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:
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.
For more information, see SEC Interpretation Release Nos.
33-8350, 34-48960, and FR-72 as well as Regulation S-K, Item
303(b)(3).
At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC
staff noted that critical accounting estimates are intended to provide the quantitative
and qualitative information investors need to understand estimation uncertainty and the
impact an estimate has had or is reasonably likely to have on a registrant’s financial
condition or results of operations. The SEC staff further highlighted several questions
a registrant should consider when preparing its critical accounting estimate
disclosures, including:
- Can an investor understand from the critical accounting estimate disclosure why the particular estimate disclosed is critical? Specifically, if the disclosure only informs the investor about the existence of the estimate, the objective of the disclosure requirement has not been met.
- Is there numerical information in the disclosure, including dollar amounts?
- Does the disclosure provide information incremental to the accounting policy? Such information should not repeat financial statement disclosures related to the accounting policy.
- Can an investor understand past variability in the estimate and assumptions?
- Does the disclosure discuss qualitatively and quantitatively the sensitivity of the reported estimate to the method and assumptions underlying its calculation?
See Deloitte’s December 18,2022, Heads Up on
the conference for additional interpretive guidance.
Footnotes
1
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.