for PBEs and organizations other than PBEs. Companies meeting the broader PBE definition will need to comply with income tax disclosures (both existing and proposed) for PBEs, as opposed to non-PBEs.

Most of the proposed amendments apply to all entities. They include language designed to promote an entity’s use of discretion and reinforce that an entity can assess a disclosure requirement’s applicability based on whether the resulting information is material. FASB also is optimistic the disclosures would provide more insight into the liquidity of U.S. multinationals’ foreign operations that don’t repatriate earnings, such as industrial firms that sell goods overseas. Comments are due by September 30, 2016.

Applicable to All Entities

All entities would be required to disclose—disaggregated between domestic and foreign—income (loss) from continuing operations before income tax expense (or benefit), income tax expense (or benefit) from continuing operations and income taxes paid. Entities would be required to disclose the amount of income taxes paid to any country that is significant to total income taxes paid and describe a tax law change that is probable to affect the entity in a future period. The proposal also would require an entity to describe a legally enforceable agreement with a government and the amount of benefit that reduces or may reduce its income tax burden. The disclosure requirement wouldn’t apply to agreements broadly available to taxpayers without a specific agreement.

All entities would be required to disclose in the notes to financial statements the cash, cash equivalents and marketable securities held by foreign subsidiaries and an explanation of the circumstances that caused a change in the assertion related to the indefinite reinvestment of undistributed foreign earnings and the corresponding amount of earnings affected. Under current standards, companies are not required to disclose the amount of undistributed foreign earnings, but only to assert the profits are “indefinitely reinvested.”

Carryforward Disclosures

The proposal would revise the carryforward disclosures in Topic 740 by requiring federal, state and foreign carryforwards (both tax-effected and not tax-effected) to be disaggregated by time period of expiration for each of the first five years after the reporting date, as well as requiring a total of the amounts for the remaining years. Entities other than PBEs only would be required to disclose the total amounts of federal, state and foreign carryforwards not tax-effected and their expiration dates.

FASB’s proposal to replace “public entity” with “public business entity” throughout Topic 740 could substantially affect companies not previously meeting the public company criteria. For example, private community banks required to file their annual audited financial statements with the Federal Deposit Insurance Corporation and that have securities not subject to contractual restriction on transfer meet the definition of a PBE. These entities will need to understand existing income tax disclosure requirements, e.g., rate reconciliation, in addition to the proposal.

Additional Requirements for PBEs

  • The financial statement line item where unrecognized tax benefits are recorded and related amounts, with a separate disclosure for unrecognized tax benefits not presented in the statement of financial position
  • The amount and explanation of the valuation allowance recognized or released during the reporting period
  • 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 total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards

Disclosure Removal

The amendments would eliminate the requirement for all entities to 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 to make a statement that the range can’t be estimated.

BKD LinkedIn BKD Twitter BKD Youtube BKD Google Plus