FASB Makes Tentative Decisions With Respect to Disclosure of Unrecognized Tax Benefits
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The Financial Accounting Standards Board (“FASB” or “Board”) made tentative decisions at its August 26, 2015 meeting on income tax disclosure requirements in ASC 740 specific to uncertain tax benefits (“UTB”). These decisions are made pursuant to the FASB’s on-going Disclosure Framework Project (“disclosure project”). The objective is to improve the effectiveness of disclosures in the notes to financial statements by providing important and relevant information. The magnitude and nature of uncertain tax positions - tax return positions for which a full or partial accounting reserve is required - is an important indicator of a reporting entity’s income tax risk tolerance and exposure. Hence, the accounting and disclosure of UTBs remain a significant topic to investors and regulators.
The Board’s tentative disclosure decisions specific to UTBs include:
- Amending the current requirement in ASC 740-10-50-15A(a)(3) regarding settlements with taxing authorities to require disaggregation of cash settlements and non-cash settlements (Note: a tabular reconciliation disclosure of beginning and ending gross UTBs is only required of public entities).
- Requiring the balance sheet accounts which are affected by UTBs to be disclosed.
- Eliminating the current requirement in ASC 740-10-50-15(d) to disclose significant changes in UTBs that are anticipated to occur within 12 months of the reporting date (Note: this requirement is applicable to public and non-public entities).
The Board decided not
to require the disclosure of:
- Disaggregation of gross UTBs by jurisdiction, the uncertain tax position, or by scheduled expiration of the relevant statute of limitation.
- Disaggregation of gross UTBs on the basis of uncertain tax positions for which recognition is not met (full benefit is reserved) and uncertain tax positions for which recognition is met but a partial reserve is required.
The August 26 meeting follows the February 11 meeting in which the Board made tentative decisions related to income tax disclosure requirements specific to foreign earnings (see a BDO Knows ASC 740, March 2015 alert for a detailed discussion of those decisions). An exposure draft is not expected until the FASB has considered other income tax disclosure changes, such as the tax rate reconciliation, the valuation allowance, and miscellaneous income tax items, as well as input from stakeholders on these and previous tentative decisions. The FASB is expected to meet and discuss such items later in the year.
Disclosure Framework Project
This FASB project seeks to improve the effectiveness of disclosures in notes to financial statements by requiring disclosure of information that is most important or relevant to an entity’s financial statement users. Information qualifying for disclosure would presumably have the capacity to impact the amount and timing of expected cash flows related to a particular line item in the financial statements (e.g., income taxes). The FASB’s disclosure framework is also intended to promote consistent decisions by the FASB about disclosure requirements and to serve as a “guide” to disclosure decisions undertaken by reporting entities. The FASB wants to provide flexibility and discretion in applying disclosures requirements. To achieve these objectives, the Board is evaluating disclosure requirements of significant topics against its proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements (“Concepts Statement”).
Unrecognized Tax Benefits – Current GAAP and Recent Issues
The income tax footnote disclosure requirements specific to UTBs are more expansive with regard to public entities than non-public entities. A key difference is that public entities are required to include a tabular reconciliation of gross UTBs in annual financial statements, which non-public entities are not required to disclose. The tabular reconciliation of gross UTBs at the beginning and end of the period is on a world-wide basis and it should include the following details at a minimum:1
- Increase or decrease related to prior periods’ tax return positions,
- Increase or decrease related to current periods’ tax return positions,
- Decrease due to settlements with taxing authorities,
- Decrease due to expiration of relevant statute of limitations.
Public entities are also required to disclose the gross UTBs in annual financial statements that, if recognized, would affect the effective tax rate.2
All entities (public and private) are required to disclose in annual financial statements:
- Interest and penalties recognized in the income statement and in the balance sheet.3
- Significant changes in UTBs expected within 12 months, the nature of the event(s), and an estimate of a range of the anticipated change(s) or a statement that an estimate of a range cannot be made. This disclosure is required of position(s) for which it is reasonably possible (generally a probability likelihood of less than 50%) that a significant change could occur within 12 months, and is often referred to as an “early warning” disclosure.4
- The tax years that remain subject to examination by major tax jurisdictions.5
BDO supports the FASB’s efforts to improve the effectiveness of financial statement disclosures through development of a disclosure framework to ensure consistency and provide flexibility.
We believe the current disclosure requirements in ASC 740 specific to UTBs provide a good framework from which reporting entities can expand disclosures to accommodate specific facts and circumstances. Reporting entities, their advisors, and auditors have generally become familiar with applying these requirements.
The evaluation of the technical strength of a tax return position and the determination of the maximum benefit that can be recognized and measured in the financial statements are fluid and continuous. In most jurisdictions, income tax law and administration (i.e., income tax compliance, examination, appeals, and settlements) are not static and periodically change due to significant complexity in the relevant income tax laws or regulations. The accounting model recognizes this uniqueness by stipulating that “all available” information, including information obtained during the examination process, shall be used to determine the maximum amount of benefit that can be recognized in the financial statements and by allowing consideration of “administrative practices” and “effective settlements” to determine recognition.6
Therefore, we believe that the disclosure requirement in ASC 740-10-50-15(d) regarding significant changes in UTBs should be retained in its current version since it serves as an “early warning” disclosure when it is reasonably possible that significant changes could occur within a short period. The current requirement provides adequate flexibility by only requiring an estimate of a range of anticipated changes, or a statement that such an estimate cannot be made. We believe practice has evolved around this specific disclosure requirement without significant implementation issues.
Additionally, in practice, many reporting entities disclose cash-settlements as a reduction in gross UTBs due to settlements with taxing authorities and disclose the reduction in gross UTB liability for which cash settlement is not required with other changes (increase/decrease) related to prior periods’ tax positions (i.e., the disclosure requirement in ASC 740-10-50-15A(a)(1)). As such, we would be in favor of clarifying ASC 740-10-50-15A(a)(3) to indicate that it is intended to present cash settlements including the utilization of a deferred tax asset for a net operating loss or tax credits carryforwards to settle a UTB liability.
The Board also voted in favor of a tentative decision to require disclosure of the balance sheet line items affected by UTBs. Most UTB liabilities are presented in other liabilities unless they meet the balance sheet threshold for a separate presentation. The standard also requires balance sheet netting of a UTB liability and a deferred tax asset for a net operating loss, similar loss, and tax credits carryforwards if the deferred tax asset is available to offset the UTB liability and the entity expects to utilize it to settle a UTB liability.7
Additionally, deferred tax liabilities could be considered UTBs (said differently, some UTBs would be classified as deferred tax liabilities).8
Given that the tabular reconciliation disclosure is an aggregation of world-wide gross UTBs it could take significant incremental work to map the tabular reconciliation disclosure to specific line items on the balance sheet.
BDO will continue to monitor this project and provide input to the FASB.
For questions related to matters discussed above, please contact:
National Assurance Group: Adam Brown
or Patricia Bottomly
National Tax ASC 740 Group: Yosef Barbut
or Ingo Harre
1 ASC 740-10-50-15A(a)(1) through (4)
2 ASC 740-10-50-15A(b)
3 ASC 740-10-50-15(c )
4 ASC 740-10-50-15(d)(1) through (3)
5 ASC 740-10-50-15(e)
6 ASC 740-10-25-6 through 25-12
7 ASC 740-10-45-10A through 45-10B
8 ASC 740-10-45-12