ASC 740 Reporting and Disclosure Requirements

ASC 740 TAX PROVISION TOPICS

ASC 740 Tax Provision Guide

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ASC 740 Valuation Allowances for Deferred Tax Assets

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ASC 740: Uncertain Tax Positions

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How ASC 740 Applies to Foreign-Source Income

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ASC 740 DISCLOSURE RESOURCES

How FASB Improvements to Income Tax Disclosures Impact Your Rate Reconciliation Process

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A Guide to FASB Updates to Income Tax Disclosures

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What Is the ASC 740 Interim Reporting Requirement?

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Sample: Required ASC 740 Income Tax Provision Disclosures

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Browse all provision articles

ASC 740-10-45 and ASC 740-10-50 provide guidance on disclosures pertaining to accounting for the ASC 740 provision for income tax. The guidance outlines specific disclosures required for the balance sheet, income statement, and related notes – plus additional disclosure rules for public vs. nonpublic entities.

ASC 740 balance sheet disclosure requirements

ASC 740 requires the following disclosures about deferred tax balance sheet accounts:

• The total of all deferred tax liabilities, deferred tax assets, valuation allowance recognized for deferred tax assets, and the net change during the year in the valuation allowance (ASC 740-10-50-2). These disclosures effectively “un-net” the balance sheet deferred tax item to their original form
• The types of temporary differences and carryforwards that give rise to significant portions of a deferred tax liability or asset (ASC 740-10-50-8)
• The amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes (ASC 740-10-50-3)
• Any portion of the valuation allowance for deferred tax assets for which future recognized tax benefits may be credited directly to contributed capital (i.e., by elimination of the valuation allowance) (ASC 740-10-50-3)
• Information about temporary differences for which a deferred tax liability has not been recognized because of the “indefinite reversal criteria” in ASC 740-30 (ASC 740-30-50-2)
• If not otherwise evident from other disclosures, companies should disclose the nature and effect of any significant matters affecting comparability of information for all periods presented (ASC 740-10-50-14)

Deferred tax disclosure note

ASC 740-10-50 requires all companies to disclose the types of temporary differences that give rise to significant portions of the deferred tax asset or liability balances.

Nonpublic companies aren’t required to disclose the amounts of temporary differences or describe the tax effect of each. However, public companies are required to present those additional details.

A public entity must disclose the approximate tax effect of each type of significant temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets (before allocation of the valuation allowance). Presumably, this information would be determinable by reference to the calculations that served as the basis for the intrinsic calculations of the deferred tax assets and liabilities.

For example, a company might indicate deferred tax assets relate to nondeductible warranty accruals and deferred tax liabilities relate to the use of accelerated depreciation for tax purposes.

Separate disclosure of the tax effects for each major tax jurisdiction is encouraged but not required.

Example: Deferred tax amounts on a balance sheet

The following illustration shows a representative example of a typical public company’s fulfillment of this requirement.

The 20X5 balance sheet would report a net deferred tax liability of $3,000. The 20X4 balance sheet would report a net deferred tax asset of $2,000.

Accounting for unrecognized tax benefits associated with uncertain tax positions

ASC 740-10-50-15 and 15A require additional disclosure of information describing various aspects of unrecognized tax benefits associated with tax positions of unknown eventual outcome. Uncertain tax positions often result in the benefit amount recognized in financial statements differing from the tax return amount. These differences between a tax position taken and a tax position reported under generally accepted accounting principles constitute an unrecognized tax benefit. The unrecognized tax benefit represents either a current or deferred liability – or reduction of net operating loss (NOL) carryforward or reduction of refund – to a taxing authority because it involves a potential future payment.

An unrecognized tax benefit (or portion thereof) giving rise to a NOL or credit carryforward should be presented as a reduction of a deferred tax asset attributable to a net operating loss carryforward (or similar tax loss or tax credit carryforward). Otherwise, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This liability would be reported as a current item in a classified balance sheet when it is anticipated that cash payment (or reduction of receipt) will occur within one year or the operating cycle, whichever is longer. Otherwise, the tax liability will be classified as noncurrent as opposed to a deferred tax liability.

If settlement will occur by other than cash payment, the obligation should not be shown as a current liability. A liability produced for an uncertain tax position should not be combined with deferred tax liabilities except to the extent the recognized tax position affects the tax bases of assets or liabilities, which could result in a taxable temporary difference and change the deferred tax liability.

