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Income Taxes: Inquiring Minds Want To Know More Details

By MarksNelson on January 15, 2016 in Articles, Don Towle CPA, CGMA

As a general rule, the Financial Accounting Standards Board (FASB) has been trying to eliminate “disclosure overload” by streamlining what companies need to disclose in their financial statement footnotes. But reporting for income taxes appears to be an exception. In the first quarter of 2016, the FASB plans to issue a proposal that will require businesses to disclose more details about domestic and foreign tax payments.

Controversial proposal

By law, U.S. corporations (other than S corporations) are generally subject to a top corporate tax rate of 35%, but many pay far less than that because of deductions and credits.  The complexities of the tax law make it difficult to project the future taxes. Finding out a company’s effective tax rate can be difficult from the information currently provided by financial statements prepared under current U.S. Generally Accepted Accounting Principles (GAAP).  Determining a future effective tax rate is, even more, challenging.

Investors and analysts are pushing for greater transparency about income taxes to help them forecast a company’s expected financial results. Companies, however, are reluctant to divulge this information. Publicly traded companies are especially concerned that, once the information is public, their competitors will benefit from it as much as their shareholders. The FASB hopes to strike a balance between these two points of view by making the disclosure requirements more effective without overloading financial statements with extraneous information.

Details in the works

At its weekly meeting on October 21, the FASB approved the main points for an upcoming proposal on reporting income taxes. It’s slated to require disclosures about changes in tax law and their effects on the company. Multinational companies may be required to break down income taxes on foreign earnings vs. domestic income, as well as providing a further breakdown of significant foreign earnings by jurisdiction.

In addition to a breakdown of taxes by country, the FASB wants companies to provide more details about income tax expense. The proposal is likely to help investors and analysts answer questions such as the following:

  • Why do actual taxes paid differ from the 35% corporate tax rate?
  • How much of its deferred tax liabilities is the company reporting?
  • How much of its deferred tax liabilities does the company expect to pay?
  • When will tax credits and deferred liabilities expire?

The FASB may even ask companies to disclose the amount of tax credits and deferred taxes they’re carrying forward from one reporting period to the next.

No more exceptions for private companies

Under Accounting Standards Codification Topic 740-10-50-12, Income Taxes — Disclosure, public companies must reconcile their taxes from continuing operations to the amount of tax they would pay by applying the federal tax rate to their pretax income from continuing operations, using percentages or dollar amounts.

Private companies are currently asked to disclose the nature of significant reconciling items, but they aren’t required to provide a numerical reconciliation. In October, the board decided that its proposal will require these disclosures for all businesses.

Stay tuned

Before the FASB issues a formal proposal on income tax disclosures, its research staff plans to hold some confidential discussions with businesses and auditors. Then it will review the feedback in a public meeting. The proposal could be sidetracked, however, because public and private companies are likely to oppose any changes that add complexity and cost without providing significant benefits to investors. For additional information contact Don Towle, or your MarksNelson professional.


Don Towle