B.2 Key Provisions of the ASU
B.2.1 Rate Reconciliation
The ASU amends ASC 740-10-50-12 to require a PBE to disclose a
reconciliation “between the amount of reported income tax expense (or benefit)
from continuing operations and the amount computed by multiplying the income (or
loss) from continuing operations before income taxes by the applicable statutory
federal (national) income tax rate of the jurisdiction (country) of domicile.”
If the PBE “is not domiciled in the United States, the federal (national) income
tax rate in that entity’s jurisdiction (country) of domicile shall normally be
used in the reconciliation.” The amendments prohibit the use of different income
tax rates for subsidiaries or segments. Further, PBEs that use an income tax
rate in the rate reconciliation that is other than the U.S. income tax rate must
disclose the rate used and the basis for using it.
The ASU also adds ASC 740-10-50-12A, which requires entities to
annually disaggregate the income tax rate reconciliation between the following
eight categories by both percentages and reporting currency amounts:
- State and local income tax, net of federal (national) income tax effect
- Foreign tax effects
- Effect of changes in tax laws or rates enacted in the current period
- Effect of cross-border tax laws
- Tax credits
- Changes in valuation allowances
- Nontaxable or nondeductible items
- Changes in unrecognized tax benefits.
Categories 2, 4, 5, and 7 must be further disaggregated on the
basis of a quantitative threshold of 5 percent “of the amount computed by
multiplying the income (or loss) from continuing operations before income taxes
by the applicable statutory federal (national) income tax rate.” If a
reconciling item is not within any of the eight categories but meets the
conditions for disaggregation on the basis of the 5 percent threshold, it must
be “disaggregated by nature.”
Connecting the Dots
A reporting entity that is domiciled in the United
States is required to separately disclose any reconciling item whose tax
effect is greater than 1.05 percent (21% × 5%) of income from continuing
operations. If a reconciling item does not fit into one of the
prescribed categories and does not meet the conditions for
disaggregation on the basis of the 5 percent threshold, it would be
aggregated with other such reconciling items in an “Other Adjustments”
category. See Case A in ASC 740-10-55-231 (reproduced in Appendix A) for an illustration of such
a rate reconciliation.
An entity should present all reconciling items on a gross basis,
except for UTBs and certain cross-border tax effects and the related tax
credits, which the entity may choose to present net (i.e., UTBs net of the
underlying position taken and the tax effect of certain cross-border tax laws
net of the related tax credits). See additional discussion in Section B.2.1.3.2 and
Section
B.2.1.3.6 related to the effects of cross-border tax laws and
changes in UTBs, respectively. Further, the presentation of changes in UTBs
related to state and local income taxes and foreign tax effects may be combined
with federal (national) changes, as further discussed below.
Lastly, the ASU adds ASC 740-10-50-12C, which states that a PBE must “provide an
explanation, if not otherwise evident, of individual reconciling items required
by paragraph 740-10-50-12A, such as the nature, effect, and underlying causes of
the reconciling items and the judgment used in categorizing the reconciling
items.” Each of the eight categories is further discussed below.
B.2.1.1 State and Local Income Taxes
This category reflects income taxes imposed at the state and
local income tax level within the jurisdiction (country) of domicile.
Changes in state and local UTBs may be excluded and reported in the separate
category for changes in UTBs. While the state and local income taxes
category does not require further disaggregation on the basis of a
quantitative threshold of 5 percent, ASC 740-10-50-12B states, in part, that
PBEs must “provide a qualitative description of the states and local
jurisdictions that make up the majority (greater than 50 percent) of the
effect of the state and local income tax category.” Accordingly, a PBE
starts with the state and local jurisdiction that has the largest effect
and, if that jurisdiction did not represent greater than 50 percent of the
impact of the category, the PBE adds the state or local jurisdiction that
has the next largest effect, and so on, until the aggregated effect is
greater than 50 percent.
B.2.1.2 Foreign Tax Effects
This category includes reconciling items attributable to the
impact of income taxes imposed by foreign jurisdictions (i.e., jurisdictions
outside the country of domicile). Changes in foreign UTBs may be excluded
and reported in the separate category for changes in UTBs. Further
disaggregation of reconciling items within the foreign tax effects category
is required by jurisdiction and by nature on the basis of the 5 percent
threshold discussed above.
