FASB ASC 740, Income Taxes
Disclosure Requirements
By: Russ Madray
Smart people learn from their mistakes. But the really sharp ones learn from the
mistakes of others.
We continue our reporting on Matters for Further Consideration (MFC) in peer review with
our look at the MFCs for 2021 peer reviews pertaining to income taxes. Specifically, we
noted an above-average number of MFCs related to income tax disclosures. Financial
Accounting Standards Board Accounting Standards Codification (FASB ASC) 740-10-50,
Income Taxes—Overall—Disclosure, is the source of guidance on the disclosures related
to income taxes in the financial statements of all entities.
Practice Note: In 2016, the FASB issued a proposed Accounting Standards Update
(ASU), Income Taxes (Topic 740): Disclosure Framework—Changes to the Disclosure
Requirements for Income Taxes, that set forth enhanced disclosure requirements for
income taxes. After passage of the Tax Cuts and Jobs Act (TCJA) in December 2017,
the FASB, in 2019, issued a revised proposed ASU. The revised proposed ASU would
(1) remove disclosures that no longer are considered cost beneficial or relevant and (2)
add disclosure requirements identified as relevant to financial statement users. The
FASB continues to work on this project.
Report
October 19, 2022
Center for Plain English Accounting
AICPA’s National A&A Resource Center
Illustrative disclosures presented in this report are not a substitute for the original
authoritative accounting guidance. Accountants and practitioners are urged to refer
directly to applicable authoritative pronouncements to help ensure compliance with
required disclosure standards. The CPEA is not providing assurance that these
illustrative disclosures comply with authoritative pronouncements and are not
recommending or endorsing these examples.
Examples of Matters for Further Consideration
Reviewer noted presentation of deferred tax assets and deferred tax liabilities on
the face of the financial statements. Notes to the financial statements did not
include significant components encompassing deferred tax assets and liabilities.
Amounts within each tax jurisdiction were not presented net as one deferred tax
asset or deferred tax liability.
Firm did not disclose the valuation allowance related to deferred tax assets.
For the entity engagement selected for review, the financial statement disclosures
do not present all the required disclosures related to income taxes, including
components of income tax assets and liabilities, the types and nature of reconciling
items between GAAP income tax expenses and amounts of income tax expense
from applying federal statutory rates.
The accountant's Income Tax note disclosure included components of income tax
(benefit) expense and the open tax years; however omitted other disclosures as
follows: reconciliation of significant items from applying statutory tax rates, types of
temporary differences and carryforwards that cause significant portions of a
deferred tax liability or asset; components and classification of deferred tax
liabilities or assets; and amounts and expiration dates of operating loss and tax
credit carry forwards.
In a compilation with disclosures of a healthcare entity, the statements and notes
did not include temporary differences between GAAP and tax basis and also the
significant elements of deferred tax liabilities or tax assets.
On the review engagement the disclosure of available tax credit carryforwards did
not include their expiration dates.
On the review engagement reviewed, the expiration dates of the net operating
losses carryforward were not disclosed.
Income tax disclosures were incomplete in that they omitted certain information
including the gross deferred tax assets & liabilities and a description of items that
comprise deferred tax balances, a description of items included in temporary
differences, the amount of net operating losses available at year end and the
amount of net operating losses used during the year, and current and deferred tax
expense.
Gross deferred tax assets & liabilities, a description of the types of reconciling items
between GAAP tax expense & federal statutory rates & the types of deferred taxes
are not disclosed.
Income tax disclosures do not include significant components of income tax
expense for current and deferred income tax, expiration dates of operating loss
carryforward, the amount of or change in valuation allowance recorded or the
amount the deferred tax asset related to the operating loss. The note clearly
conveys that a 100% valuation allowance is recorded. This engagement is
nonconforming.
