Chapter 13 — Presentation of Income Taxes

13.2 Statement of Financial Position Classification of Income Tax Accounts

ASC 740-10

45-1 This Section provides guidance on statement of financial position, income statement and statement of shareholder equity classification, and presentation matters applicable to all the following:

Statement of financial position classification of income tax accounts
Income statement presentation of certain measurement changes to income tax accounts
Income statement classification of interest and penalties
Presentation matters related to investment tax credits under the deferral method.
Statement of shareholder equity reclassification of certain income tax effects from accumulated other comprehensive income.

45-2 See Subtopic 740-20 for guidance on the intraperiod allocation of total income tax expense (or benefit).

Statement of Financial Position Classification of Income Tax Accounts

45-3 Topic 210 provides general guidance for classification of accounts in statements of financial position. The following guidance addresses classification matters applicable to income tax accounts and is incremental to the general guidance.

Deferred Tax Accounts

45-4 In a classified statement of financial position, an entity shall classify deferred tax liabilities and assets as noncurrent amounts.

45-5 Paragraph superseded by Accounting Standards Update No. 2015-17.

45-6 For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.

45-7 Paragraph superseded by Accounting Standards Update No. 2015-17.

45-8 Paragraph superseded by Accounting Standards Update No. 2015-17.

45-9 Paragraph superseded by Accounting Standards Update No. 2015-17.

45-10 Paragraph superseded by Accounting Standards Update No. 2015-17.

Tax Accounts, Other Than Deferred

Unrecognized Tax Benefits

45-10A Except as indicated in paragraphs 740-10-45-10B and 740-10-45-12, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, shall be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.

45-10B To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and shall be made presuming disallowance of the tax position at the reporting date.

45-11 An entity that presents a classified statement of financial position shall classify an unrecognized tax benefit that is presented as a liability in accordance with paragraphs 740-10-45-10A through 45-10B as a current liability to the extent the entity anticipates payment (or receipt) of cash within one year or the operating cycle, if longer.

45-12 An unrecognized tax benefit presented as a liability shall not be classified as a deferred tax liability unless it arises from a taxable temporary difference. Paragraph 740-10-25-17 explains how the recognition and measurement of a tax position may affect the calculation of a temporary difference.

Offsetting

45-13 The offset of cash or other assets against the tax liability or other amounts owing to governmental bodies is not acceptable except as noted in paragraphs 210-20-45-6 and 740-10-45-10A through 45-10B.

In November 2015, the FASB issued ASU 2015-17, which requires entities to present DTAs and DTLs as noncurrent in a classified balance sheet. The ASU simplifies the old guidance, which required entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. The ASU is currently effective for all entities.

For other balance sheet items, such as income taxes payable/receivable, ASC 210-10 provides guidance on the classification in the statement of financial position. Typically, income taxes payable would be presented as a current liability because it would be expected to be settled within a relatively short period, usually 12 months (ASC 210-10-45-9).

For public companies, ASC 210-10-S99-1(20) and ASC 210-10-S99-1(26) indicate that the SEC prescribed certain balance sheet captions in SEC Regulation S-X, Rule 5-02, related to income taxes, as follows:

“Other current liabilities. State separately, in the balance sheet or in a note thereto, any item in excess of 5 percent of total current liabilities. Such items may include, but are not limited to, accrued payrolls, accrued interest, taxes, indicating the current portion of deferred income taxes, and the current portion of long-term debt. Remaining items may be shown in one amount.”
“Deferred credits. State separately in the balance sheet amounts for (a) deferred income taxes, (b) deferred tax credits, and (c) material items of deferred income.”

On the basis of informal discussions with the SEC staff, a liability for UTBs should be classified as an “other current liability” or “other long-term liability” to comply with SEC Regulation S-X, Rule 5-02.1

Because the SEC staff does not consider this liability a “contingent liability,” disclosures for contingencies would not be required. However, an entity must follow the disclosure requirements outlined in ASC 740-10-50. See Chapter 14 for more information.

See below for further guidance on circumstances in which a UTB liability should be recorded as a current liability.

13.2.1 Presentation of Deferred Federal Income Taxes Associated With Deferred State Income Taxes

ASC 740-10-55-20 states:

State income taxes are deductible for U.S. federal income tax purposes and therefore a deferred state income tax liability or asset gives rise to a temporary difference for purposes of determining a deferred U.S. federal income tax asset or liability, respectively. The pattern of deductible or taxable amounts in future years for temporary differences related to deferred state income tax liabilities or assets should be determined by estimates of the amount of those state income taxes that are expected to become payable or recoverable for particular future years and, therefore, deductible or taxable for U.S. federal tax purposes in those particular future years.

It is not appropriate to net the federal effect of a state DTL or DTA against the state deferred tax. ASC 740 generally requires separate identification of temporary differences and related deferred taxes for each tax-paying component of an entity in each tax jurisdiction, including U.S. federal, state, local, and foreign tax jurisdictions. ASC 740-10-45-6 states the following regarding the offsetting of DTAs and DTLs:

For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. [Emphasis added]

For example, assume that Company A has a state DTL of $100 related to a fixed asset and that this DTL represents taxes that will need to be paid when the fixed asset is recovered at its financial reporting carrying amount. The future state taxes will result in a $100 deduction on the U.S. federal income tax return, and a DTA of $21 ($100 deduction × 21% tax rate) should be recognized for that future deduction. In this example, A should report a $100 state DTL and separately report a $21 federal DTA. It would not be appropriate to report a “net of federal tax benefit” state DTL of $79.

