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Monday, July 11, 2016

Upcoming FASB Proposal on Income Tax Disclosures


The Financial Accounting Standards Board (FASB) recently decided to start drafting its long-awaited proposal on income tax disclosures. Despite the board’s general efforts to streamline the disclosure requirements under U.S. Generally Accepted Accounting Principles (GAAP), this proposal would require businesses to disclose more details about domestic and foreign tax payments. Here’s what you can expect from the updated guidance.

Balancing opposing views
By law, U.S. corporations (other than S corporations) are generally subject to a top corporate tax rate of 35%, but many pay far less than that because of deductions and credits. Investors and analysts are pushing for greater transparency about income taxes to help them forecast a company’s expected financial results.

Companies, however, are reluctant to divulge this information. Publicly traded companies are especially concerned that, once the information is public, their competitors will benefit from it as much as shareholders. The FASB hopes to strike a balance between these two points of view by making the disclosure requirements more effective without overloading financial statements with extraneous information.

Fine-tuning the details  
At its June 8 weekly meeting, the FASB addressed tentative plans to amend the disclosure rules for income taxes under Accounting Standards Codification Topic 740-10-50-12, Income Taxes—Disclosure. Board members discussed the costs and benefits of the changes and decided to proceed with drafting the proposed amendments. The FASB has been working on this issue since January 2015.

After reviewing confidential feedback from companies and audit firms, the FASB reversed its previous decision to require an entity to disaggregate the cumulative amount of indefinitely reinvested foreign earnings for any country that represents at least 10% of the total cumulative amount. Instead, companies would be required to disclose the aggregate of cash, cash equivalents and marketable securities held by foreign subsidiaries.

In addition, the board addressed the term “public entity.” Currently, some disclosure requirements in Topic 740 are required of public entities and some are required of nonpublic entities. The revised guidance will use the term “public business entity” as defined in the Master Glossary of the Accounting Standards Codification. The result is that some disclosures will be required of public business entities while other disclosures will be required of entities other than public business entities.

A key issue the FASB discussed on June 8 relates to disclosures about income tax carryforwards. Based on this discussion, the board decided to require public business entities to disclose:

  1. The amounts of federal, state and foreign carryforwards (not tax effected) by time period of expiration for each of the first five years after the reporting date and a total of the amounts for the remaining years, and
  2. The deferred tax asset for carryforwards (tax effected) before valuation allowance disaggregated by federal, state and foreign amounts. Each category of carryforward asset would also be further disaggregated by time period of expiration for each of the first five years after the reporting date and a total of the amounts for the remaining years.

For other types of entities, the FASB decided to revise the carryforward disclosures so that just the amounts of federal, state and foreign carryforwards (not tax effected) would be disclosed.

Drafting the update
The FASB instructed its staff to draft a proposed Accounting Standards Update with a comment period of 60 days or ending on September 30, 2016, whichever is longer. When it’s published, the proposal is likely to be met with significant opposition from companies to the extent that the changes add complexity and cost without providing significant benefits to investors.

Update on government assistance disclosures
A Proposed Accounting Standards Update, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, would have added disclosures about the money that companies receive in government aid, including cash grants, low interest loans and tax incentives. However, the Financial Accounting Standards Board (FASB) recently decided to exclude employee benefit plans, not-for-profit entities and income taxes from the scope of its project on government assistance disclosures. Going forward, this project will focus on legally enforceable agreements, rather than general tax provisions any company can claim.

The FASB will now address issues related to government assistance that fall under income tax accounting in Accounting Standards Codification Topic 740, Income Taxes. During its June deliberations on income tax disclosures, the board decided to require an entity to disclose the terms of any rights or privileges granted by a governmental entity directly to an entity, if they have reduced, or may reduce, that entity’s income tax burden.

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