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Financial Reporting for TaxesCurrent Developments

Rick FavorDirector, Deloitte Tax LLP

Tax Executives Institute - Detroit, MIDecember 9, 2015

2 Copyright © 2015 Deloitte Development LLC. All rights reserved.

Agenda

Standard setting update

SEC/PCAOB matters

Other developments

Questions

Standard setting update

Balance sheet classification of deferred taxes


Accounting guidance — ClassificationBalance sheet classification of deferred taxes

Current New – ASU 2015-17ASC 740-10-45-7 provides “A deferred tax liability or asset for a temporary difference that is related to an asset or liability shall be classified as current or noncurrent based on the classification of the related asset or liability”

Classify all deferred taxes as noncurrent

ASC 740-10-45-9 provides “A deferred tax liability or asset that is not related to an asset or liability for financial reporting… including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference”

ASC 740-10-45-9 removed


Accounting guidance — Jurisdictional nettingBalance sheet classification of deferred taxes

Current New – ASU 2015-17ASC 740-10-45-6 provides “For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.”

ASC 740-10-45-6 provides “For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.”


Balance sheet classification of deferred taxes

Timeline• January 22, 2015 – FASB issued proposed ASU 2015-210 as part of a

simplification initiative• November 20, 2015 – ASU 2015-17 issued

Transition guidance• Entities may apply the amendments either retrospectively or prospectively

Effective date• Public entities – annual periods, including interim periods within those annual

periods, beginning after December 15, 2016 (one year later for non-public entities)

• Early adoption is permitted for any period in which the financial statements have not yet been issued (or available to be issued for private entities)

Intra-entity asset transfers


Accounting guidanceIntra-entity asset transfers

Current ProposedSeller ASC 810-10-45-8 provides “If

income taxes have been paid on intra-entity profits on assets remaining within the consolidated group, those taxes shall be deferred or the intra-entity profits to be eliminated in consolidation shall be appropriately reduced”

The proposed ASU removes the prohibition on recognition of income tax expense for taxes paid for intra-entity transactions

Buyer ASC 740-10-25-3(e) prohibits recognition of a deferred tax asset for the intra-entity difference between the tax basis of the assets in the buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements

The proposed ASU removes the prohibition on recognition of deferred tax asset on intra-entity differences between the tax basis of the assets in a buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements


Intra-entity asset transfers

Timeline• January 22, 2015 – FASB issued proposed ASU 2015-200 as part of a

simplification initiative• May 29, 2015 – Comment period ended• October 5, 2015 – FASB redeliberated the proposals

Proposed transition guidance• Modified retrospective with a cumulative catch-up adjustment to opening retained

earnings in the period of adoption

Proposed effective date• Public entities – annual periods, including interim periods within those annual

periods, beginning after December 15, 2016 (one year later for non-public entities)

• Early adoption is permitted for non-public entities, but not before the effective date for public entities


Comment letter responses and FASB’s reactionIntra-entity asset transfers

• 31 comment letters were received, with mixed views, including

− Several respondents also suggested a practical expedient to continue the exception only for intra-entity transfers of inventory

• October 5, 2015− After redeliberating, the Board instructed its staff to further research the issues of cost

and complexity raised in the comment letters and perform outreach with respect to continuing the exception only for intra-entity asset transfers of inventory

Opponents• New guidance would result in greater cost and complexity than the current guidance• New guidance results in greater volatility and distortion of earnings and the ETR• Changes will not provide meaningful information to investors

Proponents• New guidance will be simpler to apply• New guidance more closely aligns with IFRS• New guidance better presents the economic reality of intra-entity transactions

and is more meaningful for users of financial statements

Share-based payments


Accounting guidanceShare-based payments

Current ProposedExcess tax benefits

Realized benefits of tax return deductions in excess of compensation cost recognized are accounted for as a credit to additional paid-in capital

All excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement

Realization A tax benefit and a credit to additional paid-in capital for the excess deduction would not be recognized until that deduction reduces taxes payable

An entity would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period

Cash flow Present excess tax benefits as a cash inflow from financing activities and a cash outflow from operating activities

Excess tax benefits would not be separated from other income tax cash flows and, thus, would be classified along with other cash flows as an operating activity


Share-based payments

Timeline• June 8, 2015 – FASB issued a proposed ASU for stock-based compensation as

part of a simplification initiative. The proposed ASU includes, but is not limited to, changes to the accounting for income taxes.

• August 14, 2015 – Comment period ended• November 23, 2015 – FASB redeliberated the proposals

Proposed transition guidance• Excess tax benefits and deficiencies – Prospective• Previously unrecognized excess tax benefits – Modified retrospective• Cash flow statement presentation – Prospective or Retrospective

Proposed effective date • Public entities – annual periods, including interim periods within those annual

periods, beginning after December 15, 2016 (one year later for non-public entities)• Early adoption is permitted

Income tax disclosures


Undistributed foreign earnings disclosures — February 11, 2015 meetingFASB’s review of income tax disclosures

The FASB deliberated additional proposed disclosure requirements related to undistributed foreign earnings and tentatively decided that entities should disclose• The domestic and foreign components of income before income taxes− Separately disclose income before income taxes of individual countries that are

significant in relation to total income before income taxes• Domestic tax expense recognized in the period related to foreign earnings• Unremitted foreign earnings that, during the current period, are no longer

asserted to be indefinitely reinvested and an explanation of the circumstances that caused the entity to no longer assert that the earnings are indefinitely reinvested− In the aggregate and for each country for which the amount no longer asserted to be

indefinitely reinvested is significant in relation to the aggregate amount• The accumulated amount of indefinitely reinvested foreign earnings for any

country that is at least 10 percent of the aggregate amount


Unrecognized tax benefit disclosures — August 26, 2015 meetingFASB’s review of income tax disclosures