In addition to improper presentation of DTAs and DTLs in the balance sheet, improperly netting the federal effect of state deferred taxes against the state deferred taxes themselves can result in, among other things, (1) an improper assessment of whether a valuation allowance is necessary in a particular jurisdiction or (2) improper disclosures related to DTAs and DTLs.

13.2.2 Balance Sheet Classification of the Liability for UTBs

ASC 740-10-45-11 states that an entity should “classify an unrecognized tax benefit that is presented as a liability in accordance with paragraphs 740-10-45-10A through 45-10B as a current liability to the extent the entity anticipates payment (or receipt) of cash within one year or the operating cycle, if longer.” ASC 740-10-45-12 states that an “unrecognized tax benefit presented as a liability shall not be classified as a deferred tax liability unless it arises from a taxable temporary difference.”

On the basis of this guidance, an entity will generally classify a liability associated with a UTB as a noncurrent liability because the period between the filing of the tax return and the final resolution of an uncertain tax position with the tax authority will generally extend over several years. An entity should classify as a current liability only those cash payments that management expects to make within the next 12 months to settle liabilities for UTBs.

In addition, an entity should reclassify a liability from noncurrent to current only when a change in the balance of the liability is expected to result from a payment of cash within one year or the operating cycle, if longer. For example, the portion of the liability for a UTB that is expected to reverse because of the expiration of the statute of limitations within the next 12 months would not be reclassified as a current liability. See Section 14.4.1 for more information on the disclosure requirements related to UTBs.

13.2.3 Interaction of UTBs and Tax Attributes

U.S. tax law requires that an entity’s taxable income be reduced by any available NOL carryforwards and carrybacks in the absence of an affirmative election to forgo the NOL carryback provisions. The Internal Revenue Service cannot require a taxpayer to cash-settle a disallowed uncertain tax position if sufficient NOLs or other tax carryforwards are available to eliminate the additional taxable income. Similarly, a taxpayer may not choose when to use its NOL carryforwards; rather, the taxpayer must apply NOL carryforwards and carrybacks in the first year in which taxable income arises. NOLs that are available but not used to reduce taxable income may not be carried to another period.

Assume that an entity takes, or expects to take, a $200 deduction in the U.S. federal tax jurisdiction related to a UTB in its current-year tax return and for which the entity records a UTB of $40 (20 percent tax rate × $200) in its financial statements. This UTB would be settled as of the reporting date without the payment of cash because of the application of available tax NOL carryforwards of $1,000 in the U.S. federal tax jurisdiction for which the entity has recognized a $200 DTA.

As discussed in ASC 740-10-45-10A and 45-10B, the entity’s balance sheet should reflect the UTB as a reduction of the entity’s NOL carryforward DTAs. Under ASC 740-10-45-10A, an entity must present a UTB, or a portion of a UTB, in its balance sheet “as a reduction to a deferred tax asset for [an NOL] carryforward, a similar tax loss, or a tax credit carryforward” except when:

An NOL or other carryforward is not available under the governing tax law to settle taxes that would result from the disallowance of the tax position.
The entity does not intend to use the DTA for this purpose (provided that the tax law permits a choice).

If either of these conditions exists, an entity should present a UTB as a liability and not net the UTB with a DTA.

The assessment of whether to net the UTB with a DTA should be performed as of the reporting date (i.e., on a hypothetical-return basis). The entity should not evaluate whether the DTA will expire or be used before the UTB is settled. However, the entity must consider whether there are any limitations on the use of the DTA in the relevant tax jurisdiction.

Therefore, if the uncertain tax position of $200 is not sustained, the entity may use its $1,000 NOL carryforward to offset such a position, thus resulting in a $40 reduction to the existing NOL carryforward DTA of $200. That is, the entity would present a net DTA of $160.

13.2.4 Balance Sheet Presentation of UTBs Resulting From Transfer Pricing Arrangements

Another common example of a UTB that may affect two separate jurisdictions is related to transfer pricing. See Section 4.6.3 for a detailed discussion of the application of transfer pricing arrangements under ASC 740.

In some cases, if two governments follow the Organisation for Economic Co-operation and Development’s transfer pricing guidelines to resolve substantive issues related to transfer pricing transactions between units of the same entity, an asset could be recognized in one jurisdiction because of the application of competent-authority procedures and a liability could be recognized for UTBs from another tax jurisdiction that arose because of transactions between the entity’s affiliates that were not being considered at arm’s length.

In this case, an entity should present the liability for UTBs and the tax benefit on a gross basis in its balance sheet. In addition, a public entity would include only the gross liability for UTBs in the tabular reconciliation disclosure. However, in the disclosure required by ASC 740-10-50-15A(b), the public entity would include the liability for UTBs and the tax benefit on a net basis in the amount of UTBs that, if recognized, would affect the ETR.

For more information on UTBs related to transfer pricing arrangements, see Section 4.6.3.

Footnotes

Rule 5-02 applies to commercial and industrial companies only. However, Regulation S-X, Rules 6-04, 7-03, and 9-03,contain similar guidance and apply to registered investment companies, insurance companies, and bank holding companies, respectively.

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.