United States: Challenges Ahead for FASB Income Tax Disclosure Proposal

When the Financial Accounting Standards Board (FASB) proposed adding a number of disclosure requirements to the guidance for income taxes, the board sought to balance the cost of the proposed changes with investors' interest in getting more information about tax liabilities. But companies that submitted comment letters to the proposed changes have made it clear that they're unhappy with the challenges they expect to face if the proposed requirements are approved as final amendments for U.S. Generally Accepted Accounting Principles (GAAP).

Proposing more detailed disclosures

Proposed Accounting Standards Update (ASU) No. 2016-270, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes, was published in July 2016. It attempted to address investor and analyst concerns that the current disclosure rules for income taxes leave investors to do guesswork on the potentially significant liabilities for some companies. With more U.S. companies conducting business abroad, investors and analysts are especially interested in the potential global tax implications.

Under the income tax disclosure proposal, businesses would be required to:

  • Separate foreign and domestic taxes,
  • Describe enacted changes in tax law,
  • Explain circumstances that cause a change in the assertion about the indefinite reinvestment of undistributed foreign earnings, and
  • Disclose the aggregate of the cash, cash equivalents and marketable securities held by foreign subsidiaries.

Publicly traded businesses would have to provide extra information, including the total amount of unrecognized tax benefits that offsets the tax credits that are carried over from one reporting period to the next. They also would have to disclose the line items in the financial statement in which the unrecognized tax benefits are presented and the related amounts of the benefits.

Reviewing harsh feedback

During a meeting in January, the FASB evaluated feedback received during the proposal's comment period. And it was clear that businesses aren't happy about being asked to disclose more details about their income tax obligations.

One-fifth of the businesses, professional groups and individuals that responded to the proposal said they opposed it entirely. Other letters challenged key parts of the proposal, and many complained about the sheer number of new requirements.

New FASB member Harold Monk aligned himself with those who criticized the volume of new disclosures. "I do have a very real concern about the practicability of this many disclosures," Monk said. "You're adding multiple pages of information to annual reports, and I think that's going to be the biggest hurdle."

Finding balance

In light of this feedback, the FASB is re-evaluating how much it would cost companies, in total, to comply with all of the new requirements. FASB member Marc Siegel said that the accounting board considered costs of individual requirements throughout its work on the proposal and even backed down from requiring some pieces of information because of the difficulty companies will face in providing it.

Specifically, investors requested detailed breakdowns of:

  • Deferred tax liabilities on unremitted foreign earnings by country,
  • Estimates about the amount of unrecognized deferred tax liabilities, and
  • Details about conditions or events that could change a business's plans for undistributed earnings.

But the FASB decided it would be too difficult for companies to compile this information and backed down on proposing such disclosures.

To illustrate: Consider a deferred tax liability on unremitted foreign earnings. This liability represents the difference between the U.S. tax the company expects to pay once foreign earnings are brought back to this country and the taxes paid overseas. The current accounting rules require disclosure of unrecognized deferred tax liabilities for indefinitely reinvested foreign earnings, but it provides what the standard-setters call a "practicability exception" if the number can't be calculated. More than 80% of the 500 largest U.S. companies use this exemption.

The FASB considered requiring companies to do the calculation, or at least a simplified version of it. But the board decided the full calculation would be too much work for companies — and a simplified version wouldn't provide helpful information for investors.

As a compromise, the proposal called for a disclosure in the financial statement footnotes of cash, cash equivalents and marketable securities held by foreign subsidiaries. But many companies told the FASB that even this watered-down proposal was too onerous and cost prohibitive.

Back to the drawing room

The FASB hasn't made any final decisions regarding the fate of its income tax disclosure proposal. In the meantime, the accounting board plans to meet with a group of tax experts to privately weigh in on some of the proposed disclosure requirements.

If you have questions regarding the proposed accounting standards update, please contact Dan Ward, Principal, Audit Services, at 314.983.1237 or dward@bswllc.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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