Balance Sheet Disclosures
Deferred Taxes
Reporting entities should disclose separately three components of the net deferred tax
balance recognized in a balance sheet:
• The total amount of deferred tax liabilities determined according to FASB ASC 740-
10-30-5(b)
• The total amount of deferred tax assets determined according to FASB ASC 740-
10-30-5(c) and 30-5(d)
• The total amount of valuation allowance on deferred tax assets measured pursuant
to FASB ASC 740-10-30-5(e)
A reporting entity also should disclose the net change in the valuation allowance on
deferred tax assets during the reporting year. In addition, FASB ASC 740-10-50-8
requires the types of temporary differences that give rise to significant portions of a
deferred tax asset or liability to be disclosed. However, it does not prescribe how the
differences should be disclosed.
The following is an example of these disclosure requirements.
Note 1—Accounting Policies
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the basis of assets and
liabilities for financial statement and income tax purposes. The differences relate
primarily to depreciable assets (use of different depreciation methods and lives for
financial statement and income tax purposes), allowance for doubtful receivables
(deductible for financial statement purposes but not for income tax purposes), and
profit on installment sales (deferred for income tax purposes but recognized for
financial statement purposes). The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be deductible
or taxable when the assets and liabilities are recovered or settled. Deferred taxes
also are recognized for operating losses and tax credits that are available to offset
future taxable income.
Note 16–Income Taxes
The Company's total deferred tax liabilities, deferred tax assets, and deferred tax
asset valuation allowances at December 31 were as follows (in thousands):
2020 2019
Deferred tax assets:
Total deferred tax assets 46,138 37,164
Less: Valuation allowance (37,856) (30,363)
Net deferred tax assets 8,282 6,801
Deferred tax liabilities:
Total deferred tax liabilities (8,056) (6,596)
Net deferred tax assets (liabilities) $226 $205
As of December 31, 2020, the Company has a valuation allowance of
approximately $37,856,000 against all net domestic deferred tax assets, for which
realization cannot be considered more likely than not at this time. The net change
in the valuation allowance was $7,493,000 for the year ended December 31, 2020.
Management assesses the need for the valuation allowance on a quarterly basis.
In assessing the need for a valuation allowance, the Company considers all
positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies, and past
financial performance.
Operating Losses and Tax Credit Carryforwards
A reporting entity should disclose the following information related to operating losses
and tax credit carryforwards:
• The amounts of operating losses and tax credit carryforwards taken on the tax
returns and the dates on which these amounts expire
• The amount of any valuation allowance (or portion thereof) on deferred tax assets
for which the reporting entity will credit any future recognized tax benefits to
shareholders’ equity (e.g., a deferred tax asset relating to a net unrealized loss on
available-for-sale securities)
The following is an example of a private company financial statement disclosure regarding
operating losses and tax carryforwards.
Note 8—Income Taxes
At June 30, 2019 and 2018, the Company has net operating losses of $-0- and
$174,000, respectively, available for carryforward to future years. These operating
losses begin to expire in June 2030.
Change in Tax Status
If a reporting entity changes its tax status after the end of the reporting year, but prior to
the date that the financial statements are available to be issued (i.e., the change qualifies
as a subsequent event according to FASB ASC 855, Subsequent Events), then two items
should be disclosed in the financial statements:
• The change in the tax status that occurred after year-end
• The effect of the change on the financial statements, if material
The following is an example of this disclosure.
Note 19—Income Taxes
On January 2, 2021, the Company filed an election with the Internal Revenue
Service, electing to be treated as a taxable corporation for U.S. federal income tax
purposes effective January 2, 2021. See Note 21, Subsequent Events, for
additional disclosures regarding the election.
Note 21—Subsequent Events
Tax Election
As discussed in Note 19, Income Taxes, on January 2, 2021, the Company filed
an election with the Internal Revenue Service, electing to be treated as a taxable
corporation for U.S. federal income tax purposes effective January 2, 2021.
Temporary Differences and Tax Carryforwards
All entities should provide additional disclosures about temporary differences and tax
carryforwards. However, the required information varies for public and nonpublic entities.
