Appendix B — FASB Proposes Changes to Income Tax Disclosure Requirements

B.2 Key Changes Under the Proposed ASU

B.2.1 Scope

The proposed amendments affect PBEs as well as organizations other than PBEs that are subject to income taxes.

B.2.2 Rate Reconciliation

ASC 740-10-50-12 currently requires a PBE 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 tax rate. The proposed ASU would retain this reconciliation guidance; however, it would (1) require a PBE to provide a tabular reconciliation annually by using both percentages and dollars (or other reporting currency) and (2) add the following requirements under proposed ASC 740-10-50-12A:

The following specific categories shall be disclosed:
1. State and local income tax, net of federal (national) income tax effect
2. Foreign tax effects
3. Enactment of new tax laws
4. Effect of cross-border tax laws
5. Tax credits
6. Valuation allowances
7. Nontaxable or nondeductible items
8. Changes in unrecognized tax benefits.
Separate disclosure shall be required for any reconciling item listed below in which the effect of the reconciling item is equal to or greater than 5 percent of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal (national) income tax rate of the jurisdiction of domicile. When disaggregating the following reconciling items by nature, an entity should consider the reconciling item’s fundamental or essential characteristics, such as the event that caused the reconciling item and the activity with which the reconciling item is associated.
1. If the reconciling item is within the effect of cross-border tax laws, tax credits, and nontaxable or nondeductible items categories, it shall be disaggregated by nature.
2. If the reconciling item is within the foreign tax effects category, it shall be disaggregated by jurisdiction (country) and by nature. If a foreign jurisdiction meets the 5 percent threshold, it shall be separately disclosed as a reconciling item. Within any foreign jurisdiction (regardless of whether it meets the 5 percent threshold), the reconciling item shall be separately disclosed by nature if its gross amount (positive or negative) meets the 5 percent threshold.
3. If the reconciling item is not within any of the categories listed in (a), it shall be disaggregated by nature.
For the purpose of categorizing reconciling items, the state and local income tax category reflects income taxes imposed at the state or local level within the jurisdiction (country) of domicile, the foreign tax effects category reflects income taxes imposed by foreign jurisdictions, and the remaining categories listed in (a) reflect federal (national) income taxes imposed by the jurisdiction (country) of domicile.

Connecting the Dots

Under the proposed ASU, a reporting entity that is domiciled in the United States would be required to separately disclose any reconciling item whose tax effect is greater than 1.05 percent (21% × 5%) of income from continuing operations.2

PBEs would also be required to qualitatively describe the state and local jurisdictions that contribute the “majority of the effect” with respect to the state and local income tax effect category in ASC 740-10-50-12A(a).

Changing Lanes

At its August 30, 2023, meeting, the Board clarified that “majority of the effect” means a simple majority (greater than 50 percent). Accordingly, a PBE would start with its largest state and local jurisdiction affecting the state and local category and, if that jurisdiction did not represent greater than 50 percent of the impact of the category, the PBE would add the next largest state and local jurisdiction, and so on, until the total impact of greater than 50 percent is disclosed.

Also at the meeting, the Board clarified the presentation of the items discussed below in light the proposed rate reconciliation.

Gross Versus Net Presentation

The FASB clarified that all reconciling items should be presented gross unless netting is specifically permitted under the final ASU. For example, with respect to the “effect of cross-border tax laws” category that would be added by proposed ASC 740-10-50-12A, the FASB decided that PBEs would be allowed, but not required, to reflect the effect of incremental taxes presented in this category net of their related foreign tax credits (e.g., an entity would be permitted to present the effects of GILTI taxes due net of associated foreign tax credits). See Examples B-1 through B-3. Further the table in the illustration in proposed ASC 740-10-55-231 would be amended to remove the foreign tax credits line from the “tax credits” category.

“Enactment of New Tax Laws” Category

The Board clarified that this proposed category would be limited to (1) the cumulative adjustment to DTAs and DTLs as of the enactment date and (2) changes in income taxes payable or refundable for prior years as a result of an enactment of new tax laws.

“Nontaxable or Nondeductible Items” Category

The FASB decided that no additional clarification was needed with respect to this proposed category. However, several Board members noted that they believed that windfalls and shortfalls from share-based compensation awards should be presented as one reconciling item and not bifurcated.

