Tax Accounting Services Income tax disclosure
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www.pwc.com/us/tas
Tax Accounting Services
Income tax disclosure
December 2013
Tax Accounting ServicesWhy disclosure
Overview the information that is most important include the indefinite reinvestment of
to users. The FASB intends the foreign earnings, effective tax rate
Users of financial statements continue framework to promote more consistent reconciliations, the assessment of
to emphasize the importance of decisions around disclosure deferred tax assets, and uncertain tax
informative, decision-useful requirements. positions.
disclosures. This focus often extends to
the reporting of income taxes, a Earlier this month, the FASB Lawmakers’ focus on disclosure
material component of most financial announced that it will seek further
input on certain income tax areas noted Income tax disclosure continues to be a
statements. Tax laws can be difficult to
in a recently completed Financial hot topic with lawmakers around the
understand due to their complexity,
Accounting Foundation report as world. Their focus has similarly been
compounded by the multitude of taxing
presenting difficulties for users. on reported effective tax rates, country-
jurisdictions throughout the world.
Specifically, information enabling by-country reporting transparency,
Connecting the effects of those laws
users to analyze income tax cash flows uncertain tax positions, and reinvested
with financial accounting principles
and the effects of indefinitely foreign earnings. Included in the
adds to the challenge.
reinvested foreign earnings. Dodd-Frank Wall Street Reform and
Numerous income tax accounting Consumer Protection Act are certain
matters require the use of estimates, IASB’s focus on disclosure country-by-country tax reporting
judgments, and other subjective provisions adopted by the SEC in
The International Accounting
information that can obscure the August 2012. They require SEC-listed
Standards Board (IASB) held a
presentation in the financial statement companies in the extractive sectors to
discussion forum in London earlier this
accounts. Clarifying disclosures can disclose, on a country-by-country
year and released a paper in May 2013,
enable users to gain a better basis, certain payments made to
Discussion Forum – Financial
understanding of the reporting entity’s governments. In early 2013, the
Reporting Disclosure Feedback
income tax environment. European Union (EU) enacted EU
Statement, outlining the initiatives they
Capital Requirements Directive IV,
Today’s financial reporting users expect to undertake. The actions
which includes provisions that will
represent a spectrum of stakeholders include steps to address materiality
require all banks, other credit
including investors, lenders, regulators, considerations and the challenges
institutions, and certain investment
accounting standard setters, analysts, associated with providing effective
firms to publish detailed financial data
researchers, and legislative or public disclosure.
on a country-by-country basis.
policy-making bodies around the
world. The business environment and SEC’s focus on disclosure Widespread relevance
user expectations have evolved such The Securities and Exchange
that companies are encouraged to Financial reporting disclosures are a
Commission (SEC) recently announced
communicate more effectively about key mechanism for communicating
its plan to hold roundtable discussions
their income tax profile. with stakeholders. Disclosures go
with its varying constituents on the
beyond the reporting of numbers in the
FASB’s focus on disclosure subject of disclosure. In October 2013,
financial statements, providing an
Mary Jo White, Chair of the SEC, gave
opportunity for a company to tell
The Financial Accounting Standards a speech to the National Association of
its story.
Board (FASB) has a large-scale Corporate Directors where she
disclosure framework project in expressed the need for continued focus While the disclosure requirements are
progress. A discussion paper was on disclosure requirements to ensure different for non-public entities,
issued on July 12, 2012 followed by a they are providing effective and useful effective disclosure can be of equal
comment period. The FASB is information to users. At the same time, importance. In addition, entities
currently reviewing the feedback, while she cautioned against information expecting to become public, as well as
developing a decision process for overload, which can confound users. regulated filers such as hedge funds,
establishing disclosure requirements. will often consider disclosure from a
The SEC staff continues to focus on
With the framework project, the FASB perspective comparable to that of
disclosures in comment letters issued
hopes to improve the effectiveness of public companies.
to registrants. In connection with
disclosures in the notes to financial
income taxes, frequent comment areas
statements by clearly communicating
2 | Tax Accounting ServicesWhen and where to disclose
When to disclose through which management must business combinations, stock-based
evaluate subsequent events. Even compensation, and foreign currency.
The presentation of financial if a subsequent event is not
statements in conformity with US recognized in the financial Where to disclose
generally accepted accounting statements, it may be necessary to For US public companies subject to
principles (US GAAP) includes proper disclose the nature of the event and SEC reporting requirements,
disclosure. an estimate of its financial effects, disclosures may be found in annual and
The following Accounting Standards or include a statement that such an quarterly filings such as the Forms
Codification (ASC) topics provide estimate cannot be made 10-K or 10-Q. A company’s annual
general guidelines regarding ASC 250, Accounting Changes filing includes the audited financial
disclosure requirements: and Error Corrections, requires statements and a narrative containing
disclosure of a change in management’s description of the
ASC 205, Presentation of company’s performance, activities, and
Financial Statements, describes accounting principle (including an
explanation of why the newly liquidity. If a significant event occurs
the benefits of presenting outside the annual and quarterly filing
comparative financial statements adopted accounting principle is
preferable), the method of periods, a Form 8-K filing may be
instead of single-period financial necessary.
statements, and addresses how the applying the change, and any
comparative information and material indirect effects of the Public companies typically also issue
related disclosures should be change. When financial statements press releases and conduct ‘earnings
presented. This includes disclosure are restated to correct an error, calls’ to disclose information to users.