The FASB deliberated additional proposed disclosure requirements related to unrecognized tax benefits and tentatively decided to• Add a disclosure requirement related to the tabular reconciliation to disaggregate

settlements between cash and noncash (e.g., settlement by using existing net operating loss or tax credit carryforwards)

• Add a disclosure requirement to provide a breakdown of the amount of total unrecognized tax benefits shown in the tabular reconciliation by the respective balance sheet lines on which such unrecognized tax benefits are recorded

• Eliminate the requirement in ASC 740-10-50-15(d) for entities to provide details of positions for which it is reasonably possible that the total unrecognized tax benefits will significantly increase or decrease in the next 12 months


Income tax disclosures — October 21, 2015 meetingFASB’s review of income tax disclosures

The FASB tentatively decided to require the following additional income tax disclosures• Income taxes paid – (1) When a change in tax law has been enacted that is

probable of affecting the reporting entity in a future period and (2) the disaggregation of the income taxes paid between foreign and domestic jurisdictions

• Deferred income taxes – The balance sheet line item(s) in which deferred taxes are presented (i.e., a mapping of total deferred taxes to the balance sheet line items in which they are reported)

• Valuation allowances – Explanation of the “nature and amounts of the valuation allowance recorded and released during the reporting period”



Rate reconciliation — The Board tentatively decided that• Nonpublic entities would be required to present a rate reconciliation in the notes

to the financial statements, as ASC 740-10-50-12 currently requires for public entities

• A disaggregation of a component of the rate reconciliation would be required if the individual component is greater than or equal to 5 percent of the tax at the statutory rate in a manner consistent with SEC Regulation S-X

• An entity would be required to disclose a qualitative description of the items that have caused a significant year-over-year change to the effective tax rate



Other disclosures – The Board tentatively decided to require disclosures about• Gross amounts and expiration dates of carryforwards recorded on a tax return• Tax-effected amounts and expiration dates of carryforwards that give rise to a

deferred tax asset• Total amount of unrecognized tax benefits that offset deferred tax assets related

to carryforwards

The additional disclosure requirements would apply to both public and nonpublic entities

Next Steps – The Board instructed its staff to• Conduct further outreach with stakeholders including discussions with the Private

Company Council• Begin drafting a proposed ASU for public comment for all the tentative decisions

reached to date regarding income tax disclosure requirements including disclosure requirements related to indefinitely reinvested foreign earnings and unrecognized tax benefits (discussed earlier)

SEC/PCAOB matters


2014 AICPA conference on current SEC and PCAOB developmentsSEC and PCAOB highlights regarding income taxes

SEC observations• Staff continues to issue comments on 1) potential tax and liquidity ramifications

regarding the repatriation of foreign earnings, 2) valuation allowances, 3) rate reconciliation, and 4) unrecognized tax benefits

• To improve MD&A disclosures — avoid boilerplate and instead− Start with tax rate reconciliation and describe material items− Discuss significant foreign jurisdictions◦ Statutory and effective rates◦ Current/future impact of reconciling items

− Provide meaningful disclosures about known trends and uncertaintiesPCAOB focus areas• Undistributed earnings• Internal controls over financial reporting• Auditing management estimates, including taxes• Use of management’s specialists


Tax-related material weaknesses and restatements

Material weaknesses Restatements

Material weaknesses and restatements in SEC filings from 1/1/14 – 12/31/14

Lack of Review 18% Inadequate

Reconciliation6%

General Procedure /

Process 25%

Improper Treatment / Recording

18%

Non-routine Transactions

6%

Period End Process 9%

Lack of Documentation

6%

Sytems Technology

6%Other 6%

Accounting for Income

Tax (General)27%

Deferred Taxes 41%

Valuation Allowances

12%

Acquisition/ Disposal 10%

Uncertain Tax Positions 4% Other 6%

Other developments


Tax implications of IFRSIFRS

Global tax and treasury planning

Local tax compliance and

planning

Income tax accounting

Tax department operations

Local tax compliance and planning• Computing tax owed and preparing required forms• Planning

Global tax and treasury planning• Implementing structures and undertaking

exercises that often involve multiple tax jurisdictions

• Moving cash around the organization to where it is needed in a tax efficient manner

Income tax accounting• The link between tax compliance process and

amounts reported in the financial statements • Reflects tax consequences of pre-tax events

reflected in the financial statements

Tax department operations• How the tax department gets the work done• Involves people, processes, technology, and data


Speaker bios

Rick Favor is a Director with Deloitte Tax LLP serving both public and private companies in various industries for over 26 years. He is on of the Regional Competency Leaders of the Financial Reporting for Taxes group. Rick currently serves as the Lead Tax Partner on several global strategic clients (public and private).Throughout his career, Rick has been a significant contributor to the thought leadership developed on ASC 740 (FAS 109 and FIN 48). He frequently speaks on tax topics at internal and external conferences on tax topics involving accounting for income taxes including client roundtables, external training, client-specific training and Dbriefs for executives and students. Rick received a Bachelor of Science degree in Accounting from the University of Detroit and a Masters in Business Administration from the University of Michigan.

1 313 396 [email protected]


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