14.3 Income Statement

ASC 740-10

50-9 The significant components of income tax expense attributable to continuing operations for each year presented shall be disclosed in the financial statements or notes thereto. Those components would include, for example:

Current tax expense (or benefit)
Deferred tax expense (or benefit) (exclusive of the effects of other components listed below)
Investment tax credits
Government grants (to the extent recognized as a reduction of income tax expense)
The benefits of operating loss carryforwards
Tax expense that results from allocating certain tax benefits directly to contributed capital
Adjustments of a deferred tax liability or asset for enacted changes in tax laws or rates or a change in the tax status of the entity
Adjustments of the beginning-of-the-year balance of a valuation allowance because of a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years. For example, any acquisition-date income tax benefits or expenses recognized from changes in the acquirer’s valuation allowance for its previously existing deferred tax assets as a result of a business combination (see paragraph 805-740-30-3).

50-10 The amount of income tax expense (or benefit) allocated to continuing operations and the amounts separately allocated to other items (in accordance with the intraperiod tax allocation provisions of paragraphs 740-20-45-2 through 45-14 and 852-740-45-3) shall be disclosed for each year for which those items are presented.

Pending Content (Transition Guidance: ASC 740-10-65-9)

50-10A Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign shall be disclosed for each annual reporting period.

50-10B Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign shall be disclosed for each annual reporting period. 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).

50-11 The reported amount of income tax expense may differ from an expected amount based on statutory rates. The following guidance establishes the disclosure requirements for such situations and differs for public and nonpublic entities.

Pending Content (Transition Guidance: ASC 740-10-65-9)

50-11 The reported amount of income tax expense (or benefit) may differ from an expected amount based on statutory tax rates. The following guidance establishes the disclosure requirements for such situations and differs for public business entities and entities other than public business entities.

50-11A The objective of these disclosure requirements is for an entity, particularly an entity operating in multiple jurisdictions, to disclose sufficient information to enable users of financial statements to understand the nature and magnitude of factors contributing to the difference between the effective tax rate and the statutory tax rate.

Public Entities

50-12 A public entity shall disclose a reconciliation using percentages or dollar amounts of the reported amount of income tax expense attributable to continuing operations for the year to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax income from continuing operations. The statutory tax rates shall be the regular tax rates if there are alternative tax systems. The estimated amount and the nature of each significant reconciling item shall be disclosed.

Pending Content (Transition Guidance: ASC 740-10-65-9)

Public Business Entities

50-12 A public business entity shall disclose a reconciliation for each annual reporting period, in accordance with paragraphs 740-10-50-12A through 50-12C, 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. In circumstances in which a public business entity, as the parent entity, 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, and different rates shall not be used for subsidiaries or segments of the public business entity. When the rate used by a public business entity is other than the United States federal corporate income tax rate, the public business entity shall disclose the rate used and the basis for using that rate. The statutory tax rates shall be the regular tax rates if there are alternative tax systems.

50-12A For each annual reporting period, a public business entity shall disclose a tabular reconciliation, using both percentages and reporting currency amounts, according to the following requirements:

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. Effect of changes in tax laws or rates enacted in the current period
4. Effect of cross-border tax laws
5. Tax credits
6. Changes in 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 income taxes by the applicable statutory federal (national) income tax rate of the jurisdiction (country) 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. Reconciling items shall be presented on a gross basis unless specific guidance in (c) permits net presentation with a related reconciling item.
1. If the reconciling item is within the effect of cross-border tax laws, tax credits, or 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, except for reconciling items related to changes in unrecognized tax benefits discussed in (c). 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 and presenting reconciling items:
1. Except for reconciling items related to changes in unrecognized tax benefits discussed in (c)(2), 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.
2. For reconciling items related to changes in unrecognized tax benefits:
  1. Reconciling items resulting from changes in judgment related to tax positions taken in prior annual reporting periods (such as subsequent recognition, derecognition, and change in measurement of unrecognized tax benefits) are reflected in the changes in unrecognized tax benefits category.
  2. When an unrecognized tax benefit is recorded in the current annual reporting period for a tax position taken or expected to be taken in the same reporting period, the unrecognized tax benefit and its related tax position may be presented on a net basis in the category where the tax position is presented.
  3. Reconciling items presented in the changes in unrecognized tax benefits category may be disclosed on an aggregated basis for all jurisdictions.
3. The effect of cross-border tax laws category reflects the effect of incremental income taxes imposed by the jurisdiction (country) of domicile on income earned in foreign jurisdictions. When the jurisdiction (country) of domicile taxes cross-border income but also provides a tax credit on the same income during the same reporting period, the tax effect of both the cross-border tax and its related tax credit may be presented on a net basis in the effect of cross-border tax laws category. For example, the tax effect related to the global intangible low-taxed income and its related foreign tax credits may be presented on a net basis as one reconciling item in the effect of cross-border tax laws category.
4. The effect of changes in tax laws or rates enacted in the current period category reflects the cumulative tax effects of a change in enacted tax laws or rates on current or deferred tax assets and liabilities at the date of enactment.

See paragraph 740-10-55-231 for an illustration of a tabular rate reconciliation disclosure.

50-12B A public business entity shall 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. For the purpose of identifying the states and local jurisdictions that make up the majority of the effect, a public business entity shall begin with the state or local jurisdiction that has the largest effect and in descending order add states or local jurisdictions with the next largest effect until the aggregated effect is greater than 50 percent.

50-12C A public business entity shall 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.

Nonpublic Entities

50-13 A nonpublic entity shall disclose the nature of significant reconciling items but may omit a numerical reconciliation.

Pending Content (Transition Guidance: ASC 740-10-65-9)

Entities Other Than Public Business Entities

50-13 An entity other than a public business entity shall qualitatively disclose the nature and effect of specific categories of reconciling items listed in paragraph 740-10-50-12A(a) and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate, but a numerical reconciliation is not required. See paragraphs 740-10-55-232 through 55-233 for an illustration of a qualitative disclosure of rate reconciling items.

All Entities

50-14 If not otherwise evident from the disclosures required by this Section, all entities shall disclose the nature and effect of any other significant matters affecting comparability of information for all periods presented.

Pending Content (Transition Guidance: ASC 740-10-65-9)

50-14 If not otherwise evident from the disclosures required by this Section, an entity shall disclose the nature and effect of any other significant matters affecting comparability of information for all periods presented.

Related Implementation Guidance and Illustrations

Income-Tax-Related Disclosures [ASC 740-10-55-79].
Example 29: Disclosure Related to Components of Income Taxes Attributable to Continuing Operations [ASC 740-10-55-212].
Example 39: Rate Reconciliation Between Income Tax Expense (or Benefit) and Statutory Expectations [ASC 740-10-55-230].

14.3.1 Rate Reconciliation

Reporting entities often pay income taxes in multiple jurisdictions other than the domestic federal jurisdiction (e.g., domestic state and local jurisdictions, foreign federal and foreign local or provincial jurisdictions), and the applicable income tax rates vary in each jurisdiction. Further, tax laws often differ from financial accounting standards; therefore, permanent differences can arise between pretax income for financial reporting purposes and taxable income.

Thus, a reporting entity’s income tax expense cannot generally be determined for a period by simply applying the domestic federal statutory tax rate to the reporting entity’s pretax income from continuing operations for financial reporting purposes. See ASC 740-10-50-12 and 50-13 above.

The disclosure requirement addressed by ASC 740-10-50-12 and 50-13 is often referred to as the “rate reconciliation” disclosure requirement. Before the adoption of ASU 2023-09, ASC 740 does not require a reporting entity to include a specific number or type of reconciling items in the rate reconciliation. Reconciling items will vary depending on the reporting entity’s facts and circumstances. However, the SEC staff frequently comments on rate reconciliation disclosures that are not clear and transparent.

A reporting entity should evaluate its reconciling items to ensure that they clearly communicate to financial statement users the events and circumstances affecting the reporting entity’s ETR.