A nonpublic entity must identify each category of significant temporary differences and
tax carryforwards. However, a nonpublic entity is not required to disclose numerical
estimates of the tax effects of each category. An entity can determine individual
disclosure items by looking at financial statement captions (e.g., property, plant, and
equipment) or by subgroup (e.g., tractors, trailers, and terminals for a trucking company)
or individual asset.
Practice Note: The FASB ASC Master Glossary does not define “significant,” as used
in FASB ASC 740-10-50-6. However, the SEC staff has indicated that, to meet this
requirement, public entities should disclose all components that equal or exceed 5
percent of the gross deferred tax asset or deferred tax liability.
Income Statement
Significant Components of Income Tax Expense
Reporting entities should disclose the significant components of tax expense that are
related to income from continuing operations for each year that an income statement is
provided. These disclosures may be provided in either the income statement or the notes
to the financial statements.
The following are examples of components that, if significant, should be disclosed:
• Current tax expense or benefit
• Deferred tax expense or benefit (without the effects of any of the other components
listed below)
• Investment tax credits
• Grants from government bodies that have been recognized as a reduction of
income tax expense
• Tax benefits of operating loss carryforwards
• Tax expense due to the apportionment of certain tax benefits to contributed capital
• Adjustments of a deferred tax liability or asset for enacted changes in tax laws or
rates or a change in the tax status of the entity
• Adjustments of the beginning-of-the-year balance of a valuation allowance
because of a change in circumstances that causes a change in judgment about
the realizability of the related deferred tax asset in future years
The following is an example of this disclosure from Best Buy Co., Inc.
Note 11–Income Taxes
Earnings before income tax expense by jurisdiction were as follows ($ in millions):
2021 2020 2019
United States $2,203 $1,704 $1,574
Foreign 174 289 314
Earnings before
income tax $2,377 $1,993 $1,888
Income tax expense (benefit) was comprised of the following ($ in millions):
2021 2020 2019
Current:
Federal $447 $261 $275
State 117 73 75
Foreign 51 48 64
615 382 414
Deferred:
Federal (25) 56 4
State (16) 8 -
Foreign 5 6 6
(36) 70 10
Income tax expense $579 $452 $424
Practice Note: Disclosure by jurisdiction, as presented above, is not required for non-
public entities.
Rate Reconciliation
All entities should provide disclosures about the difference between income tax expense
recognized in the financial statements and the amount expected if tax expense were
calculated by applying the statutory income tax rates to net income before taxes.
However, the required information varies for public and nonpublic entities.
All entities should provide information about the nature and effect of any significant item
that makes it difficult to compare the amount of income tax expense recognized in the
financial statements across all the periods presented. A nonpublic entity must disclose
the nature of each significant reconciling item but is not required to present a numerical
reconciliation. Further, nonpublic entities should provide information about the main
reconciling items between:
• The amount of income tax expense recognized in its income statement that is
related to income from continuing operations; and
• The amount of income tax expense calculated as follows:
Pretax income from continuing operations
X
Domestic federal statutory income tax rates
The following is an excerpt of a typical private company financial statement disclosure for
a reconciliation of the company’s statutory rate to its effective tax rate.
