Accounting Research Tool
Appendix D — Sample Disclosures of Income Taxes

D.5 MD&A — Critical Accounting Estimates

D.5 MD&A — Critical Accounting Estimates1

Sample Disclosure
Our income tax expense, DTAs and DTLs, and liabilities for UTBs reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our DTAs in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of DTLs, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
As of December 31, 20X3, we have federal and state income tax NOL carryforwards of $XXX and $XXX, which will expire on various dates from 20X4 through 20Y8 as follows:
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We believe that it is more likely than not that the benefit from certain state NOL carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $XX on the DTAs related to these state NOL carryforwards. If our assumptions change and we determine that we will be able to realize these NOLs, the tax benefits related to any reversal of the valuation allowance on DTAs as of December 31, 20X3, will be accounted for as follows: Approximately $XXX will be recognized as a reduction of income tax expense and $XXX will be recorded as an increase in equity.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We (1) record UTBs as liabilities in accordance with ASC 740 and (2) adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the UTB liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
We believe that it is reasonably possible that an increase of up to $XX in UTBs related to state exposures may be necessary within the coming year. In addition, we believe that it is reasonably possible that approximately $XX of our currently remaining UTBs, each of which is individually insignificant, may be recognized by the end of 20X4 as a result of a lapse of the statute of limitations.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We have not recorded a DTL related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $XX of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. If we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.


At the 2013 AICPA Conference on Current SEC and PCAOB Developments (the “AICPA Conference”), in remarks related to disclosures about valuation allowances on DTAs, the SEC staff discouraged registrants from providing “boilerplate” information and instead recommended that they discuss registrant-specific factors (e.g., limitations on their ability to use NOLs and FTCs). The SEC staff also stated that it has asked registrants to disclose the effect of each source of taxable income on their ability to realize a DTA, including the relative magnitude of each source of taxable income. In addition, the staff recommended that registrants consider disclosing the material negative evidence they evaluated, since such disclosures could provide investors with information about uncertainties related to a registrant’s ability to recover a DTA. For additional information, see Deloitte’s December 16, 2013, Heads Up on the AICPA Conference.