Changing Lanes

ASU 2023-09 requires entities to consistently categorize and provide greater disaggregation of information in the rate reconciliation. For more information about the new disclosure requirements, see Appendix B.

14.3.1.1 Evaluating Significance of Reconciling Items in the Rate Reconciliation

ASC 740-10-50 does not define the term “significant.” However, SEC Regulation S-X, Rule 4-08(h)(2), states that as part of the reconciliation, public entities should disclose all reconciling items that individually make up 5 percent or more of the computed amount (i.e., income before tax multiplied by the applicable domestic federal statutory tax rate).

In accordance with SEC Regulation S-X, Rule 4-08(h)(2), reconciling items may be aggregated in the disclosure if they are individually less than 5 percent of the computed amount. Reconciling items that are individually equal to or greater than 5 percent of the computed amount should not be netted against other offsetting reconciling items into a single line item that is itself less than 5 percent.

SEC Regulation S-X, Rule 4-08(h)(2), states, in part, that public entities can omit this reconciliation in the following circumstances:

[When] no individual reconciling item amounts to more than five percent of the amount computed by multiplying the income before tax by the applicable statutory Federal income tax rate, and the total difference to be reconciled is less than five percent of such computed amount, no reconciliation need be provided unless it would be significant in appraising the trend of earnings.

Because SEC Regulation S-X, Rule 4-08(h), does not apply to non-PBEs, such entities must often use judgment in determining whether they need to disclose the nature of a particular reconciling item or items.

Changing Lanes

ASU 2023-09 adds to U.S. GAAP ASC 740-10-50-12A and 50-12B, which expand the guidance on an entity’s requirements related to providing separate disclosures on the basis of defined significance. For more information about the enhanced disclosure requirements under the ASU, see Appendix B.

14.3.1.2 Appropriate Federal Statutory Rate for Use in the Rate Reconciliation of a Foreign Reporting Entity

Under ASC 740-10-50-12 before the adoption of ASU 2023-09, the federal statutory income tax rate that a foreign reporting entity (i.e., the parent of the consolidated group that is not domiciled in the United States) should use when preparing the rate reconciliation disclosure should be based on application of “domestic federal statutory tax rates to pretax income from continuing operations.” SEC Regulation S-X, Rule 4-08(h)(2), states, in part:

Where the reporting person is a foreign entity, the income tax rate in that person’s country of domicile should normally be used in making the above computation, but different rates should not be used for subsidiaries or other segments of a reporting entity.

As noted, the appropriate rate for public entities is normally the federal rate in the reporting entity’s jurisdiction of domicile. That rate should be applied to pretax income from continuing operations of all subsidiaries or other segments of the reporting entity, even if most of the operations are located outside that jurisdiction.1 SEC Regulation S-X, Rule 4-08(h)(2), also notes that if the rate used differs from the U.S. federal corporate income tax rate (e.g., because the reporting entity is domiciled in a foreign jurisdiction), “the rate used and the basis for using such rate shall be disclosed.”

Question 1 in paragraph 5 of SAB Topic 6.I (codified in ASC 740-10-S99-1(5)) provides an exception to the general rule and states:

Question 1: Occasionally, reporting foreign persons may not operate under a normal income tax base rate such as the current U.S. Federal corporate income tax rate. What form of disclosure is acceptable in these circumstances?

Interpretive Response: In such instances, reconciliations between year-to-year effective rates or between a weighted average effective rate and the current effective rate of total tax expense may be appropriate in meeting the requirements of Rule 4-08(h)(2). A brief description of how such a rate was determined would be required in addition to other required disclosures. Such an approach would not be acceptable for a U.S. registrant with foreign operations. Foreign registrants with unusual tax situations may find that these guidelines are not fully responsive to their needs. In such instances, registrants should discuss the matter with the staff.

The use of a rate other than the federal rate in the reporting entity’s jurisdiction of domicile could be subject to challenge and, accordingly, consultation is encouraged in these situations.