of changes due to reclassifications disclosure should include a Companies should be aware of what
or other reasons that affect the description of the nature of the others in their industry are disclosing
manner of, or basis for, presenting error and may consider disclosing
information through industry-specific
corresponding items for two or ASC 270, Interim Reporting,
more periods publications. Non-authoritative sources
provides guidance on accounting
may also be useful references for
ASC 235, Notes to Financial and disclosure issues specific to
disclosure, including the American
Statements, sets forth guidelines interim reporting and minimum
Institute of Certified Public
disclosure requirements for interim
for the content and format of Accountants’ US GAAP Financial
financial statements of public
disclosures of accounting policies Statements – Best Practices in
companies
ASC 275, Risks and Uncertainties, Presentation and Disclosure.
requires reporting entities to In addition to the general guidelines,
Non-public entities may limit their
disclose information about the specific disclosure requirements are
disclosure considerations to those
risks and uncertainties resulting prescribed within numerous accounting
specified in the authoritative
from the nature of their topical standards. With respect to
accounting guidance. In some
operations, the use of estimates in income taxes, ASC 740, Income Taxes,
instances, the guidance differs from the
preparing financial statements, and requires certain financial statement
requirements for public companies.
significant concentrations in footnote disclosures. These are
Non-public entities that anticipate
certain aspects of the entity’s augmented by SEC footnote
seeking public capital or otherwise
operations requirements for public companies. In
wish to report in a more publicly
addition, there are tax-related footnote
comparable manner may expand their
ASC 855, Subsequent Events, disclosures required under other
disclosure considerations.
prescribes the date of issuance for standards, such as those relating to
financial statements and the date
Tax Accounting Services | 3Management’s discussion and analysis of
financial condition and results of operations
Overview Discuss management’s key With respect to deferred taxes,
performance indicators, including discussion of the expected timing of
Our journey through Form 10-K begins non-financial performance future tax cash flows may be useful.
with management’s discussion and indicators, that are used to operate Disclosure is also expected to indicate
analysis (MD&A). In recent years, this the business and that may be potential tax costs that would be
opening section of registrant filings has relevant to users incurred if foreign cash or cash
garnered frequent comments from the equivalents were needed to fund US
SEC staff. Identify and disclose known obligations or contingencies.
trends, events, demands,
MD&A disclosure is guided by three commitments, and uncertainties Effective tax rate
principal objectives: that are reasonably likely to have a
material effect on a company’s As discussed later, the effective tax rate
To provide a narrative explanation (ETR) is based upon the reported
of a registrant’s financial financial condition or operating
performance amount of income tax expense
statements that enables investors to attributable to continuing operations.
see the registrant through the eyes Provide disclosure of information Discussion should provide users with
of management not only responsive to MD&A an understanding of the key underlying
To enhance the overall financial requirements, but which explains factors reflected in the ETR
disclosure and provide the context management’s view of the reconciliation. Registrants should
within which financial information implications and significance of explain the reasons for significant
should be analyzed that information changes in the ETR from year to year.
It is presumed that reported results will This may include discussion of
To provide information about the significant changes that may occur in
quality and potential variability of be fairly consistent over the near/mid-
term horizon to the best of the future. Additionally, registrants
a registrant’s earnings and cash should provide a discussion of unusual
flows, so that investors can management’s knowledge. To the
extent that additional information is and infrequent items impacting the
ascertain the likelihood that past ETR reconciliation.
performance is indicative of known by management that may
future performance impact this presumption, discussion International operations
within MD&A is encouraged in order
The discussion should be from the to provide appropriate context and Registrants should consider discussion
perspective of management rather than timely warning to readers. of significant income tax implications
that of one department, specific relating to international operations
employees, or even the corporate Since MD&A should provide and/or foreign income tax rates, which
board. Obtaining broad organizational clarifying discussions to enhance the may include:
input can be instrumental to distilling usefulness of the financial statements,
key considerations and providing it should not repeat or contradict Tax holidays and other
clarification that is not otherwise content already contained within government tax incentives
apparent within the filing. In another part of the filing; it should not Certain transfer pricing
determining whether commentary be generic in nature; it should not focus arrangements, particularly where
within MD&A is appropriate, consider on immaterial events or transactions; minority investors or other
the following steps: and it should not dilute the user’s unrelated parties are affected
understanding. Disclosure is about the
Focus on materiality and quality, not quantity, of information. Advance pricing agreements
relevance, eliminating immaterial Restructuring activities or
information that does not promote Cash flows and liquidity potential business changes that
an understanding of a company’s Registrants should explain significant may impact the mix of US and
financial condition, its liquidity matters impacting cash flows and foreign income
and capital resources, or changes capital resources. For example, in the
in its financial condition and Disclosure can provide users with
event there are significant cash flows insight into the risks and opportunities
results of operations (both in the related to windfall tax benefits from
context of profit and loss and relevant to an organization based on
stock-based compensation, discussion how it conducts its cross-border
cash flows) within MD&A may be appropriate. business and which taxing jurisdictions
4 | Tax Accounting Servicesare of major significance to the The SEC staff has recommended that across and between a broad spectrum
organization. the historical relationship between pre- of models that often require significant
tax earnings and taxable income, judgment.
