FASB Proposes Changes to Income Tax Disclosure Requirements
Background
On March 25, 2019, the FASB issued a proposed ASU1 that would modify or eliminate
certain requirements related to income tax disclosures as well as establish new disclosure
requirements. The proposed guidance, which is part of the Board’s disclosure framework
project, is intended to increase the relevance of income tax disclosures for financial statement
users. Comments on the proposal are due by May 31, 2019.
The proposed ASU is a revised version of the FASB’s July 2016 exposure draft on changes to
the income tax disclosure requirements (the “initial ED”). The Board discussed stakeholder
feedback on the initial ED in January 2017 and again in November 2018, when it also assessed
whether updates would be needed as a result of the Tax Cuts and Jobs Act (the “Act”).
This Heads Up compares the requirements in the initial ED with those in the proposed
ASU (see Deloitte’s July 29, 2016, Heads Up for more information about the initial ED). The
proposed ASU’s questions for respondents are reproduced in Appendix A for reference, and
certain of its sample disclosures related to operating loss and tax credit carryforwards are
reproduced in Appendix B.
Key Changes Made by the Proposed ASU
Disaggregation
The initial ED would have required all entities to disclose the following disaggregated
amounts:
- The amount of pretax income (or loss) “from continuing operations . . . disaggregated between domestic and foreign.”2
- The amount of “income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign.”3
- The amount of income taxes paid, disaggregated by foreign and domestic amounts. A further disaggregation would be required for “any country that is significant to total income taxes paid.”
The proposed ASU retains the disaggregated presentation of the amount of income (or loss)
from continuing operations, the amount of income tax expense (or benefit) from continuing
operations, and the amount of income taxes paid, disaggregated by foreign and domestic
amounts, but it removes the by-significant-country disaggregation requirement related to
income taxes paid.
On the basis of stakeholder feedback regarding concerns about (1) potential diversity with
respect to the classification of U.S. federal income tax on foreign earnings (e.g., U.S. tax on
global intangible low-taxed income) and (2) current diversity in practice related to reporting
income or loss from continuing operations disaggregated between foreign and domestic
amounts, the proposed ASU also contains clarifications related to the following:
- Jurisdiction of domicile income tax on foreign earnings — Such income tax should be classified as income tax for the jurisdiction of domicile (e.g., U.S. federal tax on global intangible low-taxed income resulting from foreign earnings is classified as domestic for a U.S. domiciled company).
- Preconsolidation basis — The amount of pretax income (or loss) from continuing operations indicated in the disaggregation should be presented “before intra-entity eliminations.” When deliberating the proposed guidance, some Board members expressed concern that diversity in practice could result because “before intra-entity eliminations” is not defined in U.S. GAAP. Accordingly, the FASB included Question 4 in the proposed ASU’s questions for respondents to determine whether clarification is needed.
Connecting the Dots
In practice, some entities disaggregate elimination entries made in arriving
at consolidated pretax income (loss) and push them back to the respective
components, while others disregard such elimination entries and report the
components before elimination entries. For more information, see Section 6.27A of
Deloitte’s A Roadmap to Accounting for Income Taxes.
Indefinitely Reinvested Foreign Earnings
The Act introduced the concept of the “transition tax,” which requires U.S. shareholders to
pay a tax on certain post-1986 undistributed and previously untaxed foreign earnings and
profits. The transition tax has significantly reduced the amount of untaxed foreign earnings
held by entities with foreign operations because taxes have been (or will be) paid on most, if
not all, post-1986 earnings. As a result, the proposed ASU removes the initial ED’s proposed requirement in ASC 740-30-50-3 that any change to an indefinite reinvestment assertion
made during the year must be disclosed, including the circumstances that caused such a
change and the amount of earnings to which the change in assertion was related.
Similarly, the proposed ASU would remove the existing requirement in ASC 740-30-50-2(b)
to disclose the “cumulative amount of each type of temporary difference” when a “deferred tax
liability is not recognized because of the exceptions to comprehensive recognition of deferred
taxes related to subsidiaries and corporate joint ventures.”
Connecting the Dots
Note that the proposed ASU would not eliminate the existing requirements in
ASC 740-30-50-2(c) to (1) disclose the amount of unrecognized deferred tax liability
related to investments in foreign subsidiaries and corporate joint ventures that are
essentially permanent in duration or (2) provide a statement that determination of
such deferred tax liability is not practicable.
Likewise, the proposed ASU removes the initial ED’s proposed requirement that entities
disclose the aggregate of cash, cash equivalents, and marketable securities held by their
foreign subsidiaries to help financial statement users predict the likelihood of future
repatriations and the associated tax consequences related to foreign indefinitely reinvested
earnings.
