Armanino Blog

Streamlining Disclosures for Tax Benefits

October 25, 2015

As part of its broader effort to weed out unnecessary information in financial statement footnotes, in late August the Financial Accounting Standards Board (FASB) unanimously approved a series of simplifications to the disclosure requirements for unrecognized tax benefits. The changes will help investors and analysts focus on the most relevant information about such tax benefits.

What are unrecognized tax benefits?
An “unrecognized tax benefit” is the difference between a tax position that a company takes, or expects to take, on its income tax return and the benefit it recognizes on its financial statements. The difference usually arises when a business is taking an uncertain tax position that has not yet been resolved through an audit or litigation.

Investors and analysts told the FASB’s research team that they look at a company’s overall unrecognized tax benefit balance to help assess the company’s aggressiveness as it relates to its tax positions. But they generally don’t care about further breakdowns of unrecognized tax benefits by jurisdiction, type of tax matter or scheduled expiration.

What’s being removed?
The FASB agreed to eliminate the requirement to break down unrecognized tax benefits into more detailed categories. The board also scrapped potential disclosures about the methods used to measure certain types of unrecognized tax benefits, and it removed an existing requirement for businesses to disclose unrecognized tax benefits that could significantly change in the next 12 months.

Developments such as emerging case law, tax law changes or interactions with taxing authorities could affect tax benefits formerly recognized. But, too often, the exact amounts of tax benefits are unknown until just weeks or, at most, months before settlement occurs.

Many companies — especially those that are publicly traded — welcome the FASB’s decision to streamline the income tax disclosures. In addition to reducing financial reporting costs, streamlined disclosures provide the IRS with less ammunition to help agents pinpoint potential tax return weaknesses.

What stays?
The FASB decided to continue requiring disclosure via a table of the opening and closing balances of unrecognized tax benefits. The board agreed that such reconciliations would continue to be disclosed on a gross basis (as opposed to a net basis). But businesses will be expected to provide more information in the table about cash and noncash settlements of the tax benefits, as well as a breakdown by balance sheet line items. Since these two new proposed disclosure requirements relate to the tabular reconciliation, they will only apply to public companies.

What’s next on the agenda?
These changes are one small part of the FASB’s bigger disclosure overhaul project. In addition to income taxes, the FASB is examining disclosure requirements for fair value measurements, defined benefits plans and inventory. The board is also working on an internal guide that would help it set more consistent, less redundant disclosure requirements as it crafts new accounting standards. Expect to hear more about these ongoing projects in the coming months.

October 25, 2015

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