Connecting the Dots
As shown in Case A in ASC 740-10-55-231 (reproduced
in Appendix A), if the taxes
imposed by a particular foreign jurisdiction create reconciling
items with respect to the jurisdiction that, in the aggregate,
exceed the 5 percent threshold, that jurisdiction should be
disclosed separately as a reconciling item within the category. Any
individual reconciling item within that jurisdiction that also
exceeds the 5 percent threshold should be separately disclosed by
nature (i.e., by jurisdiction and by nature). However, ASC
740-10-50-12A specifies that “[w]ithin any foreign jurisdiction
(regardless of whether it meets the 5 percent threshold), the
reconciling item shall be separately disclosed by nature if [it]
meets the 5 percent threshold.” This may happen when a particular
foreign jurisdiction has a reconciling item or items that
individually trigger the 5 percent threshold but are offset by other
reconciling items that have an opposite impact on the rate
reconciliation (i.e., the net impact of a foreign jurisdiction is
below the 5 percent threshold in the aggregate).
B.2.1.3 Impacts of Federal (National) Income Taxes
The remaining categories (effect of changes in tax laws or
rates enacted in the current period, effect of cross-border tax laws, tax
credits, changes in valuation allowances, nontaxable or nondeductible items,
and changes in UTBs) include only reconciling items attributable to the
impact of federal (national) income taxes for the jurisdiction (country) of
domicile. For example, changes in valuation allowances related to a federal,
state, or foreign jurisdiction must be disclosed in the changes in valuation
allowances category, the state and local income tax (net of federal
[national] income tax effect) category, or the foreign tax effects category,
respectively. Although the changes in UTBs category includes reconciling
items attributable to the tax effect of positions taken on federal
(national) income taxes, an entity may also choose to include reconciling
items attributable to the impact of positions taken at the state and local
level as well as the foreign level, as further discussed below.
B.2.1.3.1 Effect of Changes in Tax Laws or Rates Enacted in the Current Period
This category includes the cumulative tax effects of a
change in enacted tax laws or rates on current or DTAs and liabilities
as of the enactment date.
B.2.1.3.2 Effects of Cross-Border Tax Laws
This category “reflects the effect of incremental income taxes imposed by
the jurisdiction (country) of domicile on income earned in foreign
jurisdictions.” For a U.S.-domiciled PBE, this category includes the
incremental tax impacts of the GILTI, BEAT, and FDII rules.
Connecting the Dots
We expect that the incremental impact of the
rules under Subpart F of the IRC and the branch income rules
would also be included in this category.
Further, PBEs are permitted but not required to
reflect the effect of incremental taxes presented in this
category net of their related FTCs (e.g., an entity would be
permitted to present the effects of GILTI taxes net of
associated FTCs). Alternatively, PBEs may report the impacts of
the incremental taxes separately from the related tax credits,
which would be presented in the tax credits category. See
Example
B-1 and Example B-2 for
illustrations of the presentation of the effects of cross-border
tax laws.
B.2.1.3.3 Tax Credits
This category includes the impacts of federal income tax
credits (e.g., R&D tax credits, or energy-related tax credits) that
are not reflected as part of the effects of cross-border tax laws.
B.2.1.3.4 Changes in Valuation Allowances
This category reflects the initial recognition and subsequent changes to
the federal (national) valuation allowance that occur during the current
year.
B.2.1.3.5 Nontaxable or Nondeductible Items
This category consists of items that are either nontaxable or
nondeductible. The FASB acknowledged in paragraph BC29 of the ASU that
entities may need to apply judgment when assessing (1) “how to
categorize certain income tax effects that do not clearly fall into a
single category” or that have “characteristics of multiple categories”
and (2) “the nature of reconciling items for further disaggregation. . .
. For example, an entity may decide to include the tax effects of
share-based payment awards (such as nondeductible expenses, shortfalls,
and windfalls) in [this] category” even though windfalls might not be
viewed as belonging to this category. In such a case, the entity should
consider whether, in accordance with ASC 740-10-50-12C, it must describe
the types of tax effects related to share-based payments that it has
included in this category. See Section B.2.1.6 for
a discussion of the application of judgment under the ASU’s disclosure
requirements.
B.2.1.3.6 Changes in UTBs
This category includes reconciling items resulting from
changes in judgment related to tax positions taken in prior annual
reporting periods. When a UTB is recorded in the current annual
reporting period for a tax position taken or expected to be taken in the
same reporting period, such benefit and its related tax position may be
presented on a net basis in the category in which the tax position is
presented.
Connecting the Dots
If an entity intends to claim $100 of federal
R&D tax credits on its “as-filed” tax return but, after
considering the recognition and measurement guidance in ASC 740,
determines that it can only recognize $75 of benefit for such
tax credits, the entity may report in the rate reconciliation a
net $75 benefit in the tax credits category. It would report any
subsequent changes in the recognition or measurement of such
credits in the changes in UTBs category. Alternatively, an
entity may present the $100 of federal R&D tax credits in
the tax credits category and the related $25 UTB in the changes
in UTBs category.
