Financial statement

presentation & disclosure

Chapter summary revised June

2015
ASC 740 not only provides guidance on the
calculation of income tax expense, but also
includes requirements for the presentation in
the financial statements of the tax provision,
uncertain tax positions, and deferred tax
assets and liabilities.

Chapter summary revised June

2015
In addition to the information provided on
the face of the financial statements, certain
disclosures must be made according to the
standard.

Balance sheet presentation of

deferred taxes revised June 2015
Principles of balance sheet classification
revised June 2015
Guidance can now be found in FSP 16
Valuation allowance and balance sheet
classification revised June
Guidance can now be found in FSP 16.3.2
and FSP Example 16-1.

Balance sheet presentation of

deferred taxes revised June 2015
Offsetting and multiple jurisdictions
revised June 2015
Guidance can now be in FSP 16.3.3 and
FSP Question 16-1.
Contingencies and uncertain tax positions
revised June 2015
Guidance can now be found in FSP 16.7.

Balance sheet disclosures revised

June 2015
Guidance can now be found in FSP 16.

Income statement presentation

revised June 2015
Guidance can now be found in FSP
sections 16.516.5.1.
Deferred tax expense or benefit revised
June 2015
Guidance can now be found in FSP
sections 16.516.5.1.
Interest and penalties revised June 2015
Guidance can now be found in FSP

Income statement presentation

revised June 2015
Interest and penalties revised June 2015
Guidance can now be found in FSP
16.5.2.
Professional fees revised June 2015
Guidance can now be in found in FSP
16.5.3.

Income statement presentation

revised June 2015
Change in tax laws, rates, or status revised
June 2015
Guidance can now be found in FSP 16.5.4
and FSP Example 16-3.
Income taxes and net income attributable to
non-controlling interests revised June 2015
Guidance can now be found in FSP 16.5.5
and FSP Example 16-4.

Income statement disclosures

revised June 2015
Guidance can now be found in FSP 16.

Disclosures for uncertain tax

positions revised June 2015
Annual disclosures revised June 2015
Guidance can now be found in FSP
16.7.2 16.7.4.
Disclosure of accounting policy on
classification of interest and penalties
revised June 2015
Guidance can now be found in FSP
16.5.2.

Disclosures for uncertain tax

positions revised June 2015
Total amount of interest and penalties
recognized in the statement of operations and
total amount of interest and penalties recognized
in the statement of financial position revised
June 2015
Guidance can now be found in FSP 16.5.2.
Reasonably possible significant changes in
unrecognized tax benefits that may occur within
the next 12 months revised June 2015
Guidance can now be found in FSP 16.7.3.

Disclosures for uncertain tax

positions revised June 2015
Tax years still subject to examination by a
major tax jurisdiction revised June 2015
Guidance can now be found in FSP 16.7.6.
Tabular reconciliation of unrecognized tax
benefits revised June 2015.

Comprehensive basis revised June 2015

Guidance can now be found in FSP
16.7.4.

Disclosures for uncertain tax

positions revised June 2015
Disclosure of gross unrecognized tax
benefits revised June 2015
Guidance can now be found in FSP
16.7.4.6 and FSP Example 16-10.
Interest and penalties revised June 2015
Guidance can now be found in FSP
16.7.4.6.

Disclosures for uncertain tax

positions revised June 2015
Treatment of deposits revised June 2015
Guidance can now be found in FSP
16.7.4.6.
Required information revised June 2015
Guidance can now be found in FSP
16.7.4.

Disclosures for uncertain tax

positions revised June 2015
The gross amounts of increases and
decreases in unrecognized tax benefits as a
result of tax positions taken during a prior
period revised June 2015
Guidance can now be found in 16.7.4.1.

Disclosures for uncertain tax

positions revised June 2015
Increases and decreases in unrecognized tax
benefits recorded for positions taken during
the year revised June 2015
Guidance can now be found in FSP 16.7.4.2
and FSP Question 16-5.

Disclosures for uncertain tax

positions revised June 2015
The amounts of decreases in the
unrecognized tax benefits relating to
settlements with taxing authorities revised
June 2015
Guidance can now be found in FSP 16.7.4.3
and FSP Example 16-6.

Disclosures for uncertain tax

positions revised June 2015
Reductions to unrecognized tax benefits
resulting from a lapse of the applicable
statute of limitations revised June 2015
Guidance can now be found in FSP 16.7.4.4
Unrecognized tax benefits that, if recognized,
would affect the effective tax rate revised
June 2015
Guidance can now be found in FSP 16.7.5.

