14.4 UTB-Related Disclosures

ASC 740-10

[All Entities]

50-15 All entities shall disclose all of the following at the end of each annual reporting period presented: . . .

c. The total amounts of interest and penalties recognized in the statement of operations and the total amounts of interest and penalties recognized in the statement of financial position

d. For positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date:

1. The nature of the uncertainty

2. The nature of the event that could occur in the next 12 months that would cause the change

3. An estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made.

e. A description of tax years that remain subject to examination by major tax jurisdictions.

[Public Entities]

50-15A Public entities shall disclose both of the following at the end of each annual reporting period presented:

A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period, which shall include at a minimum:
1. The gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period
2. The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during the current period
3. The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities
4. Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.

See Example 30 (paragraph 740-10-55-217) for an illustration of disclosures about uncertainty in income taxes.

Related Implementation Guidance and Illustrations

Example 30: Disclosure Relating to Uncertainty in Income Taxes [ASC 740-10-55-217].

14.4.1 The Tabular Reconciliation of UTBs

ASC 740-10-50-15A(a) requires public entities to disclose a “tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period.” In some cases, the beginning and ending amounts in the tabular disclosure equal the amount recorded as a liability for the UTBs in the balance sheet. However, that is not always the case, since the reconciliation must include, on a comprehensive basis, all UTBs that are recorded in the balance sheet, not just the amount that is classified as a liability. In other words, the reconciliation should include an amount recorded as a liability for UTBs and amounts that are recorded as a reduction in a DTA, a current receivable, or an increase in a DTL. (See Section 13.2.3 for an example of a UTB recorded as a reduction in a DTA.)

An entity’s policy election for interest and penalties under ASC 740-10-45-25 does not affect the disclosures under ASC 740-10-50-15A.

Interest and penalties that are classified as part of income tax expense in the statement of operations, and that are therefore classified as a component of the liability for UTBs in the statement of financial position, should not be included by public entities in the tabular reconciliation of UTBs under ASC 740-10-50-15A(a).

14.4.1.1 Items Included in the Tabular Disclosure of UTBs From Uncertain Tax Positions May Also Be Included in Other Disclosures

ASC 740-10-50-15A(a) indicates that the tabular reconciliation of the total amounts of UTBs should include the “gross amounts of the increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period” or a current period. Increases and decreases in the estimate that occur in the same year can be reflected on a net basis in the tabular reconciliation. However, if these changes in estimate are significant, it may be appropriate to disclose them on a gross basis elsewhere in the footnotes to the financial statements. For example, if a public entity does not recognize any tax benefit for a significant position taken in the second quarter (and therefore recognizes a liability for the full benefit) but subsequently recognizes the full benefit in the fourth quarter (and therefore derecognizes the previously recorded liability), the entity would be expected to disclose the significant change in estimate in the footnotes to the financial statements.

14.4.1.2 Periodic Disclosures of UTBs

Both ASC 740-10-50-15 and 50-15A appear to require entities to provide disclosures at the end of each annual reporting period presented. Accordingly, entities should present the information required by ASC 740-10-50-15 and 50-15A for each applicable period. For example, if a public entity were to present three years of income statements and two years of balance sheets, the disclosures listed in ASC 740-10-50-15 and 50-15A would be required for each year in which an income statement is presented.

14.4.1.3 Presentation of Changes Related to Exchange Rate Fluctuations in the Tabular Reconciliation

Exchange rate fluctuations are not changes in judgment regarding recognition or measurement and are not considered as part of the settlement when a tax position is settled. Therefore, in the tabular reconciliation, increases or decreases in UTBs caused by exchange rate fluctuations should not be combined with other types of changes; rather, they should be presented as a separate line item (a single line item is appropriate).

14.4.1.4 Disclosure of Fully Reserved DTAs in the Reconciliation of UTBs

Public entities with NOLs and a full valuation allowance are required to include in their tabular disclosure amounts for positions that, if recognized, would manifest themselves as DTAs that would be reduced by a valuation allowance because it is more likely than not that some portion or all of the DTAs will not be realized. The general recognition and measurement provisions should be applied first; the remaining balance should then be evaluated for realizability in accordance with ASC 740-10-30-5(e).

Example 14-1

A public entity has a $1 million NOL carryforward. Assume a 25 percent tax rate. The entity records a $250,000 DTA, for which management applies a $250,000 valuation allowance because it does not believe it is more likely than not that the entity will have income of the appropriate character to realize the NOL. Management concludes that the tax position that gave rise to the NOL will more likely than not be realized on the basis of its technical merits. The entity concludes that the benefit should be measured at 90 percent. The entity would need to reduce the DTA for the NOL and the related valuation allowance to $225,000, which represents 90 percent of the benefit. In addition, the entity would include a UTB of $25,000 in the tabular disclosure under ASC 740-10-50-15A(a).