B.2.1.4 Statutory Tax Rate
The ASU adjusts ASC 740-10-50-12 to align with the requirements in SEC
Regulation S-X, Rule 4-08(h)(2). In paragraph BC38 of the ASU, the FASB
notes that if “an entity (a) is domiciled in a jurisdiction with an income
tax rate significantly lower than the U.S. statutory income tax rate or (b)
operates at or around break even, the entity would be expected to apply
judgment in determining the appropriateness of using a different statutory
income tax rate and evaluating the materiality of reconciling items.”
B.2.1.5 Materiality
The Board decided against clarifying in ASC 740 whether an entity should
consider materiality when evaluating the required disclosures, including
identifying reconciling items that meet the quantitative threshold. Instead,
the Board notes in paragraph BC22 of the ASU that it “observed that the
guidance in paragraph 105-10-05-6, which states that the provisions of the
Codification need not be applied to immaterial items, is applicable to the
amendments in [the ASU and that] an entity does not need to separately
disclose the required specific categories or reconciling items if they are
immaterial, even if the quantitative threshold is met.”
B.2.1.6 Application of Judgment
In the ASU’s Basis for Conclusions, the FASB acknowledges that entities will
need to use judgment when applying certain of the ASU’s disclosure
requirements. The Board states in paragraph BC29 that when applying such
judgment, an entity “should assess whether the disclosure objective in
paragraph 740-10-50-11A is met [and] consider whether an accompanying
explanation is needed in accordance with paragraph 740-10-50-12C.” An entity
may be required to use judgment in situations in which, for example, it (1)
evaluates certain reconciling items that may not clearly fall into a single
category or might have characteristics of multiple categories or (2)
operates at or near the break-even point.
B.2.1.7 Entities Other Than PBEs
Entities other than PBEs are required to qualitatively
disclose the nature and effect of the specific categories of reconciling
items listed in ASC 740-10-50-12A(a) as well as individual jurisdictions
that result in a significant difference between the statutory tax rate and
the ETR. A numerical reconciliation is not required.
B.2.2 Income Taxes Paid
Income taxes paid must be disaggregated by foreign, domestic,
and state taxes, with further disaggregation by jurisdiction on the basis of a
quantitative threshold of 5 percent “of total income taxes paid (net of refunds
received).”1 Further, comparative information for all periods presented is not required
for the disclosures related to income taxes paid in an individual jurisdiction
under ASC 740-10-50-23.
B.2.3 Disaggregation of Pretax Income and Expense
The ASU adds ASC 740-10-50-10A and 50-10B, which, in a manner
consistent with existing disclosure requirements for PBEs under SEC Regulation
S-X, Rule 4-08(h), require all entities to disclose for each annual reporting period:
- “Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign.”
- “Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. . . . Income taxes on foreign earnings that are imposed by the jurisdiction of domicile shall be included in the amount for that jurisdiction of domicile (that is, the jurisdiction imposing the tax).”
B.2.4 Indefinitely Reinvested Foreign Earnings
The ASU removes the requirement in ASC 740-30-50-2(b) to
disclose the “cumulative amount of each type of temporary difference [when in
accordance with ASC 740-30-50-2] a deferred tax liability is not recognized
because of the exceptions to comprehensive recognition of deferred taxes related
to subsidiaries and corporate joint ventures.”
Connecting the Dots
While removing the requirement in ASC 740-30-50-2(b), the ASU does not
remove the guidance in ASC 740-30-50-2(c) under which an entity must (1)
disclose the “amount of the unrecognized deferred tax liability for
temporary differences related to investments in foreign subsidiaries and
foreign corporate joint ventures that are essentially permanent in
duration” or (2) provide “a statement that [such] determination is not
practicable.”
B.2.5 Unrecognized Tax Benefits
The ASU eliminates the requirement in ASC 740-10-50-15(d) that
entities must disclose details of tax positions for which it is reasonably
possible that the total amount of UTBs will significantly increase or decrease
in the next 12 months.
Connecting the Dots
In paragraph BC90 of the ASU, the Board notes that an
entity must still apply the guidance in ASC 275-10-50-8 when considering
whether it must provide additional disclosures related to UTBs.
B.2.6 Reconciliation With ASC Master Glossary
The ASU replaces the term “public entity” throughout ASC 740
with the term “public business entity” as defined in the ASC master
glossary.
Footnotes
1
The FASB notes in paragraph BC59 of the ASU that the 5 percent threshold
for disaggregation is consistent with the requirement in SEC Regulation
S-X, Rule 4-08(h)(1).