Income tax related disclosures for stock

compensation revised June 2015
Guidance can now be found in FSP 15.4.6.

Significant risks & uncertainties

disclosure revised June 2015
Guidance can now be found in FSP 16.8.4.

SEC disclosures revised June

2015
SEC disclosures that are required in SEC
filings but are outside of the financial
statements, and are most applicable to a
broad range of reporting entities.

SEC disclosures revised June

2015
Additional footnote disclosures revised
June 2015
Guidance can now be found in FSP 16.6.4.

SEC disclosures revised June

2015
Contractual obligations table
The SEC concluded that, in accordance
with SEC Regulation S-K Item 303(a)(5),
liabilities for unrecognized tax benefits
should be considered when a registrant
prepares the contractual obligations table.

SEC disclosures revised June

2015
Contractual obligations table
There are various formats that those
disclosures might follow. Deciding which
of the various formats should be used is a
matter of professional judgment.

SEC disclosures revised June

2015
Contractual obligations table
However, the ultimate goal of the disclosures
is to provide transparent information that
enables investors to understand the impact of
uncertain tax positions on the companys
liquidity

SEC disclosures revised June

2015
Contractual obligations table
If a company can make reliable estimates
about the periods in which cash outflows
relating to its liabilities are expected to occur,
it should include those estimates in the
relevant columns of the contractual obligations
table.

SEC disclosures revised June

2015
Contractual obligations table
For instance, any liabilities classified as a
current liability in the companys balance
sheet should be presented in the Less than
1 Year column of the contractual
obligations table.

SEC disclosures revised June

2015
Contractual obligations table
If, however, a company cannot make
reliable estimates of the cash flows by
period, the company should consider
alternative methods of conveying relevant
information to investors.

SEC disclosures revised June

2015
Contractual obligations table
For instance, the company might consider
including its liabilities in an all other
column in the table (with a transparent note
disclosure). Alternatively, the company might
rely on a note disclosure alone (including
quantitative information).

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
Companies are required to disclose in
quarterly reports any material changes to
contractual obligations that occur outside
the ordinary course of business.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
The method by which any material
changes are disclosed is a matter of
professional judgment.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
A company should evaluate whether the
inclusion of liabilities for unrecognized tax
benefits in its disclosures of contractual
obligations represents a material change to
its prior disclosures.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
If including the liabilities does, in fact,
represent a material change, the company
should use judgment to determine the
appropriate means of conveying this
information to investors.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
The SECs management discussion and
analysis (MD&A) rules do not specifically
require companies to include the
contractual obligations table in quarterly
reports.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
However, the inclusion of an updated table
is one way to effectively disclose material
changes.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
Another method provides in the
contractual obligations disclosures a
discussion of the impact of the liabilities.

SEC disclosures revised June

2015
Interim reporting (form 10-Q filings)
As noted above, the ultimate goal of the
disclosures is to provide transparent
information that enables investors to
understand the impact of uncertain tax
positions on the companys liquidity.

SEC disclosures revised June

2015
Schedule II requirement
In addition to the disclosure requirements
mentioned, S-X Rule 5-04 requires that
valuation allowance details be provided on
Schedule II, as prescribed in Rule 12-09.

SEC disclosures revised June

2015
Schedule II requirement
If the information required by Schedule II
is otherwise provided in the financial
statements or notes, the schedule can be
omitted.

SEC disclosures revised June

2015
MD&A disclosures
SEC registrants must also make certain
disclosures related to income taxes in the
MD&A of SEC filings.

SEC disclosures revised June

2015
Effective tax rate
In their MD&A, registrants should explain the
reasons for significant changes in the effective
income tax rate from year to year and the
effect that income tax payments would have
on liquidity and capital resources.

SEC disclosures revised June

2015
Effective tax rate
In addition, qualitative disclosures related to
an entitys effective tax rate should be
carefully considered in each period.

SEC disclosures revised June

2015
Effective tax rate
For example, absent commentary to the
contrary, a reader of the financial statements
should be entitled to assume that an entitys
effective tax rate for the most recent periods
will continue into the near-term future.

SEC disclosures revised June

2015
Effective tax rate
If items impacting the effective rate in the
current period will not recur in such a way
that the expected tax rate will be substantially
different going forward, MD&A disclosure of
the one-time items is required.

SEC disclosures revised June

2015
Effective tax rate
This will be the case regardless of whether
the items are significant enough to require
separate disclosure in the effective tax rate
reconciliation.

SEC disclosures revised June

2015
Accounting estimates & contingencies
In December 2003, the SEC issued FRR 72 to
remind companies of existing SEC guidance
and to provide additional guidance,
interpretation, and requirements related to
MD&A disclosures, as specified in Items 303
of Regulations S-K and S-B.