Unrecognized Tax Benefits
The proposed ASU removes the initial ED’s proposed requirement that entities disclose,
in the tabular reconciliation of the total amount of unrecognized tax benefits required by
proposed ASC 740-10-50-15A(a), settlements disaggregated by those that have been (or will
be) settled in cash and those that have been (or will be) settled by using existing deferred tax
assets (e.g., settlement by using existing net operating loss or tax credit carryforwards). But
the proposed ASU retains the initial ED’s proposed requirement that public business entities
provide a breakdown (i.e., a mapping) of the amount of total unrecognized tax benefits shown
in the reconciliation of the total amounts of unrecognized tax benefits by the respective
balance-sheet lines on which such unrecognized tax benefits are recorded. However, the
proposed ASU removes the initial ED’s proposed requirement to disclose an unrecognized
tax benefit that is not included in a balance-sheet line separately since it was unclear to which
unrecognized tax benefit the requirement would now be relevant.
The proposed ASU also retains the proposal to remove the existing requirement in ASC
740-10-50-15(d) to disclose the details of tax positions for which it is reasonably possible that
the total amount of unrecognized tax benefits will significantly increase or decrease in the next
12 months.
Valuation Allowances
The proposed ASU retains the initial ED’s proposed requirement that public business entities
explain any valuation allowance recognized or released during the year, along with the
corresponding amount.
Rate Reconciliation
The proposed ASU affirms the initial ED’s proposed amendment to the requirement in ASC
740-10-50-12 that a public business entity disclose the income tax rate reconciliation in a
manner consistent with SEC Regulation S-X, Rule 4-08(h). As amended, ASC 740-10-50-12
would continue to require a public business entity to disclose a reconciliation of the reported
amount of income tax expense (or benefit) from continuing operations to the amount of
income tax expense (or benefit) that would result from multiplying the pretax income (or loss) from continuing operations by the statutory federal or national income tax rate. However,
the amendment would modify the requirement to disaggregate and separately present
components in the rate reconciliation that are greater than or equal to 5 percent of the tax at
the statutory rate in a manner consistent with the requirement in Rule 4-08(h).
During deliberations of the proposed ASU, some Board members questioned whether 5
percent is an appropriate threshold given the decrease to the U.S. statutory rate as a result of
the Act. Thus, the FASB included Question 6 in the proposed ASU’s questions for respondents.
Operating Loss and Tax Credit Carryforwards
Currently, entities are required to disclose, for tax purposes, the amount and expiration
dates of operating losses and tax credit carryforwards. Historically, there has been diversity
in practice related to this disclosure requirement, which the initial ED sought to reduce by
requiring a public business entity to disclose the total amount of:
- “[F]ederal, state, and foreign [gross net operating loss and tax credit] carryforwards (not tax effected) by time period of expiration for each of the first five years after the reporting date and a total for any remaining years.”
- “[D]eferred tax assets for federal, state, and foreign [net operating loss and tax credit] carryforwards (tax effected) before the valuation allowance.”
However, the proposed ASU removed the requirement to report not-tax-effected amounts
because the Board determined that disclosing such amounts of federal or national, state, and
foreign gross net operating loss and tax credit carryforwards does not provide decision-useful
information. The Board also concluded that disclosure of the tax-effected amounts of federal
or national, state, and foreign net operating loss and tax credit carryforwards is useful, so it
retained the initial ED’s proposed requirement, with a modification to also disclose the
valuation allowance associated with such amounts.
While the FASB voted to require public business entities to provide the tax-effected amounts
of federal or national, state, and foreign deferred tax assets related to net operating loss and
tax credit carryforwards, on the basis of feedback received from nonpublic entities, the Board
retained the initial ED’s proposed requirement in ASC 740-10-50-8A that nonpublic entities
disclose the total amounts of federal or national, state, and foreign tax credits and other
federal or national, state, and foreign carryforwards (on a not-tax-effected basis) separately for
(1) those carryforwards that expire and (2) those that do not, along with their expiration dates
(or range of expiration dates).
Appendix B contains illustrations of the above disclosure requirements from the proposed ASU.
Interim Disclosure Requirements
The initial ED did not make changes to interim disclosure requirements. However, the
proposed ASU would amend ASC 230-10-50-2 to add an interim requirement to disclose
income taxes paid for all interim periods presented.