14.4.1.5 Disclosure of the Settlement of a Tax Position When the Settlement Amount Differs From the UTB

In some cases, cash that will be paid as part of the settlement of a tax position differs from the UTB related to that position. The difference between the UTB and the settlement amount should be disclosed in line 1 of the reconciliation, which includes the gross amounts of increases and decreases in the total amount of UTBs related to positions taken in prior periods. The cash that will be paid to the tax authority to settle the tax position would then be disclosed in line 2 of the reconciliation, which contains amounts of decreases in UTBs related to settlements with tax authorities.

Example 14-2

Entity A has recorded a UTB of $1,000 as of December 31, 20X7 (the end of its fiscal year). During the fourth quarter of fiscal year 20X8, Entity A settles the tax position with the tax authority and makes a settlement payment of $800 (recognizing a $200 benefit related to the $1,000 tax position). Entity A’s tabular reconciliation disclosure as of December 31, 20X8, would show a decrease of $200 in UTBs from prior periods (line 1) and a decrease of $800 in UTBs related to settlements (line 2). A “current taxes payable” for the settlement amount of $800 should be recorded until that amount is paid to the tax authority.

14.4.1.6 Consideration of Tabular Disclosure of UTBs in an Interim Period

ASC 740-10-50-15A(a) requires public entities to provide a “tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period.”

Although such disclosure is not specifically required in an interim period, if a significant change from the prior annual disclosure occurs, management should consider whether a tabular reconciliation or other qualitative disclosures would inform financial statement users about the occurrence of significant changes or events that have had a material impact since the end of the most recently completed fiscal year. Management should consider whether to provide such disclosure in the notes to the financial statements if it chooses not to provide a tabular reconciliation.

Management of entities subject to SEC reporting requirements should consider Form 10-Q’s disclosure requirements, which include providing disclosures about significant changes from the most recent fiscal year in estimates used in preparation of the financial statements.

14.4.1.7 Presentation in the Tabular Reconciliation of a Federal Benefit Associated With Unrecognized State and Local Income Tax Positions

The recognition of a UTB may indirectly affect deferred taxes. For example, a DTA for a federal benefit may be created if the UTB is related to a state tax position. If an evaluation of the tax position results in an entity’s increasing its state tax liability, the entity should record a DTA for the corresponding federal benefit. However, the UTB related to a state or local income tax position should be presented by a public entity on a gross basis in the tabular reconciliation required by ASC 740-10-50-15A(a).

Example 14-3

Entity P, a public entity, records a liability for a $1,000 UTB related to a position taken in a state tax return. Its federal tax rate is 21 percent. The additional state income tax liability associated with the unrecognized state tax deduction results in a state income tax deduction on the federal tax return, creating a federal benefit of $210 ($1,000 × 21%). Entity P would include only the gross $1,000 unrecognized state tax benefit in the tabular reconciliation. However, in accordance with ASC 740-10-50-15A(b), P would include $790 in the amount of UTBs that, if recognized, would affect the ETR.

14.4.1.8 Presentation in the Tabular Reconciliation of the Interaction of UTBs Between Different Jurisdictions

As noted previously, public entities are required to disclose a tabular reconciliation (or rollforward) of the “total” amount of UTBs. This total would include the direct effects of an uncertain tax position. The evaluation of what is and what is not a direct effect often involves judgment and depends on how the unit of account is determined for the particular uncertain tax position. For example, when evaluating the impact of a transfer pricing position on the tabular reconciliation of UTBs, an entity should generally present the amount of UTB liability in one jurisdiction gross of the offsetting UTB receivable in the other jurisdiction because each represents a separate unit of account with a separate taxing authority.

Example 14-4

Subsidiary 1 of Entity P, a public entity, records $500,000 of revenue in Jurisdiction A. Revenue is generated through the licensing of intellectual property (IP) to P’s Subsidiary 2, which operates in Jurisdiction B. Entity P determines that upon examination by the taxing authority for Jurisdiction A, the taxing authority will conclude that the licensing revenue recorded was understated on the basis of its interpretation of Jurisdiction A’s arm’s-length pricing requirement. After considering the ASC 740 recognition and measurement guidance, P recorded a UTB liability for the tax position taken in Jurisdiction A.