“Changes in Unrecognized Tax Benefits” Category

The Board discussed whether this proposed category should reflect the initial recognition and measurement of a UTB or only subsequent changes in the recognition and measurement of a UTB (i.e., the initial recognition and measurement of a UTB would be netted against the item that is not being recognized or being measured, such as the benefit of a tax credit claimed on an as-filed income tax return but adjusted under the ASC 740 recognition and measurement guidance). In addition, the FASB discussed whether the category should be disaggregated by jurisdiction or whether to permit aggregation.

The Board decided that entities would present only subsequent changes in the recognition and measurement of a UTB in this category. Further, entities would be permitted, but not required, to aggregate UTBs for all jurisdictions and present them as one reconciling item in the rate reconciliation.

Statutory Tax Rate

The Board decided to adjust the proposed modifications to ASC 740-10-50-12 to align with the requirements in SEC Regulation S-X, Rule 4-08(h)(2), for evaluating the appropriate statutory tax rate. This change is expected to affect entities domiciled outside the United States.

Entities other than PBEs would, on an annual basis, have to qualitatively disclose, for each category listed in ASC 740-10-50-12A(a), the nature and effect of items and individual jurisdictions that result in a significant difference between the statutory tax rate and the ETR; a numerical reconciliation would not be required.

Example B-1

Entity A is a U.S. parent entity. Entity A has no income or loss on a stand-alone basis, no FTC limitation, and consolidates Entity B for financial reporting purposes. Entity B is a foreign subsidiary (operating in Jurisdiction Y). Entity B generated pretax income of $1,000 and has no permanent or temporary differences in Jurisdiction Y. Jurisdiction Y has a tax rate of 10 percent. All of B’s income results in a Subpart F inclusion for A.

Below are two acceptable approaches for presenting the effects of cross-border taxes in accordance with the FASB’s tentative decisions at its August 30, 2023, meeting.

We note that if B is a disregarded entity, presentation of the rate reconciliation is expected to be substantially similar to the example above.

Example B-2

Assume the same facts as Example B-1, except that instead of Entity B’s income resulting in a Subpart F inclusion for Entity A, its income results in a GILTI inclusion for A, subject to a 50 percent deduction.

Below are two acceptable approaches for presenting the effects of cross-border taxes in accordance with the FASB’s tentative decisions at its August 30, 2023, meeting.

B.2.3 Income Taxes Paid

The proposed ASU would require all entities to provide (1) interim and annual disclosures of the year-to-date amount of income taxes paid (net of refunds received), disaggregated by federal (national), state, and foreign amounts and (2) annual disclosures of the amount of income taxes paid (net of refunds received), further disaggregated by individual jurisdictions in which the total income taxes paid for the year (net of refunds received) are equal to or greater than 5 percent.

Changing Lanes

At its August 30, 2023, meeting, the FASB decided not to add proposed ASC 740-270-50-3, which would have required all entities, for each interim reporting period, to “disclose the year-to-date amount of income taxes paid [net of refunds received] disaggregated by federal (national), state, and foreign.” With respect to the disclosures related to income taxes paid under proposed ASC 740-10-50-22 and 50-23, the Board decided that it would not require comparative information for all periods presented.

B.2.4 Disaggregation of Pretax Income and Expense

Under the proposed ASU, all entities would be required to disclose:

The amount of “income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign.”3
The amount of “[i]ncome tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign shall be disclosed. 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).”4

B.2.5 Indefinitely Reinvested Foreign Earnings

The 2017 Act introduced provisions under which U.S. shareholders were required to pay a tax on certain post-1986 undistributed and previously untaxed foreign earnings and profits, and it generally allows entities to repatriate earnings from foreign subsidiaries without incurring U.S. federal income taxes. In keeping with the reduction introduced by the 2017 Act related to previously untaxed foreign earnings, the proposed ASU would remove 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 the proposed ASU would eliminate the disclosure required by ASC 740-30-50-2(b), it would retain the guidance in ASC 740-30-50-2(c) under which an entity would have to (1) disclose the amount of unrecognized DTL related to investments in foreign subsidiaries and corporate joint ventures that are essentially permanent in duration or (2) provide a statement that determination of such DTL is not practicable.

B.2.6 Unrecognized Tax Benefits

The proposal would eliminate the requirement in ASC 740-10-50-15(d) for all entities to 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.

B.2.7 Reconciliation With ASC Master Glossary

Under the proposed ASU, the term “public entity” would be replaced throughout ASC 740 with the term “public business entity” as defined in the ASC master glossary.

Footnotes

This is consistent with the existing disclosure requirement for PBEs under SEC Regulation S-X, Rule 4-08(h).

See footnote 2.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.