Typical examples of this situation are where the uncertain tax position relates to the acceleration of a tax deduction in advance of the correct or otherwise more certain tax year.

An entity should not evaluate whether a deferred tax asset expires before the statute of limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit’s settlement.

Disclosure requirements for uncertain tax positions

U.S. GAAP imposes a substantial disclosure requirement for uncertain tax positions. ASC 740-10-50-15 requires a disclosure of the following at the end of each annual reporting period presented:

• The total amounts of interest and penalties recognized in the statement of operations and in the statement of financial position
• For positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change within 12 months of the reporting date:
  • The nature of the uncertainty
  • The nature of the event that could occur in the next 12 months to cause the change
  • An estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made
• All tax years that remain open to assessment by major tax jurisdictions

Public entities must additionally disclose the following at the end of each annual reporting period presented:

• A tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period, which includes:
  • The gross amounts of increases and decreases in unrecognized tax benefits due to tax positions taken during a prior period
  • The gross amounts of increases and decreases in unrecognized tax benefits resulting from tax positions taken during the current period
  • The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities
  • Reductions to unrecognized tax benefits because of a lapse of the applicable statute of limitations
• The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate

These disclosures are required at the end of each annual reporting period, but generally a public company would also be required to disclose events that have a material effect in interim reports. Article 10, Interim Financial Statements, Regulation S-X requires disclosure, generally governed by U.S. GAAP, of significant changes during interim periods of information. Also note that ASC 740-10-50-19 requires, in the notes to its financial statements, that an entity disclose its policy on classification of interest and penalties, per the alternatives permitted in ASC 740-10-45-25.

Net operating loss and tax credit carryforwards

If a portion of a deferred tax asset arises from a net operating loss carryforward (and/or tax credit carryforward), the entity should indicate the amounts and expiration dates, if any. The amount should be determined using the applicable tax laws for the reduction of taxes payable in specific future years’ returns.

It is consistent with full disclosure principles to also note any other limitations that may relate to the realizability of these potential benefits, such as limitations on the use of tax attributes under IRC Section 382 and 383.

Companies should also disclose the nature and potential effects of any tax law provisions that might limit the availability or utilization of those carryforward amounts (e.g., separate-return limitations or limitations caused by changes in ownership).

Subsequent recognition of tax benefits

The tax benefits of an acquired company’s deductible temporary differences, net operating losses, and tax credit carryforwards could be offset by a valuation allowance at the acquisition date in the event management believed that it was more likely than not that the related tax benefits would not be realized. In those cases, the subsequent recognition of the acquired tax benefits that occurred within the measurement period resulting from new information about the facts and circumstances that existed at the acquisition date are recognized through an adjustment to goodwill. Once goodwill is reduced to zero, any additional decrease in the valuation allowance should be reported as a bargain purchase (i.e., as a gain attributable to the acquirer). Effects of changes outside of the measurement period to the valuation allowance established in acquisition accounting, or changes during the measurement period that do not relate to facts and circumstances that existed at the acquisition date, are reported directly as a reduction of income tax expense.

Likewise, the subsequent recognition of tax benefits (by a reduction or elimination of a valuation allowance) that were initially recorded with a valuation allowance as a direct benefit to shareholders’ equity may be credited directly to shareholders’ equity, as opposed to being included in the income statement, depending on the nature of the change of the valuation allowance. In this regard, ASC 740-10-50-3 requires disclosure of any portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits will be directly credited to shareholders’ equity.

Indefinite reversal criteria and other exceptions

ASC 740-30-50-2 requires additional disclosures whenever a deferred tax liability has not been recognized for temporary differences because an exception has been met – for example, the indefinite reversal criteria of ASC 740-30. The temporary differences covered by ASC 740-30 include:

• Undistributed earnings of domestic and foreign subsidiaries
• Bad debt reserves of savings and loan institutions
• Policyholders’ surplus of stock life insurance companies

The following should be disclosed whenever a deferred tax liability is not recognized for taxable temporary differences because of the exceptions allowed under ASC 740-30:

• A description of the nature of the temporary differences and the types of events that would cause them to become taxable
• The cumulative amount of each type of temporary difference
• The amount of unrecognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration, if determining that amount is practicable, or a statement that determination of that amount is not practicable