The SEC staff has emphasized the
including the nature and amount of Specifically, factors to consider for this
importance of transparency with
material differences, be disclosed. disclosure include:
respect to undistributed foreign
Likewise, a discussion regarding tax-
earnings. They have been regularly How the company arrived at the
planning strategies that would be
asking companies to disclose the estimate/assumption
available to generate future taxable
specific factors and plans considered in
support of indefinite reinvestment
income and the timing of the reversal How accurate the estimate/
of significant deductible temporary assumption has been in the past
assertions.
differences should be considered. How much the estimate/
Realizability of deferred tax Changes in valuation allowances, assumption has changed in the past
assets whether recording or releasing an Whether the estimate/assumption
allowance, should be explained. The is reasonably likely to change in
Registrants should consider discussion SEC staff expects that such changes the future
of the organization’s assessment of the would not only have been
realizability of deferred tax assets Many organizations include income
foreshadowed in prior disclosure, but
(DTAs). If there are recent cumulative taxes within this section of MD&A due
that support for changes in the accounts
losses in a jurisdiction with significant to the judgmental nature of the
be discussed in detail.
DTAs, consider explaining why no accounting estimates and assumptions
valuation allowance was established. If Contractual obligations table management must make. Common
not explained in the footnotes, examples include valuation allowance
emphasis should be given in MD&A to Liabilities for unrecognized tax assessments, indefinite reversal
the evidence considered by benefits should be considered when a assertions for unremitted earnings of
management and the weighting registrant prepares the contractual foreign subsidiaries, and tax
accorded to each component of obligations table. There are various examination developments.
evidence in reaching its conclusion. formats that these disclosures might
follow. However, the ultimate goal of Forward-looking disclosure
In the event it is not apparent that an the disclosures is to provide transparent
organization’s existing level of income Consideration should be given to tax-
information that enables investors to
for a particular jurisdiction is sufficient related events or uncertainties that
understand the impact of uncertain tax
could be of a material nature. This may
to realize its DTAs, the following positions on the company’s liquidity.
should be discussed: include proposed tax legislation that
Critical accounting estimates could significantly impact
The minimum amount of future management’s judgments and
taxable income needed (e.g., Registrants should provide a discussion decisions. Many companies track
extent of the future increase in of critical accounting estimates, legislative proposals significant to their
profitability needed) assumptions, and uncertainties within organizations and denote significant
MD&A to serve as a supplement to the tax implications that could result if
Management’s assumptions in accounting policy section of the notes such proposals were enacted. The
concluding it is more-likely-than- to the financial statements. This emphasis would be on the potential
not that the results of future discussion should not be repetitive or a effect of such developments on the
operations will generate sufficient replacement of the financial statement variability of earnings, financial
income footnote discussion. It should include a condition, and liquidity.
discussion of the process management
used to apply decision frameworks
Tax Accounting Services | 5Notes to the financial statements
Accounting policies ETR reconciliations Other common ETR differentials
include:
ASC 235 is a generic disclosure Public entities must disclose a
standard that applies to all entities reconciliation (using percentages or Change in valuation allowance
issuing financial statements under US dollar amounts) of the reported amount Change in unrecognized tax
GAAP. This standard addresses the of income tax expense attributable to benefits from uncertain tax
disclosure of the accounting policies continuing operations for the year to positions
judged by management to most fairly the amount of income tax expense that
present the entity’s financial would result from applying the Dividends-received deduction
statements. domestic federal statutory tax rate to Stock-based compensation
pre-tax income from continuing shortfalls
It requires that disclosure identify and
operations. The statutory tax rate Goodwill impairments or tax
describe the accounting principles
should be the regular tax rate if there amortization
followed by the entity and the methods
are alternative tax systems. The
of applying those principles that Permanent differences and tax
estimated amount and the nature of
materially affect the determination of credits
each significant reconciling item
financial position, cash flows, or
results of operations. The disclosure
should be disclosed. A non-public Effects of intercompany asset
entity must disclose the nature of transfers
encompasses important judgments as to
significant reconciling items but may
the appropriateness of accounting
omit a numerical reconciliation. Foreign currency translation and
principles and methods that involve transactions
any of the following: ASC 740 does not define what
constitutes a ‘significant’ item in the Matters disclosed with the ETR
A selection from existing rate reconciliation. However, Rule 4- reconciliation may also be relevant to
acceptable alternatives 08(h) of SEC Regulation S-X requires other parts of the filing such as
Principles and methods peculiar to disclosure of individual reconciling MD&A. Organizations should ensure
the industry in which the entity items that are more than 5% of the consistency of such disclosures
operates, even if such principles amount computed by multiplying pre- throughout their filing as well as with
and methods are predominantly tax income by the statutory tax rate all other financial information made
followed in that industry (e.g., for a US-based entity subject to available (e.g., earnings calls,
the 35% statutory tax rate, any item information on company websites, and
Unusual or innovative applications investor presentations).
of US GAAP that increases or decreases the tax rate
by 1.75%). Care should be taken to Dual-rate jurisdictions and
The significant accounting policies ensure that items are not disaggregated
disclosure of many companies includes or aggregated to avoid this hybrid taxes
income tax policies. The extent of the requirement, and that reconciling items Certain jurisdictions tax corporate
disclosure, including the level of depth below this threshold are displayed in income at different rates, depending on
and specific income tax topics covered, appropriate categories. While whether (and, in some cases, when)
varies among financial statement groupings should generally be that income is distributed to
preparers. Income tax policies often consistent from year to year, when a shareholders. A jurisdiction may have a
included in this disclosure are: change to a grouping is appropriate an tax system under which a credit for
accompanying explanation should taxes previously paid is provided when
Assertions regarding undistributed
be considered. dividends are paid. Conversely, in
foreign earnings
An area of increasing user interest is other jurisdictions the ‘distributed’ rate
Assertions regarding cross-border the foreign tax rate differential. This exceeds the ‘undistributed’ rate, and
intercompany loans and the related reconciling line item should reflect additional taxes are due whenever
foreign currency accounting activity resulting from foreign tax income is distributed to shareholders.
implications rates. The foreign rate differential is There should be disclosure of the rate
Effects of intercompany asset not intended to capture all items that applied in measuring current and
transfers may have a related foreign tax deferred taxes. When dividends are
Policy election for classification of consequence. declared, any additional tax (or benefit)
tax-related interest and penalties should be considered for presentation
in the ETR reconciliation.
