Chapter 8 — Accounting for Income Taxes in Separate Financial Statements

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.

If the separate financial statements are those of a single-member LLC and no allocation of income taxes has been made, the single-member LLC should disclose that fact in the notes to the separate financial statements and the reasons why.

8.7.3 Disclosures in Abbreviated Separate or Carve-Out Financial Statements

See Section 8.2.5 of this Roadmap, Section 5.2.4 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.

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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.