Tax Accounting Services Income tax disclosure

 
Tax Accounting Services Income tax disclosure
www.pwc.com/us/tas

                          Tax Accounting Services
                          Income tax disclosure

December 2013
Tax Accounting Services
Why 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 Services
When 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 | 3
Management’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 Services
are 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 | 5
Notes 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 Services
Disclosure 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 Services
Uncertain 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 | 9
Topic              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 Services
Other 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 | 11
Interim 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 Services
Form 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 | 13
Other 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 Services
with 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 | 15
Takeaway
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 Services
Let’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 | 17
Primary 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

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