6 | Tax Accounting ServicesDisclosure should also be considered Other required disclosures relating to separately allocated to items that are
with respect to other types of hybrid deferred tax balance sheet accounts included in other categories, such as
tax systems that similarly require an include: discontinued operations, other
assessment of the appropriate tax rate. comprehensive income, and
This includes: The nature and effect of any extraordinary items.
significant matters affecting
Alternative income-based comparability of information for The amount of income tax expense or
calculations all periods presented (unless benefit allocated to continuing
otherwise evident from other operations would ordinarily be shown
Higher of a tax based on income or
disclosures) on the face of the income statement.
a tax based on another measure
The significant components of income
(such as a gross receipts or capital- Any portion of the valuation
tax expense attributable to continuing
based computation) allowance for DTAs for which
operations for each year presented are
Branch profits taxes subsequently recognized tax
to be disclosed in the financial
benefits will be credited directly to
statements or footnotes. Those
Balance sheet disclosures contributed capital
components may include:
ASC 740 and SEC regulations require Tax carryforwards Current tax expense or benefit
the disclosure of gross DTAs, gross Companies are required to disclose the
deferred tax liabilities (DTLs), the Deferred tax expense or benefit
amounts and expiration dates of loss
valuation allowance, and the net (exclusive of the effects of other
and tax credit carryforwards. This
change in the valuation allowance. This components listed below)
would include the nature and potential
disclosure requirement would not apply effects of any tax law provision that Unrecognized tax benefits from
to deferred tax charges related to might limit the availability or uncertain tax positions
intercompany transactions and deferred utilization of those carryforward
tax credits arising from leveraged Research and investment tax
amounts (e.g., limitations caused by credits
leases. change in ownership).
Government grants (to the extent
Management may find it prudent to The disclosure of such tax attributes recognized as a reduction of
indicate in the financial statements the should also reflect unrecognized tax income tax expense)
extent to which realization of DTAs is benefits that would reduce the amounts
dependent on projections of future claimed or reported in the tax returns. Benefits of loss or other tax
taxable income. In addition, Regulation Companies may wish to disclose the carryforwards
S-X Rule 5-04 requires that valuation claimed tax return amounts as well as Tax expense that results from
allowance details be provided on the amount that excludes the effects of allocating certain tax benefits
Schedule II, as prescribed in Rule 12- unrecognized tax benefits. directly to contributed capital
09, if it is not otherwise provided in the
financial statements or notes. When a stock compensation award is Adjustments to valuation
settled, but a company cannot allowances
Public companies must disclose the recognize the tax benefit of a windfall
amounts of significant types of Adjustments to deferred taxes for
deduction because it did not reduce
temporary differences. Non-public changes in tax laws or tax status
income taxes payable, the
entities are not required to provide this carryforwards for which a DTA is
numeric information but must disclose
Foreign earnings
recorded may differ from the amount
the nature of significant items. available to the company. The In situations where a DTL has not been
Regulation S-X Rule 4-08(h) does not carryforwards related to windfall tax recognized because of the exception for
impose a mechanical hurdle for benefits will need to be tracked indefinite reinvestment, the following
determining which types of temporary separately, but will be included with information should be disclosed:
differences are significant. As a the other available carryforwards A description of the types of
practical benchmark, we believe that a disclosed in the footnotes. The amount temporary differences and the
particular type of temporary difference of carryforwards for which a benefit types of events that would cause
should be considered significant if its would be recorded in equity when those differences to become
deferred tax effects equal 5% or more realized should be disclosed. taxable in the parent’s home
of either total DTAs (i.e., before country jurisdiction
valuation allowance) or total DTLs, Income statement disclosures
whichever is greater. The cumulative amount of each
ASC 740 and SEC regulations require type of temporary difference; for
the disclosure of the amount of income example, the amount of unremitted
tax expense or benefit allocated to earnings and amount of cumulative
continuing operations and the amounts currency translation
Tax Accounting Services | 7 The estimated amount of earnings of foreign subsidiaries. If the indirect method of reporting cash
unrecognized DTL or a statement Disclosure may include assumptions flows is used, income taxes paid during
that the determination of such an that management uses to estimate its the period should be disclosed.
estimate is not practicable balance sheet and income statement tax
accounts. When it is reasonably Consideration should also be given to
For companies that do not disclose an possible that a material adjustment will disclosure of other significant
estimate of the unrecorded liability, the occur in the near term (generally assumptions that may be used, for
SEC staff has been requesting an considered approximately one year), example, to determine the
explanation as to why determination of the financial statements should disclose measurement of deferred taxes. An
an estimate is not practicable. Some this uncertainty along with a range of example of this is the expected manner
companies that had historically potential changes to its recorded of recovery (e.g., disposal versus
concluded that an estimate was not amounts. The premise of this distribution) used to measure a DTL
practicable have more recently begun disclosure requirement is that related to an equity method investment.