Because the UTB liability is recorded by Subsidiary 2 under the licensing agreement, P also evaluated whether a corresponding adjustment was needed for the tax position taken in Jurisdiction B. After considering the recognition and measurement criteria discussed in Section 4.6.3, P determined that management has recognized a UTB receivable in Jurisdiction B.

In the tabular rollforward of UTBs, P should reflect the total amount of UTB liability associated with Jurisdiction A in the table without considering the offsetting impact associated with the UTB receivable related to Jurisdiction B. Although related to the same position (i.e., the same IP licensing agreement), the UTB receivable is a separate unit of account that the Jurisdiction B taxing authorities would evaluate independently; therefore, it should not be netted in the tabular rollforward of UTBs.

14.4.1.9 Reserved

Example 14-5

Reserved

14.4.2 Disclosure of UTBs That, if Recognized, Would Affect the ETR

ASC 740-10-50-15A(b) requires public entities to disclose the “total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.”

The disclosure under ASC 740-10-50-15A(b) is required if recognition of the tax benefit would affect the ETR from “continuing operations” determined in accordance with ASC 740. However, the SEC staff expects public entities to provide supplemental disclosure of amounts that significantly affect other items outside continuing operations (e.g., goodwill or discontinued operations).

14.4.2.1 Example of UTBs That, if Recognized, Would Not Affect the ETR

Certain UTBs, if recognized, would not affect the ETR and would be excluded from the ASC 740-10-50-15A(b) disclosure requirements. The example below illustrates a situation involving such UTBs.

Example 14-6

An entity expenses $10,000 of repair and maintenance costs for book and tax purposes. Upon analyzing the tax position, the entity believes, on the basis of the technical merits, that the IRS will more likely than not require the entity to capitalize and depreciate the cost over 10 years. The entity has a 25 percent applicable tax rate. The entity would recognize a $2,250 ($9,000 × 25%) DTA for repair cost not allowable in the current period ($1,000 would be allowable in the current period for depreciation expense) and a liability for the UTB. Because of the impact of deferred tax accounting, the disallowance of the shorter deductibility period would not affect the ETR but would accelerate the payment of cash to the tax authority to an earlier period. Therefore, the entity recognizes a liability for a UTB and a DTA, both affecting the balance sheet, with no net impact on overall tax expense.

14.4.3 Disclosure of UTBs That Could Significantly Change Within 12 Months of the Reporting Date

ASC 740-10-50-15(d) requires an entity to disclose information “[f]or positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.”

Sometimes, the total amount of a UTB will change without affecting the income statement (e.g., a UTB may be expected to be settled in an amount equal to its carrying value). In other cases, a change in the total amount of a UTB will affect the income statement (e.g., the tax benefit will be recognized because the applicable statute of limitations has expired). Further, UTBs may be attributable to either permanent differences, which generally affect the income statement if adjusted, or temporary differences, which generally do not affect the income statement if adjusted.

The ASC 740-10-50-15(d) disclosure is intended to provide financial statement users with information about future events (such as settlements with the tax authority or the expiration of the applicable statute of limitations) that may result in significant changes to the entity’s total UTBs within 12 months of the reporting date. “Total UTBs” would be those reflected in the tabular reconciliation required by ASC 740-10-50-15A. The disclosure should not be limited to UTBs for which it is reasonably possible that the significant changes will affect the income statement or to UTBs associated with permanent differences.

While ASC 740-10-50-15(d) does not require disclosure of whether a reasonably possible change in UTB will affect tax expense, an entity may consider disclosing the amounts of the expected change that will affect tax expense and the amounts that will not.

Example 14-7

An entity identifies an uncertain tax position and measures the UTB at $40 million as of the reporting date of year 1. The tax authorities are aware of the uncertain tax position, and the entity expects that it is reasonably possible to settle the amount in the fourth quarter of year 2 for between $20 million and $60 million and that the potential change in UTB would be significant. In this example, the entity’s ASC 740-10-50-15(d) financial statement disclosure for year 1 should report that because of an anticipated settlement with the tax authorities, it is reasonably possible that the amount of UTBs may increase or decrease by $20 million.

Example 14-8

An entity identifies an uncertain tax position and measures the UTB at $40 million as of the reporting date of year 1. The tax authorities are aware of the uncertain tax position, and while the entity expects to settle the amount for $40 million in the fourth quarter of year 2, it is reasonably possible that the entity could sustain the position. The uncertain tax position is a binary position with only zero or $40 million as potential outcomes. In this example, provided that the change in UTB would be significant, the entity’s ASC 740-10-50-15(d) financial statement disclosure for year 1 should state that it is reasonably possible that a decrease of $40 million in its UTB obligations could occur within 12 months of the reporting date because of an anticipated settlement with the tax authorities.

