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FASB Income Tax Disclosure Framework: A Disclosure Framework — Part 2

Sept. 15, 2020, 8:46 AM

The Financial Accounting Standards Board is still on its journey to provide a final Accounting Standards Update for changes to its disclosure requirements for income taxes. The effort has been underway for four years, having been delayed by the 2017 tax law, then the global pandemic.

This is the second part of a two-part look at the numerous challenges FASB has faced in the process—including ever-evolving and increasingly complex tax rules—as well as what the solution going forward should look like.

Again, the ultimate goal should be simple: sustainable consistency for reporting in current and future periods.

Part 1, which focused on the benefits and complexities of the update, left off with the idea that providing relevant disclosure of the income tax provision should contemplate principles-based tax law changes for the user of financial statements, for which disaggregation has diminishing investor value.

Retroactive reporting is not a useful measure for future operations due to the unprecedented changes in tax laws with still-evolving guidance on interpretation. Rather, FASB’s objective should be forward-looking to add meaningful value to interpret financial statements.

The disclosure of income taxes should achieve objectives set forth in guiding principles thereby aligned with financial principles. Disclosure of material changes in the tax provision, as compared with prior periods, also should conform to the Securities and Exchange Commission’s Regulation S-X, which details financial reporting requirements.

Regulation S-X already requires an explanation of year-to-year significant changes for tax rate reconciling items, prescribing separate disclosure for any reconciling item that amounts to more than 5% of the amount derived by multiplying pretax book income/loss by the applicable statutory federal income tax rate.

Significant changes in the tax provision from period to period are disclosed in the MD&A section, resulting in duplicative footnote disclosures. Modifying a company’s accounting systems would require significant time for additional reporting, as the systems were not generally designed to keep pace with the global change in tax laws, and such information would generally not add significant value for a reader of the financial statements.

Additionally, some current standards have become less useful, including forward-looking projections of unrecognized tax benefits that are subjective and pose additional risks in making decisions about income taxes. Proposed disaggregation concepts generally involve significant costs and potential dissimilar processes of determination which clearly outweigh possible benefits to the users of financial statements, requiring measurement against the objectives set forth in the guiding principles.

Recommended Guiding Principles:

  • Disclosures for public business entities subject to SEC reporting should conform to SEC Regulation S-X. This conformity provides consistency and efficiencies for interpretation, representing a cost-benefit value-add.
  • Additional disclosures regarding Tax Cuts and Jobs Act or future tax legislation should not be separately adopted. As an example, the CARES Act enacted temporary provisions overriding legislative provisions of the TCJA. New regulations are still evolving, which impact TCJA and other provisions, thus the ability to interpret the interplay of such differences is unduly complex and would not render additional value to an investor.
  • Tabular disclosures should be relevant. Disclosures requiring separate tax carryover periods, accompanied by related deferred tax assets or valuation allowances involves subjectivity and complexity while not contributing to value-add information. Specific identification of tax attributes for carryovers represent non-intuitive rules, including specific identification of valuation allowances.
  • Hypothetical pro-forma and forward-looking statements should be avoided. As an example, potential changes in future amounts of unrecognized tax benefits is generally forward-looking and the variables upon which they rely may change. A foreseen material change to the financial statements would be separately disclosed as a “red-flag” warning to investors.
  • Valuation Allowances are complex, subject to judgment, and additional explanations or specific identifications are not a value-add disclosure. The rules for determining when, and if, a Valuation Allowance is recorded are complex and subject to judgment, including possible multi-year scheduling. This complexity is based upon ASC 740 guidance and non-intuitive.
  • Duplicative disclosures in the tax footnote and other sections of the financial statements should be avoided. For example, certain changes may be disclosed in MD&A, etc.
  • Disaggregation between federal, state and/or foreign jurisdictions for the income taxes paid disclosure is not a relevant disclosure item. The current disclosure for income taxes paid in aggregate is inherently distortive, due to myriad reasons including different timing rules for estimated income tax payments, audit adjustments, amended tax returns due to retroactive law changes, refunds, current and prior tax year inclusions, refund claims, etc. This disclosure does not provide a direct link, or bridge, to other financial statement items.
  • Separate country/state tax disclosures are not relevant for disclosure. Due to the interplay of federal, state and foreign tax provisions, separate jurisdictional disclosure is currently complex, and promises to represent an increasing future challenge. Specific jurisdictional disclosures may include consolidated, regional and global allocations, formulaic apportionments, different tax bases, etc. that may, or may not, represent the actual business operations in a specific jurisdiction.
  • Restatement of prior period disclosures are elective and not required. A multinational enterprise’s historical operations, includible lines of business, acquisitions, divestitures, divergence in tax laws and regulations, among others, are not determinative factors of future trends to necessitate prior year disclosures. Additionally, Covid-19 represents a new world and change in thinking for most multinationals, resulting in operations that will be different for current and future years and not based on a historical trend relationship or elements of tax disclosures.
  • Effective dates should allow one year-end for transition, with the following year-end applicable for adoption. Early adoption would be permitted.

Going Forward

FASB has been forced to be very patient in effecting this set of tax disclosures, allowing time to provide and review comments as well as considering significant new legislation that would impact this process.

And in the interim, global business has experienced significant transformation.

A set of guiding principles would enhance this transformation and deliberative process, providing a basis of conformity upon which final rules are adopted. The principles would represent a platform for evolving changes, resulting in benefits to the investor while embracing changes to the evolving landscape.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information
Keith Brockman is a CPA, CGMA, and authors a Best Practices international tax blog at strategizingtaxrisks.com. He is a frequent presenter at international tax conferences, having over 30 years of experience as a corporate tax executive. He has served on tax committees in the U.S. and Europe with Tax Executives Institute and Manufacturers Alliance for Productivity and Innovation.

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