disclosing an estimate. significant one-time charges or
If it is reasonably possible that within benefits, such as a change in the Additional SEC disclosures
one year there will be a change in an assessment of the need for a valuation
allowance, should not surprise users. Several footnote disclosures required
indefinite reversal assertion (or in the
by the SEC are not specifically
expected method of recovery of an
investment in a domestic subsidiary), Other tax disclosures required by ASC 740. These include:
disclosure under ASC 275 may be ASC 740 requires public entities that The source of income (loss) before
required. If a foreign non-controlled are not subject to income taxes, tax expense (benefit) must be
investee becomes a subsidiary, because their income is taxed directly classified as foreign or domestic
disclosure should be considered with to their owners, to disclose that fact. In The amounts applicable to US
respect to the treatment of previously addition, there should be disclosure of federal income taxes, to foreign
recorded deferred taxes. the net difference between the tax income taxes, and to other income
Disclosure should also be considered in bases and the reported amounts of taxes, separately for each major
relation to earnings that are not eligible assets and liabilities. component of income tax expense
for home country tax deferral. For US (i.e., current and deferred)
Consistent with ASC 235, more
companies, that can include so-called specific income tax accounting policy If applicable, (1) the aggregate
‘subpart F’ earnings of foreign choices should also be considered for dollar and per-share effects of any
subsidiaries as well as foreign branch disclosure. In addition to other tax holiday and (2) the date on
earnings. The income tax accounting disclosures discussed in the context of which the special tax status will
model in each of these contexts can in particular topics, examples of such terminate
certain cases present policy choices policy choices in the income tax area These disclosure requirements apply
that should be considered for may include: not only to continuing operations, but
disclosure.
Effects of intercompany transfers also to total pre-tax income and total
Risks and uncertainties of indefinite-lived assets tax expense. However, overall
Investment tax credits and related disclosures of the components of total
ASC 275 requires disclosures in income tax expense (i.e., current vs.
financial statements of risks and deferred taxes on basis differences
deferred and US federal vs. foreign vs.
uncertainties (e.g., use of estimates) Temporary differences relating
other) are acceptable. It is not
that can help users in predicting future to partnerships necessary to make such disclosures
cash flows and results of operations.
The method of accounting for tax with respect to each of the different
This guidance is often relevant to categories (continuing operations,
leases and for recognizing revenue
income taxes in relation to areas such discontinued operations, extraordinary
and allocating income tax benefits
as valuation allowances and indefinite items, etc.) in which income tax
and asset costs to current and
reversal assertions for unremitted expense is reported.
future periods
8 | Tax Accounting ServicesUncertain tax positions
Disclosures for uncertain tax positions expects will change significantly reflected in the financial statements
require the use of professional within the next 12 months. Further, the (e.g., the tabular reconciliation of
judgment. While management might be quantitative reconciliation of unrecognized tax benefits) should be
concerned with including information unrecognized tax benefits required in based on the years for which the
in the financial statements that could be public company footnotes is prepared relevant income statements are
helpful to a taxing authority, users base on a worldwide aggregated basis. presented. Disclosures that are
their investment decisions on the same primarily forward-looking in nature
Disclosures should be provided for
financial statements. ASC 740 may be presented as of the most recent
each annual reporting period presented.
addresses this tension in part by balance sheet date only. If applicable,
To meet this requirement, disclosures
requiring a qualitative discussion of significant changes to the disclosures
related to historical information
only those positions that management would be reported in interim periods.
Topic Disclosure
Interest and Accounting policy for the classification of interest and penalties, either as components of income tax
penalties expense or as part of pre-tax income. In either case, however, they should not be included in the annual
tabular reconciliation disclosure because they are not considered unrecognized tax benefits.
Total tax-related interest and penalties recorded in the statement of operations and the total amount of
interest and penalties accrued as of the balance sheet date. Interest expense should be disclosed on a gross
basis, although interest income, as well as related tax benefits, can also be disclosed.
Significant The nature of uncertain positions and related events if it is reasonably possible that the positions and events
changes could change the associated recognized tax benefits within the next 12 months. This includes unrecognized
tax benefits that are expected to be recognized upon the expiration of a statute of limitations. Disclosure
should include an estimate of the range of the reasonably possible change or a statement that an estimate
cannot be made.
Examination All tax years that remain open to assessment by major tax jurisdictions.
years
Tabular Reconciliation of the beginning and ending balances of unrecognized tax benefits. This includes all
reconciliation unrecognized benefits, whether they are reflected in a liability, a decrease in a DTA (irrespective of whether
a valuation allowance would be required), or even an off-balance-sheet exposure such as an uncertain stock
option windfall benefit that has not been recorded because it has not yet reduced taxes payable.
Disclosure includes the following minimal line items (which can be further expanded by the preparer):
Gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken
during a prior period
Gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken
during the current period
Amounts of decreases in unrecognized tax benefits relating to settlements with taxing authorities
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations
A decrease in unrecognized tax benefits resulting from concessions or adjustments by the taxing authority
should be reflected as a change to prior-period unrecognized tax benefits. A settlement agreed with a taxing
authority as of year end should generally be shown, even though the actual cash or other form of payment is
made subsequent to year end.
Foreign currency The effects of currency translation on the line items within the tabular reconciliation may be presented as a
translation separate line item or included in the amount presented in each line item. Disclosure may include reference to
the manner of presentation.
