Financial Statement Presentation & Disclosure
The following discussion is focused on the key presentation and disclosure requirements for publicly traded companies. Privately held companies do not have all of the disclosure requirements, but as a matter of practice should produce workpapers that support the same level of disclosure as a public company.
BALANCE SHEET PRESENTATION
Deferred Tax Accounts
For each jurisdiction that a company operates in, the deferred accounts must first be segregated into four categories: current and noncurrent DTAs (excluding VAs) and current and non-current DTLs.
A deferred item is classified as current or noncurrent based on the balance sheet classification of the underlying asset or liability that gives rise to the deferred item. If an item does not relate to a balance sheet account, it will be classified as current or noncurrent based on the period in which the item is expected to reverse.
Any VA related to the jurisdiction is allocated proportionately between current and noncurrent DTAs regardless of which underlying DTAs the VA may relate to.
Finally, the company will net the deferred accounts for each jurisdiction to report just two deferred balances; a net current deferred (DTA or DTL) and a net noncurrent deferred (DTA or DTL) in its balance sheet.
In October 2015, the FASB unanimously affirmed its proposal to present all deferred income amounts as noncurrent for years beginning after December 15, 2016 for public companies. This change would result in a single deferred balance for each jurisdiction.
BALANCE SHEET DISCLOSURES
A company must disclose the total of all DTAs, DTLs and VAs as of the balance sheet dates. In addition, a public entity must disclose the amounts of significant items making up both the total DTA and DTL. Typically, an item will be listed separately if it constitutes more than 5% of the total deferred balance. All other items will be disclosed as a combined total.
A company must disclose the net change in the total valuation allowance.
NOL and Credit Carryforwards
A company must disclose the amount of the unrecognized deferred tax liability related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration if the determination of that liability is practicable, or a statement that determination is not practicable.
Shared Based Compensation
A company with suspended APIC credits associated with excess benefits from share-based compensation must disclose the amount of benefit that would be credited to APIC upon utilization of the related NOL.
A company must disclose the gross amount and expiration dates of any NOL or credit carryforwards.
INCOME STATEMENT PRESENTATION
Total tax expense associated with continuing operations is reported in the income statement. This is typically the sum of current income tax expense, deferred tax expense, and noncurrent income tax expense including any interest associated with uncertain income tax positions.
Intraperiod allocation requires that the total income tax expense is allocated to continuing operations, extraordinary items, noncontrolling interests, discontinued operations, other comprehensive income, and APIC.
INCOME STATEMENT DISCLOSURES
A company must disclose the fiscal year total current, deferred, and noncurrent income tax expense associated with each of the federal, state, and foreign jurisdictions. In practice companies often include the noncurrent expense with the current expense.
Components of Income Tax Expense
Typically the rate reconciliation disclosure presents state income taxes net of the federal benefit. Alternatively, the components of income tax expense typically show the state current and deferred expense on a gross basis and the federal current and deferred expense net of the state tax.
A public entity must disclose the significant items reconciling the tax expense at the statutory federal tax rate (typically 35%) to the total effective income tax expense attributable to continuing operations.
The reconciliation can use either percentages or dollar amounts.
Typically, an item will be separately disclosed in the reconciliation if it constitutes 5% of the amount of income tax applicable to pretax income at the statutory tax rate.
UNCERTAIN TAX POSITION DISCLOSURES
Tabular Rollforward of Uncertain Tax Positions
Annually, a company must disclose a rollforward of the change in the amount of uncertain tax benefits in the following categories:
a. Increases related to current year positions
b. Increases and decreases related to prior year positions
c. Settlements of positions with a taxing authority
d. Reductions to unrecognized tax benefits as a result of the lapse of the applicable statute of limitations
The tabular rollforward should include only the tax amounts associated with the uncertain tax positions. Consequently, the disclosed amount will not necessarily correspond with the noncurrent payable in the financial statements due to interest and penalties that have been accrued.
Furthermore, the tabular reconciliation should not include any benefits that may arise in a jurisdiction due to an uncertain position in another jurisdiction.
Currency translation adjustments associated with uncertain tax positions may also be included in the reconciliation if necessary.
In all reporting periods, the company must disclose the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
Amount of Interest
A company must disclose the total amount of interest and penalties recognized in the income statement and the total amounts of interest and penalties recognized in the statement of financial position.
Policy With Respect to Interest
A company must disclose its policy election to either include interest and penalties associated with uncertain tax benefits as part of pretax income or as a component of income tax expense.
Years Subject To Examination
A company must disclose the years that are open to examination for its major jurisdictions.
Expected Change in the Gross Uncertain Tax Positions
For positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date; the following must be disclosed:
a. The nature of the uncertainty
b. The nature of the event that could occur in the next 12 months that would cause the change
c. An estimate of the range of the reasonably possible change, or a statement that an estimate of the range cannot be made
Professional judgement should be used in determining any amount to disclose under this requirement.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
A company should describe the major drivers of its income tax rate in the MD&A.
The SEC has become more focused on the accumulation of significant profits oversees and the liquidity concerns that a permanent reinvestment assertion, among other restrictions, may have on the company’s ability to fund operations.