8.7 Disclosures Required in the Separate Financial Statements of a Member of a Consolidated Tax Return
ASC 740-10
50-17 An entity
that is a member of a group that files a consolidated tax return
shall disclose in its separately issued financial statements:
- The aggregate amount of current and deferred tax expense for each statement of earnings presented and the amount of any tax-related balances due to or from affiliates as of the date of each statement of financial position presented
- The principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to members of the group and the nature and effect of any changes in that method (and in determining related balances to or from affiliates) during the years for which the above disclosures are presented.
50-17A An entity that is both not
subject to tax and disregarded by the taxing authority that
elects to include the allocated amount of current and deferred
tax expense in its separately issued financial statements in
accordance with paragraph 740-10-30-27A shall disclose that fact
and provide the disclosures required by paragraph
740-10-50-17.
For general disclosure requirements related to the accounting for income
taxes, see Chapter 14. ASC
740-10-50-17 contains disclosure requirements specific to separate financial statements
of a member of a consolidated filing group. Further, ASC 740-10-50-17A requires an
entity that is not subject to tax and is disregarded by the taxing authority to disclose
that an allocation of income taxes has been made in the separate financial
statements.
8.7.1 Disclosures in Separate or Carve-Out Financial Statements to Be Included in a Filing With the SEC
The disclosures required by ASC 740-10-50-17 help financial
statement users understand how current and deferred income taxes were allocated, as
required by ASC 740-10-30-27, to a member in its separate financial statements. The
disclosures also help inform users about how that allocation method differs, if at
all, from the terms of any tax-sharing agreements of the member, its parent, and its
affiliates.
However, as SAB Topic 1.B.1 states, the disclosures do not provide information needed
to help financial statement users understand “what the effect on income would have
been if the registrant had not been eligible to be included in a consolidated income
tax return with its parent.” For example, the disclosures required by ASC
740-10-50-17 do not describe either the (1) nature of DTAs and DTLs, NOLs, and tax
credit carryforwards or (2) uncertain tax positions of the consolidated return group
that are attributable to the assets, liabilities, operations, and tax positions of
the member.
Therefore, while it is not clear in ASC 740-10-50-17, we believe
that the separate financial statements of a member that will be included in a filing
with the SEC should generally provide the disclosures required by ASC 740-10-50-17
in addition to the disclosures required by ASC 740-10-50-2 through 50-16,
particularly in situations in which a method other than the parent-company-down
approach is used to compute the tax allocation included in the financial statements.
We believe that the same is true for carve-out financial statements that will be
included in a filing with the SEC.
In addition, as discussed in Section 8.3.2, a
pro forma income statement reflecting a tax provision calculated on a
separate-return basis is required if the separate or carve-out financial statements
include an allocation of current and deferred income taxes that uses a method other
than the separate-return method.
8.7.2 Disclosures in Separate or Carve-Out Financial Statements That Will Not Be Included in a Filing With the SEC
If a member’s separate or carve-out financial statements will not be included in a
filing with the SEC, the disclosures required by ASC 740-10-50-17 may be provided
in lieu of those required by ASC 740-10-50-2 through 50-16. However, we
do not believe that this is preferable for the reasons discussed above. Further,
such financial statements may need to provide income tax disclosures other than
those specifically required by ASC 740-10-50-17 when, for example, income tax
matters affecting a member or carve-out entity are critical to users’ understanding
of the financial statements. The circumstances under which additional disclosures
should be provided in such financial statements are a matter of judgment, and
consultation with accounting advisers is recommended.
8.7.3 Disclosures in Abbreviated Separate or Carve-Out Financial Statements
See Section
8.2.5 of this Roadmap, Section 5.2.3 of Deloitte’s Roadmap Carve-Out Financial
Statements, and Section 1.5 of Deloitte’s Roadmap SEC Reporting Considerations for Business
Acquisitions for further discussion of when abbreviated
financial statements may be appropriate.
When abbreviated separate or carve-out financial statements of a business acquired or
to be acquired are prepared with no income tax allocation, an entity should disclose
in the footnotes to the historical abbreviated statements that no allocation of
income tax has been made. It may also be appropriate to include an explanatory
paragraph in the independent accountant’s report that (1) indicates that no income
tax expense or benefit has been recognized in the statement of revenues and expenses
and (2) provides a reference to the appropriate footnote that further discusses the
matter.