Example 14-9

On January 1 of year 1, an entity (1) incurs $10 million of costs related to maintaining equipment and (2) claims a deduction for repairs and maintenance for the entire amount of the costs incurred in its tax return filed for year 1. It is more likely than not that the tax law requires the costs to be capitalized and depreciated over a five-year period. As of the reporting date in year 1, the entity recognizes an $8 million liability for a UTB associated with the deductions taken for tax purposes in year 1. Management believes that the $8 million liability will be reduced by $2 million per year over the next four years as the entity forgoes claiming depreciation for the asset previously deducted. In this example, provided that the change in UTB would be significant, the entity’s ASC 740-10-50-15(d) financial statement disclosure for year 1 should state that it is reasonably possible that a decrease of $2 million will occur within 12 months of the reporting date. The entity should continue to disclose such information in subsequent years until the liability balance is reduced to zero (provided that the entity does not believe that it is reasonably possible that a more accelerated reversal of the UTB will result from an audit of the year of deduction).

14.4.3.1 Disclosure of Expiration of Statute of Limitations

A scheduled expiration of the statute of limitations within 12 months of the reporting date is subject to the disclosure requirements in ASC 740-10-50-15(d). If the statute of limitations is scheduled to expire within 12 months of the date of the financial statements and management believes that it is reasonably possible that the expiration of the statute will cause the total amounts of UTBs to significantly decrease, the entity should disclose the required information.

14.4.3.2 Disclosure Requirements for Effectively Settled Tax Positions

There are no specific disclosure requirements for tax positions determined to be effectively settled as described in ASC 740-10-25-10. However, for positions expected to be effectively settled, an entity should not overlook the requirements in ASC 740-10-50-15(d). Under those requirements, the entity must disclose tax positions for which it is reasonably possible that the total amounts of UTBs will significantly increase or decrease within 12 months of the reporting date.

Example 14-10

A calendar-year-end entity is undergoing an audit of its 20X4 tax year. The 20X4 tax year includes tax positions that did not meet the more-likely-than-not recognition threshold. Therefore, the entity recognizes a liability for the UTBs associated with those tax positions. The entity believes that the tax authority will complete its audit of the 20X4 tax year during 20X8. It also believes that it is reasonably possible that the tax positions within that tax year will meet the conditions to be considered effectively settled. When preparing its ASC 740-10-50-15(d) disclosure as of December 31, 20X7, the entity should include the estimated decrease of its UTBs for the tax positions taken in 20X4 that it believes will be effectively settled.

14.4.3.3 Interim Disclosure Considerations Related to UTBs That Will Significantly Change Within 12 Months

The ASC 740-10-50-15(d) disclosure is required as of the end of each annual reporting period presented. However, material changes since the end of the most recent fiscal year-end should be disclosed in the interim financial statements in a manner consistent with SEC Regulation S-X, Article 10.

Therefore, in updating the ASC 740-10-50-15(d) disclosure for interim financial reporting, an entity must consider changes in expectations from year-end as well as any events not previously considered at year-end that may occur within 12 months of the current interim reporting date and that could have a material effect on the entity. This effectively results in a “rolling” 12-month disclosure. For example, an entity that is preparing its second-quarter disclosure for fiscal year 20X7 should consider any events that may occur in the period from the beginning of the third quarter of fiscal year 20X7 to the end of the second quarter of fiscal year 20X8 to determine the total amounts of UTBs for which a significant increase or decrease is reasonably possible within 12 months of the reporting date.

14.4.4 Separate Disclosure of Interest Income, Interest Expense, and Penalties

ASC 740-10

Interest and Penalty Recognition Policies

50-19 An entity shall disclose its policy on classification of interest and penalties in accordance with the alternatives permitted in paragraph 740-10-45-25 in the notes to the financial statements.

ASC 740-10-50-15(c) states that entities must disclose “[t]he total amounts of interest and penalties recognized in the statement of operations and the total amounts of interest and penalties recognized in the statement of financial position.” Interest income, interest expense, and penalties should be disclosed separately. Accordingly, an entity should disclose interest income, interest expense, and penalties gross without considering any tax effects. In accordance with ASC 740-10-50-19, an entity should also disclose its policy for classification of interest and penalties.

14.4.4.1 Interest Income on UTBs

The SEC staff has advised us that if an entity’s accounting policy is to include interest income attributable to overpayment of income taxes within the provision for income taxes, this policy must be prominently disclosed and transparent to financial statement users. Public entities should consider presenting the following disclosure of the components of the income tax provision, either on the face of the statements of operations or in a note to the financial statements:

Interest expense and interest income in the table above should not include any related tax effects since those amounts should be included in the deferred tax expense (benefit) line.