Note 6—Income Taxes
The following is a reconciliation of the statutory federal income tax rate applied to
pretax accounting income with the income tax provision attributable to continuing
operations in the statements of income:
Year Ended December 31
2014 2013
Income Tax Expense at the Statutory Rate
(22.08% / 15.00%) $25,433 $4,055
Increase (Decrease) Resulting from:
State Income Taxes,
Net of Federal Income Tax Benefit (2,140) (308)
Temporary Differences (2,145) 411
Permanent differences 621 414
Deferred Income Tax Adjustment 2,429 (685)
Provision for Federal Income Tax $24,198 $3,887
Unrecognized Tax Benefits
All reporting entities should provide the following information regarding unrecognized tax
benefits at the end of each annual reporting period presented:
• Amount of interest and penalties recognized in the income statement and balance
sheet, respectively
• The following items specific to those tax positions for which it is reasonable to
expect that the amount of unrecognized tax benefits may change significantly
either positively or negatively within 12 months of the reporting date:
o The reason why the position is uncertain
o The type of event that could lead to a change in the amount within 12 months
o The approximate range of the change deemed reasonably possible, or a
statement that such an estimate is indeterminable
o A statement describing the tax years still open for audit by major tax authorities
(See the CPEA’s report, titled, Controversy Over the Applicability of the
Disclosure Requirement of Open Tax Years: Unintended Consequences and
Lessons for All, about this requirement. We feel that this disclosure is necessary
only if an entity has unrecognized tax benefits.)
The following is an example of this disclosure.
Note 13–Income Taxes
Uncertain Tax Positions
The Company has approximately $1.9 million and $1.1 million accrued for interest
and penalties as of December 31, 2020 and December 31, 2019, respectively, in
the Consolidated Balance Sheets and recorded $0.8 million and $0.6 million in
interest and penalties during 2020 and 2019, respectively in the Consolidated
Statements of Income. Interest and penalties related to unrecognized tax benefits
are recorded in "Provision for income taxes" on the Consolidated Statements of
Income.
Unrecognized tax benefits are not expected to significantly change within the next
12 months.
Generally, a number of years may elapse before a tax reporting year is audited
and finally resolved. With few exceptions, the Company is no longer subject to
U.S. federal, state, or local examinations by tax authorities before 2015. While it
is often difficult to predict the final outcome or the timing of or resolution of a
particular tax matter, the Company does not anticipate any adjustments resulting
from U.S. federal, state, or foreign tax audits that would result in a material change
to the financial condition or results of operations. Adequate amounts are
established for any adjustments that may result from examinations for tax years
after 2015. However, an unfavorable settlement of a particular issue would require
use of the Company's cash and cash equivalents.
Other Disclosures
Consolidated Tax Return
If an entity is a member of a tax group that files a consolidated tax return and issues
separate financial statements, then the entity must provide the following information in its
separate financial statements:
• The aggregate current and deferred income tax expense for each income
statement presented
• The amounts owed to or by affiliated entities for taxes as of the date of each
balance sheet presented
The principal provisions of the method by which the consolidated amount of current and
deferred tax expense is allocated to members of the group and the nature and effect of
any changes in that method (and in determining related balances to or from affiliates)
during the years for which the above disclosures are presented. The following is an
example of this disclosure.
Note 9—Income Taxes
The Company is a member of a tax group that files a consolidated tax return and
uses the separate return method to allocate the consolidated amount of current
and deferred tax expense among the group members. Under the separate return
method, the Company is assumed to file a separate return with the taxing authority,
thereby reporting its taxable income or loss and paying the applicable tax to or
receiving the appropriate refund from the parent. Thus, it is possible that the
Company could recognize a loss or credit carryforward, even though there is no
carryforward on a consolidated basis. Additionally, when the tax law in the
jurisdiction provides for the carryback of losses, the Company could reflect the
carryback of a current-year loss against prior taxable income even though the
consolidated group had losses. Allocated income tax expense (benefit) was
comprised of the following ($ in millions):
2021 2020 2019
Current: 615 382 414
Deferred: (36) 70 10
Income tax expense $579 $452 $424
The following amounts are owed to or (by) the Company for taxes as of December
31 ($ in millions):
2019 $ 15
2020 $(89)
2021 $ 13
Practice Note: A reporting entity does not have to allocate consolidated amounts of
current and deferred tax expense to a legal entity that is not subject to tax and that is
disregarded by the taxing authority, but it may elect to do so on an entity-by-entity basis.
