4.10 Treatment of Tax Adjustments
In certain circumstances, a registrant may reflect a non-GAAP measure after taxes and therefore show
the tax adjustments when reconciling a non-GAAP measure to the appropriate GAAP measure. C&DI
Question 102.11 indicates that the tax expense impact for a performance measure should be consistent
with the amount of non-GAAP income since adjusting revenue or income before income tax could affect
the tax expense or benefits assumed in the calculation of the tax provision. For example, suppose that
a registrant has a $200 million GAAP loss for the most recent fiscal year, which resulted in a 3 percent effective
tax rate. After making various reconciling adjustments, if the registrant presents a non-GAAP adjusted
income measure of $400 million, the SEC staff may comment if the registrant uses the same 3 percent
effective tax rate to compute the tax provision.
If a non-GAAP measure is a liquidity measure, adjusting the GAAP tax amount to present taxes paid in
cash may be acceptable.
A registrant should present its reconciling adjustments gross of tax and should disclose how the tax adjustments were determined. If other tax adjustments are included in the reconciliation (e.g., the removal of discrete tax adjustments), a registrant should separately disclose the income tax effects of the non-GAAP adjustments from such other adjustments.
C&DIs — Non-GAAP Financial Measures
Question: How should
income tax effects related to adjustments to arrive at a
non-GAAP measure be calculated and presented?
Answer: A registrant
should provide income tax effects on its non-GAAP measures
depending on the nature of the measures. If a measure is a
liquidity measure that includes income taxes, it might be
acceptable to adjust GAAP taxes to show taxes paid in cash.
If a measure is a performance measure, the registrant should
include current and deferred income tax expense commensurate
with the non-GAAP measure of profitability. In addition,
adjustments to arrive at a non-GAAP measure should not be
presented “net of tax.” Rather, income taxes should be shown
as a separate adjustment and clearly explained. [May 17,
2016]
Example 4-3
To illustrate the discrete effect of taxes on individual adjustments in the reconciliation, the registrant may
present the tax effect of all adjustments as a single line in the reconciliation as follows:
The registrant should clearly disclose how it determined the tax effect. Other alternative presentations may be
appropriate as long as the gross amount of adjustments are disclosed. For example, a registrant could disclose
the relevant information about the gross amount of the adjustment and the tax amount in parentheses (e.g.,
stock-based compensation $10 million less the amount of taxes $3 million) to arrive at the net amount (e.g., $7
million) and could provide similar disclosure for the restructuring charges.
When calculating a non-GAAP measure, a registrant should be mindful of how the adjustments made to a GAAP measure affect total income tax expense. As indicated above, a registrant’s adjustment of revenue or income before tax expense could affect the tax expense or benefits assumed in the calculation of the tax provision and therefore could have an impact on the tax computation in the reconciliation.
4.10.1 Non-GAAP Financial Measures Related to the Impact of Tax Reform
On December 22, 2017, President Trump signed into law the tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). Under ASC 740, the effects of new legislation are recognized upon enactment, which (for federal legislation) is the date the president signs a bill into law. Accordingly, recognition of the tax effects of the Act was required in the interim and annual periods that include December 22, 2017.
Registrants may choose to make non-GAAP adjustments related to discrete amounts
that affect income as a result of the recognition of the tax effects of the Act,
such as (1) the adjustment of deferred taxes upon the change in corporate tax
rates and (2) the recognition of incremental tax expense related to foreign
earnings previously considered to be indefinitely reinvested abroad and not
subject to U.S. taxation (the deemed repatriation tax). If such adjustments are
accompanied by the disclosures required by the non-GAAP rules and are not
misleading, the adjustments for tax reform may be permissible depending on the
registrant’s specific facts and circumstances. If a registrant includes an
adjustment for the impact of tax reform in its non-GAAP measures, it should
ensure that the adjustment is for the total impact of tax reform and not just
for select provisions (i.e., it should not engage in cherry picking [see
Section 4.3]).
For example, if a registrant adjusts its non-GAAP measure to remove the deemed
repatriation transition tax, it should also adjust its non-GAAP measure for the
change in tax rates related to deferred taxes. See Section 3.6.2 for further discussion of
the consistent presentation of non-GAAP measures.
Some registrants may also consider adjustments that attempt to depict a “normalized” tax rate between comparable periods to enhance comparability of periods before and after tax reform (i.e., adjustments in which the new tax rate is applied to periods before enactment). However, such non-GAAP measures may be considered misleading and may be deemed individually tailored accounting principles since they may not reflect different tax strategies, tax assertions, or other actions a registrant may have taken if the lower tax rate had applied to all periods presented (e.g., increased compensation, increased research and development). See Section 4.3.3 for further discussion of individually tailored accounting measures.
For additional information about the Act’s effects on financial reporting, see
Deloitte’s January 3, 2018 (updated August 30, 2018), Financial Reporting Alert.