This disclosure is also recommended for nonpublic entities, since it may help financial statement users understand the effect of interest expense and income.

14.4.5 Disclosure of Liabilities for UTBs in the Contractual Obligations Table

In November 2020, the SEC issued a final rule that amends Regulation S-K to (1) eliminate Item 301, “Selected Financial Data”; (2) simplify the requirements in Item 302 on supplementary financial information; and (3) modernize, simplify, and enhance the requirements in Item 303 on MD&A.

As a result, registrants are no longer required to include in the MD&A section a tabular disclosure of all known contractual obligations, such as long-term debt, capital and operating lease obligations, purchase obligations, and other liabilities recorded in accordance with U.S. GAAP. However, Item 303(b) specifies that the registrant must provide an analysis of “material cash requirements from known contractual and other obligations.”

A registrant that chooses to disclose contractual obligations within the MD&A section should include the liability for UTBs in the tabular disclosure of contractual obligations in MD&A if it can make reasonably reliable estimates about the period of cash settlement of the liabilities. For example, if any liabilities for UTBs are classified as a current liability in a registrant’s balance sheet, the registrant should include that amount in the “Less than 1 year” column of its contractual obligations table. Similarly, the contractual obligations table should include any noncurrent liabilities for UTBs for which the registrant can make a reasonably reliable estimate of the amount and period of related future payments (e.g., uncertain tax positions subject to an ongoing examination by the respective tax authority for which settlement is expected to occur after the next operating cycle).

Often, however, the timing of future cash outflows associated with some liabilities for UTBs is highly uncertain. In such cases, a registrant (1) might be unable to make reasonably reliable estimates of the period of cash settlement with the respective tax authority (e.g., UTBs for which the statute of limitations might expire without examination by the respective tax authority) and (2) could exclude liabilities for UTBs from the contractual obligations table or disclose such amounts within an “other” column added to the table. If any liabilities for UTBs are excluded from the contractual obligations table or included in an “other” column, a footnote to the table should disclose the amounts excluded and the reason for the exclusion.

14.4.6 Disclosing the Effects of Income Tax Uncertainties in a Leveraged Lease Entered Into Before the Adoption of ASC 842

On the effective date of ASC 842, leases previously classified as leveraged leases under ASC 840 will be subject to the guidance in ASC 842-50. The legacy accounting requirements are grandfathered in for leases that were entered into and accounted for as leveraged leases before the effective date of ASC 842. A leveraged lease modified on or after the effective date of ASC 842 would be accounted for as a new lease under the lessor model in ASC 842. Entities are not permitted to account for any new or subsequently amended lease arrangements as leveraged leases after the effective date of ASC 842. For additional information on the impact of ASC 842 on leveraged lease accounting, see Section 9.5.2 of Deloitte’s Roadmap Leases.

ASC 840-30-35-42 indicates that a change or projected change in the timing of cash flows related to income taxes generated by a leveraged lease is a change in an important assumption that affects the periodic income recognized by the lessor for that lease. Accordingly, the lessor should apply the guidance in ASC 840-30-35-38 through 35-41 and ASC 840-30-35-45 through 35-47 whenever events or changes in circumstances indicate that a change in timing of cash flows related to income taxes generated by a leveraged lease has occurred or is projected to occur.

In addition, ASC 840-30-35-44 states, in part, “Tax positions shall be reflected in the lessor’s initial calculation or subsequent recalculation based on the recognition, derecognition, and measurement criteria in paragraphs 740-10-25-6, 740-10-30-7, and 740-10-40-2.”

The tax effects of leveraged leases are within the scope of ASC 740. Accordingly, a lessor in a leveraged lease should apply the disclosure provisions of ASC 740-10-50 that would be relevant to the income tax effects for leveraged leases, including associated uncertainties and effects of those uncertainties.

Lessors in a leveraged lease should also be mindful of the SEC observer’s comment in EITF Issue 86-43 (codified in ASC 840-30), which indicates that when an entity applies the leveraged lease guidance in ASC 840-30-35-38 through 35-41 because the after-tax cash flows of the leveraged lease have changed as a result of a change in tax law, the cumulative effect on pretax income and income tax expense, if material, should be reported as separate line items in the income statement. Because ASC 840-30-35-42 through 35-44 clarify that the timing of the cash flows related to income taxes generated by a leveraged lease is an important assumption — just as a change in tax rates had always been — this guidance should be applied by analogy.

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.