While SEC Regulation S-X, Rule 4-08(h), does not apply to non-PBEs, we believe that it would generally be appropriate for such entities to determine the domestic federal statutory rate in a manner consistent with how public reporting entities determine it.

Changing Lanes

ASU 2023-09 amends ASC 740-10-50-12 to provide disclosure requirements that are more prescriptive as well as considerations related to the applicable federal rate used in the rate reconciliation. For more information about the ASU’s enhanced disclosure requirements, see Appendix B.

14.3.1.3 Computing the “Foreign Rate Differential” in the Rate Reconciliation

The unit of account for various reconciling items is not always clear. For example, before the adoption of ASU 2023-09, an entity with foreign operations will commonly include a reconciling item referred to as a “foreign rate differential.” Because it is often unclear what the foreign rate differential reconciling line should include, diversity in practice exists.

We believe that a line in the rate reconciliation described as the foreign rate differential should generally include only the effects on an entity’s ETR of differences between the domestic federal statutory tax rate and the statutory income tax rate in the applicable foreign jurisdiction(s), multiplied by pretax income from continuing operations in each respective foreign jurisdiction.

Changing Lanes

ASU 2023-09 adds to U.S. GAAP ASC 740-10-50-12A, which creates a specific category for foreign tax effects that must be disclosed within the rate reconciliation. For more information about the enhanced disclosure requirements under the ASU, see Appendix B.

14.3.2 Other Income Statement Disclosure Considerations

ASC 740-10-50-9 requires an entity to disclose significant components of income tax expense or benefit that are attributable to continuing operations for each year presented in the financial statements.

14.3.2.1 Disclosure of the Components of Deferred Tax Expense

One of the components required to be disclosed in ASC 740-10-50-9 is deferred tax expense (or benefit). In many circumstances, certain changes between the beginning-of-year and end-of-year deferred tax balances do not affect the total deferred tax expense or benefit. Examples of such circumstances include, but are not limited to, the following:

If a business combination has occurred during the year, DTLs and DTAs, net of any related valuation allowance, are recorded as of the acquisition date as part of acquisition accounting. There would be no offsetting effect to the income tax provision.
If a single asset is purchased (other than as part of a business combination) and the amount paid is different from the tax basis attributable to the asset, the tax effect should be recorded as an adjustment to the carrying amount of the related asset in accordance with ASC 740-10-25-51.
For consolidated subsidiaries in foreign jurisdictions for which the functional currency is the same as the parent’s reporting currency but income taxes are assessed in the local currency, deferred tax balances should be remeasured in the functional currency as transaction gains or losses or, if considered more useful, as deferred tax benefit or expense, as described in ASC 830-740-45-1.
For consolidated subsidiaries in foreign jurisdictions for which the local currency is the functional currency and income taxes are assessed in the local currency, deferred tax balances should be translated into the parent’s reporting currency through the CTA account. The revaluations of the deferred tax balances are not identified separately from revaluations of other assets and liabilities.

In addition, other changes in deferred tax balances might result in an increase or a decrease in the total tax provision but are allocated to a component of current-year activity other than continuing operations (e.g., discontinued operations and the items in ASC 740-20-45-11 such as OCI).

14.3.2.2 Disclosure of the Tax Effect of a Change in Tax Law, Rate, or Tax Status

ASC 740-10-50-9(g) requires an entity to disclose the tax consequences of adjustments to a DTL or DTA for enacted changes in tax laws or rates or a change in the entity’s tax status. An entity may provide such disclosures on the face of its income statement as a separate line item component (e.g., a subtotal) that, in the aggregate, equals the total amount of income tax expense (benefit) allocated to income (loss) from continuing operations for each period presented. However, the entity should not present the effects of these changes on the face of the income statement or in the footnotes in terms of per-share earnings (loss) amounts available to common shareholders because such disclosure would imply that the normal earnings per share (EPS) disclosures required by ASC 260 are not informative or are misleading.

Footnotes

This would apply to (or include) a tax inversion.

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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.