SEC disclosures revised June

2015
Accounting estimates & contingencies
However, FRR 72 does not amend existing
disclosure requirements and it provides
interpretive guidance on three focused areas,
one being critical accounting estimates.
Although not

SEC disclosures revised June

2015
Accounting estimates & contingencies
specifically stated, we believe that this includes
tax contingencies.

SEC disclosures revised June

2015
Accounting estimates & contingencies
The interpretation provides that the MD&A
should, among other things, supplement the
description of estimates already provided in
the accounting policy section of the notes to
the financial statements.

SEC disclosures revised June

2015
Accounting estimates & contingencies
Including such factors as how the entity arrived
at the estimate, how accurate the
estimate/assumption has been, how much the
estimate/assumption has changed from the past,
and whether the estimate/ assumption is
reasonably likely to change in the future.

SEC disclosures revised June

2015
Realization of deferred tax assets
The SEC requires certain disclosures with
respect to deferred tax assets in certain
circumstances. The following is a transcript of
comments made by the SEC at the AICPA
Conference on Current SEC Developments on
January 12, 1993:

SEC disclosures revised June

2015
Realization of deferred tax assets
The SEC staff would insist that a registrant
provide additional disclosures regarding the
realization of its deferred tax asset in those
situations in which the deferred tax asset
comprises a significant portion of the
registrants total assets, cont.

SEC disclosures revised June

2015
Realization of deferred tax assets
Cont... and/or stockholders equity and it is not
apparent that the registrants existing level of
income would be sufficient to realize the deferred
tax asset.

SEC disclosures revised June

2015
Realization of deferred tax assets
If realization of a material deferred tax asset
will require material improvements in
profitability, or material changes in trends, or
material changes in the relationship between
reported pretax income, cont.

SEC disclosures revised June

2015
Realization of deferred tax assets
Cont. and federal taxable income, or material
asset sales or similar non-routine transactions,
the staff believes that a discussion in MD&A of
these factors is necessary.

SEC disclosures revised June

2015
Realization of deferred tax assets
The staff believes that the registrant should
provide sufficient disclosures in MD&A to
inform the reader as to what factors and
assumptions led management to arrive at its
conclusion that the deferred tax asset would be
realized in the future.

SEC disclosures revised June

2015
The staff recommended that the following
disclosures be provided in MD&A:
1. A discussion of the minimum amount of future
taxable income that would have to be generated
to realize the deferred tax asset and whether the
existing levels of pretax earnings for financial
reporting purposes are sufficient to generate that
minimum amount of future taxable income.

SEC disclosures revised June

2015
If not sufficient, a discussion of the extent of the future
increase in profitability that is necessary to realize the
deferred tax asset, quantified to the extent possible, and
the significant assumptions relied upon by management
in concluding that it is more-likelythan-not that the
results of future operations will generate sufficient
taxable income to realize the deferred tax asset.

SEC disclosures revised June

2015
For example, anticipated improvements in
profitability resulting from improved gross
margins, additional store openings, cost reduction
programs, and corporate restructurings.

SEC disclosures revised June

2015
2. The historical relationship between pretax
earnings for financial reporting purposes and
taxable income for income tax purposes,
including a discussion of the nature and
amount of material differences between such
amounts.

SEC disclosures revised June

2015
A table reconciling pretax income to taxable
income for each of the years for which financial
statements are presented has been used to
accomplish this objective.

SEC disclosures revised June

2015
3. A discussion of tax-planning strategies that
would be available to generate future taxable
income if the registrant were unable to
generate sufficient future taxable income from
ordinary and recurring operations.

SEC disclosures revised June

2015
4. The annual amounts of net operating loss
carryforwards for income tax purposes that
expire by year.

SEC disclosures revised June

2015
At the 1994 Conference, the staff added that
disclosures regarding significant deferred tax
assets arising from deductible temporary
differences such as OPEBs should include the
expected timing of reversal of those temporary
differences.

SEC disclosures revised June

2015
The staff recognized that estimates may be
required since there are no actual expiration
dates for the deductible temporary differences
and that less precise disclosures would need to
be accepted in certain circumstances.

SEC disclosures revised June

2015
For example, disclosures regarding significant
deferred tax assets arising from deductible
temporary differences might provide annual
reversals by year of significant deductible
temporary differences that give rise to deferred
tax assets for the first five years, followed by
groupings for subsequent five-year periods.

Exemptions for nonpublic entities

revised June 2015
Guidance can now be found in FSP 16.9.