Tax Accounting Services | 9Topic Disclosure
Impact to the The total amount of unrecognized tax benefits that, if recognized, would impact the ETR — that is,
ETR unrecognized tax benefits that would affect (if recognized) the tax provision within continuing operations.
This would generally not include (1) timing-related uncertainties, (2) windfall tax deductions from stock-
based compensation, and (3) measurement period adjustments. Supplemental disclosures should be
considered to indicate, for example, the amount of gross unrecognized tax benefits included in the ending
balance whose tax effects, if recognized, would be recorded in equity and/or goodwill.
Uncertain tax positions embedded in a loss or credit carryforward that carries a full valuation allowance
would not impact the effective tax rate on a net basis, as long as the uncertainty is expected to be resolved
while a full valuation allowance is maintained. A company may disclose that if the unrecognized tax benefit
is recognized, it would affect the ETR but then go on to indicate that, if recognized, such amounts are likely
to attract a full valuation allowance thereby offsetting the ETR impact.
Backwards With respect to uncertain tax positions relating to discontinued operations, extraordinary items,
tracing intercompany transactions, and items included in other comprehensive income, there may be policy choices
that should be considered for disclosure.
Subsequent Relevant developments occurring after the balance sheet date but before issuance of financial statements
events (including the discovery of information that was not available as of the balance sheet date) that affect
unrecognized tax benefits should be considered a non-recognized subsequent event. Accordingly, the effects
are not recorded in the current period financial statements, but an explanatory disclosure of the event and its
potential impact should be considered.
10 | Tax Accounting ServicesOther footnote disclosures
Stock-based compensation Foreign currency Gains and losses that are later
reclassified out of accumulated
Disclosures related to the tax effects of The amount of income tax expense or other comprehensive income into
stock-based compensation should benefit allocated to currency translation net income are disclosed along
include: must be disclosed on the face of the with their respective income tax
The amount of cash received from financial statements or in the notes. effects
exercise of share options (and There are several forms of acceptable
similar instruments) and the presentation. The policy applied with respect to
corresponding tax benefit realized clearing tax effects related to
Other foreign currency tax-related
from stock-based compensation available-for-sale securities
disclosures may include:
during the current year Business combinations
Disclosure of intercompany
The total compensation cost financing arrangements that are Several tax accounting policy elections
recognized in income, as well as considered to be of a long-term may be disclosed in connection with
the total recognized tax benefit for investment nature, the extent to business combinations, including:
each year for which an income which tax effects on the respective
statement is presented translation amounts have not been Consideration of whether acquired
recognized, and the types of events DTLs support realization of
Additionally, under both the direct and existing versus acquired DTAs
indirect methods of reporting cash that would cause the tax
flows, windfall tax benefits from stock- accounting to change Effects of a planned post-
based compensation should be Policy or assertions with respect to acquisition restructuring on the
classified as cash inflows from providing deferred taxes currency ability to benefit from acquired
financing activities. translation amounts related to loss or credit carryforwards
Other stock-based compensation subpart F earnings of foreign Tax effects from remeasuring a
disclosures may include: subsidiaries or foreign branch previously held investment
earnings
Anticipated near-term DTA write- The effects on tax-deductible
offs from the expiration or Policy for presenting revaluations goodwill from contingencies or
settlement of awards of foreign deferred tax balances as contingent consideration
transaction gains or losses or as
Accounting policy used in deferred tax benefit or expense. If Effects of a step-up in basis of tax-
determining allocable reported as deferred tax benefit or deductible goodwill obtained
compensation expected to be expense, those amounts are still through a transaction that occurs
disallowed under Internal Revenue included in the aggregate outside of acquisition accounting
Code section 162(m) or similar transaction gain or loss disclosed
tax laws Tax effects of acquisition-related
for the period. transaction costs
Accounting policies for calculating Other comprehensive income Other business combination disclosures
windfalls and for determining may include:
when a windfall benefit is realized Disclosures related to other
(i.e., when the deduction is comprehensive income include: Contingent consideration and
considered to have reduced The amount of income tax expense indemnification assets
taxes payable) or benefit allocated to each The total amount of tax-deductible
Accounting policy for determining component of other goodwill
windfall pool(s) when there are comprehensive income, including Bargain purchases and partial
benefits and shortfalls from reclassification adjustments, on the acquisitions
employee and non-employee face of the financial statements or
awards in the notes Measurement period adjustments
Tax Accounting Services | 11Interim disclosures
Financial statement disclosures disclosures, including reasonably financial condition. This includes
required during interim periods are possible changes to the total addressing significant changes in the
generally prepared under the amount of unrecognized tax results of operations that did not arise
assumption that users have read or can benefits within the next 12 months from or are not necessarily
access the audited financial statements representative of the ongoing business.
for the preceding year. For this reason, Impact that recently issued
accounting standards will have on Users of the financial statements can
interim reporting disclosures are not
the financial statements of the assume, for instance, that a company’s
expected to be as robust as the
registrant when adopted in a ETR for the most recent periods will
disclosures required at year end.
future period continue into the near-term future. If
Disclosure requirements for significant items impacting the interim rate will
income tax items generally include: Tax impacts of significant risks not recur, disclosure would generally
and uncertainties be appropriate.
Tax effects of significant unusual
or infrequent items that are Significant changes DTAs or In the event interim statements are used
recorded separately or items that DTLs, if not otherwise apparent in lieu of annual statements (e.g., in a
are reported net of their related Additionally, appropriate financial registration statement), disclosure is
tax effect statement disclosures should be made required of the components of interim
for interim-period income tax policies. income tax expense.