Other Changes
Change in Tax Law
The initial ED would have required an entity to disclose an enacted tax law change if it was
probable that such a change would affect the entity in the future. Stakeholders expressed
concerns that this language was potentially too broad, and the Board discussed the possibility
of modifying the requirement to provide such disclosure if that change would have a
“significant effect [on the entity] in a future period.”4 However, the Board ultimately determined that the disclosure requirement was unnecessary and removed it (ASC 740-10-50-22 in the
initial ED) from the proposed ASU.
Government Assistance
The initial ED would have required an entity to disclose certain information related to
assistance received from a governmental unit that reduces the entity’s income taxes. However,
this proposed disclosure was removed from the proposed ASU.
Transition and Effective Date
The proposed ASU would require the guidance to be applied prospectively, and the Board will
determine an effective date and whether to permit early adoption after it considers feedback
from stakeholders.
Appendix A — Questions for Respondents
The proposed ASU’s questions for respondents are reproduced below.
Question 1: Would the amendments in this proposed Update that add or modify disclosure requirements result in
more effective, decision-useful information about income taxes? Please explain why or why not. Would the proposed
amendments result in the elimination of decision-useful information about income taxes? If yes, please explain why.
Question 2: Are the proposed disclosure requirements operable and auditable? If not, which aspects pose operability
or auditability issues and why?
Question 3: Would any of the proposed disclosures impose significant incremental costs? If so, please describe the
nature and extent of the additional costs.
Question 4: One of the proposed amendments would require entities to disclose pretax income (or loss) from
continuing operations before intra-entity eliminations disaggregated between domestic and foreign, which initial
feedback indicated would reduce diversity in practice. Would this proposed amendment be operable? Should the Board
specify whether the disclosed amounts should be before or after intra-entity eliminations? Why or why not?
Question 5: Would a proposed amendment to require disaggregation of income tax expense (or benefit) from
continuing operations by major tax jurisdiction be operable? Would such a proposed amendment result in decisionuseful
information about income taxes? Why or why not?
Question 6: The proposed amendments would modify the existing rate reconciliation requirement for public business
entities to be consistent with SEC Regulation S-X 210.4-08(h). That regulation requires separate disclosure for any
reconciling item that amounts to more than 5 percent of the amount computed by multiplying the income before tax by
the applicable statutory federal income tax rate. Should the Board consider a threshold that is different than 5 percent?
If so, please recommend a different threshold and give the basis for your recommendation.
Question 7: Are there any other disclosures that should be required by Topic 740 on the basis of the concepts in Chapter 8 of Concepts Statement 8, as a result of the Tax Cuts and Jobs Act, or for other reasons? Please explain why.
Question 8: Are there any disclosure requirements that should be removed on the basis of the concepts in Chapter 8,
as a result of the Tax Cuts and Jobs Act, or for other reasons? Please explain why.
Question 9: The proposed amendments would replace the term public entity in Topic 740 with the term public business
entity as defined in the Master Glossary of the Codification. Do you agree with the change in scope? If not, please
describe why.
Question 10: Should the proposed disclosures be required only for the reporting year in which the requirements are
effective and thereafter or should prior periods be restated in the year in which the requirements are effective? Please
explain why.
Question 11: How much time would be needed to implement the proposed amendments? Should the amount of time
needed to implement the proposed amendments by entities other than public business entities be different from the
amount of time needed by public business entities? Should early adoption be permitted? Please explain why.
Appendix B — Illustrative Examples of Disclosures Related to Operating Loss and Tax Credit Carryforwards
The illustrative examples below are reproduced from the proposed ASU.
ASC 740-10 (Added Guidance Suggested by Proposed ASU 2019-500)
55-220 If Entity A is a public business entity, illustrative disclosure for the entity follows.
Realization of the deferred tax asset is dependent on generating sufficient taxable income to utilize the carryforwards.
Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will
be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
55-220A If Entity A is an entity other than a public business entity, illustrative disclosure for the entity follows.
The entity has $6.6 million, $6.0 million, and $5.4 million in federal, state, and foreign loss carryforwards (not tax effected),
respectively, of which $1.8 million and $1.6 million in federal and state loss carryforwards, respectively, do not expire. The
remaining loss carryforwards expire at various points between 20X2 and 20X9. The entity also has deferred tax assets of
$1.2 million, $0.4 million, and $0.5 million for federal, state, and foreign credit carryforwards, respectively, which expire at
various points between 20X2 and 20X7.
Realization of the deferred tax asset is dependent on generating sufficient taxable income to utilize the carryforwards.
Although realization is not assured, management believes that it is more likely than not that all of the deferred tax asset
will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.