The Financial Accounting Standards Board (FASB or Board) issued a proposal aimed at making income tax disclosures more effective. The proposal would (1) require entities to make additional disclosures related to foreign earnings (including those subject to an indefinite reinvestment assertion) and other income tax topics, (2) change the disclosure requirements related to uncertain tax positions and (3) broaden the applicability of certain existing income tax disclosure requirements by replacing the term "public entity" with "public business entity" (PBE).

The proposal is part of the FASB's broader disclosure framework project aimed at making disclosures in the notes to the financial statements clearly communicate the most important information. As part of the project, the Board is also reviewing disclosure requirements for inventory, fair value measurement, defined benefit plans and interim reporting.

Key considerations

Use of the term 'public business entity'

The proposal would replace the term "public entity" in Accounting Standards Codification (ASC) 740 with the term "public business entity," which is defined in the ASC Master Glossary. PBEs include several types of entities that are not considered public under other definitions in US GAAP.

Foreign earnings and indefinite reinvestment assertions

In addition to the existing disclosure requirements, the proposal would require all entities to disclose the following information related to foreign earnings,¹ including those subject to an indefinite reinvestment assertion:

— Pretax income (loss) from continuing operations disaggregated between domestic and foreign²

— Income tax expense (benefit) from continuing operations disaggregated between domestic and foreign2

— Income taxes paid disaggregated between domestic and foreign

— Income taxes paid to any individual country if the amount is significant when compared with total income taxes paid

— The amount of and explanation of circumstances that caused a change in an assertion about the indefinite reinvestment of undistributed foreign earnings (e.g., an entity asserts that the earnings are indefinitely reinvested or no longer asserts that they are indefinitely reinvested)

— The aggregate of cash, cash equivalents and marketable securities held by foreign subsidiaries

Unrecognized tax benefits

The proposal would amend the existing disclosure requirements related to the reconciliation of unrecognized tax benefits to require PBEs to disclose the following information as part of their reconciliation:

— Settlements disaggregated between those that use existing deferred tax assets (e.g., an existing net operating loss) and those that use cash

— A breakdown of the amount of unrecognized tax benefits by the balance sheet line item in which the amounts are presented and separate disclosure of any amounts of unrecognized tax benefits not presented in the balance sheet

The proposal would eliminate for all entities the existing requirement to disclose certain information when it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.

Other income tax topics

Changes in tax laws

In addition to existing disclosure requirements related to changes in tax laws, the proposal would require all entities to disclose information about an enacted change in tax law if it is probable that the change will affect the entity in a future period.

Valuation allowances

The proposal would require PBEs to provide an explanation of the nature and amounts of valuation allowances recorded or released during the reporting period. All entities are currently required to disclose the total valuation allowance recognized for deferred tax assets and the net change in the total valuation allowance for the year.

Tax rate reconciliations

Consistent with existing Securities and Exchange Commission (SEC) reporting requirements, the proposal would require PBEs to disclose a reconciliation between the amount computed by multiplying pretax income (loss) by the applicable statutory federal income tax rate and the total income tax expense (benefit) from continuing operations. Individual reconciling items that amount to more than 5% of the amount computed by multiplying the income before tax by the applicable statutory federal income tax rate should be identified. The proposal would also require PBEs to disclose a qualitative description of items that have caused a significant change in the rate year over year. Additionally, a PBE that uses a rate other than the US federal corporate income tax rate would be required to disclose that rate and its basis for using that rate.

Tax carryforwards

The proposal would amend the existing disclosure requirements related to carryforwards and require PBEs to disclose the following:

— The amounts of the carryforwards (i.e., not tax effected) disaggregated by federal, state and foreign, with amounts further disaggregated by expiration date for each of the first five years after the reporting period and a total of the amounts for the remaining years

— The amounts of the deferred tax assets for carryforwards (i.e., tax effected) before valuation allowances disaggregated by federal, state and foreign, with the amounts further disaggregated by expiration date for each of the first five years after the reporting period and a total of the amounts for the remaining years

— The total amount of unrecognized tax benefits that offset the deferred tax asset attributable to carryforwards

Non-PBEs would be required to disclose the total amounts of federal, state and foreign carryforwards (i.e., not tax effected) and their expiration dates.

Government assistance

The proposal would eliminate the current requirement to disclose, as a component of income tax expense, the amount of government grants recognized as a reduction of income tax expense and require all entities to disclose a description of legally enforceable agreements with a government, including the duration of the agreement and the commitments made with the government under that agreement. The amount of benefit that reduces, or may reduce, an entity's income tax burden also would be disclosed. The disclosure would not apply to broadly available arrangements with a government that do not require specific agreements between the entity and the government.

Effective date and transition

The guidance would be applied prospectively. The FASB said it would determine an effective date and whether early adoption would be permitted based on feedback it receives during the comment period.

Implications

Entities should consider whether the information is currently available to comply with the proposed disclosure requirements or whether they would have to change their processes to collect it.

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RELATED RESOURCES

— For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting
— For more information about EY's Tax Accounting University education program for clients, visit us at www.ey.com/TAU

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ENDNOTES

¹ Foreign income taxes or other foreign tax-related items are those related to any country outside the reporting entity's home country.

² These proposed disclosures are similar to those required under SEC Regulation S-X 4.08(h)(1) and (h)(3).