Changes in estimates or provisions
for income taxes, such as changes Examples of specific areas where such
in the assessment of a valuation policies may impact the estimated
allowance, that occur during the annual ETR include the treatment of:
period Non-recognized subsequent events
Variations in the customary Zero-rate jurisdictions
relationship between income tax
expense and pre-tax accounting Windfall tax benefits
income, if not otherwise apparent A business combination occurring
Significant changes to the during the year
presentation of liabilities for Acquisition-related transaction
unrecognized tax benefits in the costs
contractual obligations table
In a similar fashion, interim MD&A
Changes related to uncertain tax disclosures are intended to enable users
positions and respective to assess significant changes in
12 | Tax Accounting ServicesForm 8-K
Form 8-K and its variants are used to terms and conditions, the Although Form 8-K filings often
report specific events, normally, circumstances surrounding the arise from third-party commercial
within four days of occurrence termination, and material early- events, there are instances in which
(unless otherwise stated). The filing termination penalties that the tax-related transactions, events, or
of Form 8-K may be required as a registrant incurred agreements occur for which an 8-K
result of any number of potentially filing would be considered. For
important events, including: Creating a material, direct example:
financial obligation or a direct or
Entering into an agreement (or contingent liability for a Tax examination or litigation
amendment of an agreement) material obligation arising out of developments
that is material and is not in the an off-balance-sheet
ordinary course of business. arrangement Conclusion that DTAs require a
Disclosure would include the valuation allowance
agreement’s date, terms, and The occurrence of events
triggering an increase or Certain transfer pricing, tax
conditions that are material to sharing, tax indemnity, or other
the company as well as acceleration of a direct financial
obligation on the part of the agreements, particularly where
identification of the parties and minority investors or other
description of material company or an obligation under
an off-balance-sheet unrelated parties are affected
relationships between the parties
arrangement that has material Advance pricing agreements or
Terminating a material consequences for the company government incentive
definitive agreement that was arrangements
not made in the ordinary course A material charge for
of business, other than by impairment of assets Agreements or other legal steps
expiration or completion of the A conclusion that previously to prevent a change in
agreement. Disclosure would issued financial statements ownership that would cause a
include the termination date, should no longer be relied upon limitation on loss carryforwards
identity of the parties involved, because of an error in such or other tax assets
material relationships between financial statements
the parties, the agreement’s
Tax Accounting Services | 13Other presentations
Separate company financial disclosure requirements of ASC 740, differences exist and some examples
it is generally advisable to include a follow.
statements description of the types (and
Businesses that prepare consolidated On the balance sheet, IFRS requires
potentially the amounts) of
(or group) financial statements also deferred taxes to be recognized on a
significant temporary differences. In
often prepare separate financial net basis (valuation allowances are
addition, if the carve-out financial
statements for one or more divisions, not allowed to be recorded) and
statements will be filed with the
business units, and/or subsidiaries. recorded in a non-current account. A
SEC, the disclosures should
Such statements (‘carve-out’ or supplemental note that provides
generally be comprehensive.
‘standalone’ financial statements) greater detail is required.
can be necessitated by a pending Disclosures regarding uncertain tax
Under IFRS, a numerical
transaction such as an initial public positions of the carve-out entity
reconciliation is required in either or
offering, spin-off, or business would generally be appropriate. The
both of the following forms:
combination. Alternatively, they may level of uncertain tax position
be required for certain statutory or disclosures, however, may vary The relationship of income tax
regulatory filings on an ongoing depending on the tax allocation expense to the product of
periodic basis. method chosen as well as the other accounting profit multiplied by
ASC 740 disclosures provided. For the applicable tax rate(s), with
The selection of an appropriate example, if income taxes are disclosure of the basis for
income tax allocation method allocated to a carve-out entity using determining the applicable
requires significant judgment. a method that provides that rate(s)
Accordingly, disclosures regarding subsequent changes relating to
the chosen policy should be uncertain tax positions are allocated The relationship of the average
sufficiently transparent to enable to the parent company, the carve-out effective tax rate and the
users to make informed decisions. entity may not need to provide all the applicable rate, with disclosure
required ASC 740 disclosures. On of the basis on which the
ASC 740 requires an entity that is a applicable rate is computed
the other hand, if the carve-out entity
member of a group that files a
is allocated income taxes using the Accounting for uncertain tax
consolidated tax return to disclose
separate return method, it should positions is not specifically
the following in its separate
generally provide all the required addressed within IFRS. As a result,
financial statements:
ASC 740 disclosures. there are accounting policies that
The aggregate amount of current may be disclosed, such as those for
Disclosure should similarly be
and deferred tax expense for measuring tax positions and for
considered for an allocation of a
each statement of earnings
windfall tax benefits pool to the determining the ‘unit of account.’
presented and the amount of tax- Relevant post-balance-sheet date
separate filing entity.
related balances due to or from events would be assessed for
affiliates as of the date of each It is also generally appropriate to possible adjustment to the current
statement of financial position disclose tax attributes that have been period accounts or disclosure
presented allocated to the carve-out entity but without current adjustment. There
will not remain with the carve-out may also be accounting policy
The principal provisions of the entity upon separation from the
method by which the choices for interest and penalties.
consolidated group. For example,
consolidated amount of current there may be a separate return Significant differences also exist
and deferred tax expense is method DTA for a loss or credit with respect to stock-based
allocated to members of the carryforward that has been used in a compensation. There is no concept
group, and the nature and effect consolidated tax return. of a ‘windfall pool’ under IFRS, and
of changes in that method (and all tax benefits or shortfalls upon
in determining related balances IFRS settlement are reported as operating
to or from affiliates) during the Because International Financial cash flows.