If an entity that is not subject to tax and that also is disregarded by the taxing authority
makes the election under FASB ASC 740-10-30-27A to include allocated amounts of
current and deferred tax expense in its separately issued financial statements, it must
disclose this fact. In addition, the entity must provide the disclosures described above.
Income Tax Accounting Policies
A reporting entity is sometimes allowed a choice between several available tax
accounting policies. The policies elected and applied by the entity should be disclosed.
These choices generally relate to:
• The classification of interest and penalties
• The method of recognition of investment tax credits
Interest and Penalties
A reporting entity may elect to present the amount of interest it recognizes pursuant to
FASB ASC 740-10-25-56 related to an underpayment of income taxes in its income
statement as either income tax expense or interest expense.
CPEA Observation: Most public reporting entities include interest and penalties in
income tax expense (i.e., provision for income taxes). Some entities disclose their policy
in the Summary of Significant Accounting Policies note; other entities disclose their policy
in the Income Taxes note for context on the amount of interest, penalties, and other
income tax-related amounts recognized in the financial statements.
The following is an example of this disclosure from Seachange International, Inc.
Note 2—Summary of Significant Accounting Policies
Our policy is to classify interest and penalties related to unrecognized tax benefits,
if and when required, as a component of income tax provision (benefit), in our
consolidated statements of operations and comprehensive loss. We have made
a policy election to treat the Global intangible low-taxed income (GILTI) tax as a
period expense.
Investment Tax Credits
For tax purposes, an investment tax credit can be used to reduce the current taxes
payable by an entity, or it can be carried back or forward. As described in FASB ASC
740-10-25-46, a reporting entity may elect one of two methods to recognize the tax
benefits from investment tax credits in its financial statements. The two acceptable
approaches are the deferral method and the flow-through method. Under the deferral
method, an entity recognizes the cost savings gradually from the tax credit. More
specifically, the investment tax credit is accounted for as a reduction to the acquired asset
that gave rise to the credit. Then, the credit is amortized over the useful life of the asset.
The amortization is a reduction to income tax expense. A temporary difference arises
when a company elects to use the deferral method for investment tax credits. Under the
flow-through method, an entity immediately recognizes the cost savings from the tax
credit. The entire investment tax credit is accounted for as a reduction in income tax
expense in the year the asset is acquired. The treatment of the tax credit using the flow-
through method is similar to the treatment of the tax credit for tax purposes. Therefore,
a temporary difference does not exist when an entity elects to use the flow-through
method. As noted in FASB ASC 740-10-25-46, the deferral method is the preferable
approach for financial reporting purposes.
The following examples illustrate this disclosure requirement:
The Company uses the flow-through method to account for investment tax credits.
Under this method, the investment tax credits are recognized as a reduction to
income tax expense.
or
Investment tax credits are accounted for under the cost reduction method whereby
they are netted against the expense or property and equipment to which they
relate. Investment tax credits are recorded when the qualifying expenditures have
been incurred and if it is more likely than not that the tax credits will be realized.
Risks and Uncertainties
FASB ASC 275, Risks and Uncertainties, provides disclosure guidance incremental to
that provided in FASB ASC 740, specific to estimates that satisfy certain conditions. The
following is an illustration of this disclosure.
The entity has recorded a deferred tax asset of $4.8 million reflecting the benefit
of $12 million in loss carryforwards, which expire in varying amounts between 20X5
and 20X7. Realization is dependent on generating sufficient taxable income prior
to expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax asset will
be realized. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Conclusion
We hope this report is helpful in understanding the disclosure requirements related to
income taxes. And, as always, the CPEA is available to answer our members’ questions.
The CPEA provides non-authoritative guidance on accounting, auditing, attestation, and SSARS standards.
Official AICPA positions are determined through certain specific committee procedures, due process and
extensive deliberation. The views expressed by CPEA staff in this report are expressed for the purposes of
providing member services and other purposes, but not for the purposes of providing accounting services or
practicing public accounting. The CPEA makes no warranties or representations concerning the accuracy of
any reports issued.
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