years for which disclosures are Reporting Standards (IFRS) and US
presented GAAP are based on comparable
Non-GAAP measures
Although these disclosure income tax accounting principles, Companies often present users with
requirements are in lieu of, rather many of the pertinent disclosure additional accounting information
than in addition to, the general considerations are similar. However, that is not presented in accordance
14 | Tax Accounting Serviceswith US GAAP. The information is for US GAAP results. Companies earnings, and uncertain tax positions.
based upon US GAAP amounts, but are required to provide a Non-GAAP measures will generally
with adjustments. These reconciliation of the non-GAAP need to include a reconciliation of
presentations are referred to as ‘non- measures to the most directly the US GAAP effective tax rate.
GAAP financial measures’ under comparable US GAAP amounts.
SEC rules. The non-GAAP financial
Income tax accounting items that are
measures may be presented in
often adjusted in non-GAAP
addition to results prepared in
measures include valuation
accordance with US GAAP, but
allowances, windfall tax benefits, tax
should not be considered a substitute
effects related to unremitted foreign
Tax Accounting Services | 15Takeaway
Disclosures are a critical element of good disclosure should be clear and Companies should foster cross-
financial statements and accompanying crisp, and in plain English. In functional teaming around income tax
communications. They enable a formulating effective disclosure, no disclosure, as income tax reporting by
company to tell its story and strengthen one company department should go it its nature requires an integration of
the relevance of their financial alone. Many companies have skill sets and multi-sourced data.
statements. Disclosures pertaining to disclosure committees that help ensure Companies are likewise encouraged to
income taxes are no exception and in proper alignment of disclosure. The have proactive conversations with their
many respects can be among the most best assessment of the effectiveness of independent audit firm. Coordination
useful to financial statement users. disclosure will often come from other among all participants in the external
than those specialists who may be most reporting chain is a best practice.
Today’s financial statement users are
familiar with the intricacies of the
more diverse than ever. To reach them,
respective financial accounts.
16 | Tax Accounting ServicesLet’s talk
For questions about income tax accounting matters, please contact your local PwC team or our Tax Accounting Services leaders
listed below.
Markets Leaders Phone Email
Global Tax Accounting Services Leader Ken Kuykendall +1 (312) 298-2546 o.k.kuykendall@us.pwc.com
Atlanta Ben Stanga +1 (615) 503-2577 ben.stanga@us.pwc.com
Northern California – San Jose Ty Kanaaneh +1 (408) 817-5729 ty.h.kanaaneh@us.pwc.com
Northern California – San Francisco Adan Martinez +1 (415) 498-6154 adan.martinez@us.pwc.com
Southern California Darrell Poplock +1 (213) 356-6158 darrell.poplock@us.pwc.com
Carolinas Tamara Williams +1 (704) 344-4146 tamara.williams@us.pwc.com
Chicago Rick Levin +1 (312) 298-3539 richard.c.levin@us.pwc.com
Florida Rafael Garcia +1 (305) 375-6237 rafael.h.garcia@us.pwc.com
Houston Maria Collman +1 (713) 356-5091 maria.t.collman@us.pwc.com
Lake Erie Mike Tomera +1 (412) 355-6095 michael.tomera@us.pwc.com
Michigan Amy Solek +1 (313) 394-6767 amy.j.solek@us.pwc.com
Minneapolis Chad Berge +1 (612) 596-4471 chad.berge@us.pwc.com
Missouri Brian Sprick +1 (314) 206-8509 brian.sprick@us.pwc.com
Northeast David Wiseman +1 (617) 530-7274 david.wiseman@us.pwc.com
New York Metro Allen AhKao +1 (973) 236-5730 allen.p.ahkao@us.pwc.com
New York Metro (Financial Services) Gayle Kraden +1 (646) 471-3263 gayle.kraden@us.pwc.com
New York Metro (Private Companies) Gary Pogharian +1 (973) 236-5696 gary.m.pogharian@us.pwc.com
New York Metro (Financial Services) John Triolo +1 (646) 471-5536 john.triolo@us.pwc.com
Ohio, Kentucky, Indiana Dan Staley +1 (513) 723-4727 daniel.j.staley@us.pwc.com
Pacific Northwest Suzanne Greer +1 (206) 398-3339 suzanne.greer@us.pwc.com
Philadelphia Diane Place +1 (267) 330-6205 diane.place@us.pwc.com
Rockies Mike Manwaring +1 (720) 931-7411 michael.manwaring@us.pwc.com
North Texas Steve Schoonmaker +1 (512) 708-5492 steve.schoonmaker@us.pwc.com
Washington Metro Jamie Grow +1 (703) 918-3458 james.b.grow@us.pwc.com
Tax Accounting Services | 17Primary authors Edward Abahoonie Tax Accounting Services Technical Leader +1 (973) 236-4448 edward.abahoonie@us.pwc.com Jonathan DeFeo National Professional Services Group +1 (973) 236-7088 jonathan.d.defeo@us.pwc.com Kristin Dunner National Tax Accounting Services +1 (617) 530-4482 kristin.n.dunner@us.pwc.com John Schmitt National Tax Accounting Services +1 (312) 298-3272 john.schmitt@us.pwc.com 18 | Tax Accounting Services
www.pwc.com Solicitation This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties. © 2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
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