ASC 740-10-50-2 through ASC 740-10-50-8 and ASC 740-30-50-2 require disclosures related to balance sheet deferred tax accounts.

16.3.1 Tax effect of temporary differences giving rise to DTAs/DTLs

All reporting entities are required to disclose total deferred tax assets and total deferred tax liabilities for each period a balance sheet is presented. However, disclosure requirements regarding temporary differences and carryforward information differ between public entities and nonpublic entities. ASC 740 defines a public entity.

Definition from ASC 740-10-20

Public entity: An entity that meets any of the following criteria:

  1. Its debt or equity securities are traded in a public market, including those traded on a stock exchange or in the over-the-counter market (including securities quoted only locally or regionally).
  2. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
  3. Its financial statements are filed with a regulatory agency in preparation for the sale of any class of securities.

As discussed in ASC 740-10-50-6, public entities must disclose the approximate tax effect of each type of significant temporary difference and tax carryforward that comprises deferred tax assets and liabilities (before allocation of valuation allowances). ASC 740 does not impose a “bright line” for determining which types of temporary differences are significant and, therefore, this assessment requires judgment.
A nonpublic entity is not required to provide quantitative information regarding the types of temporary differences and carryforwards that give rise to significant deferred tax assets and liabilities. However, a nonpublic entity must disclose qualitative information on the nature of significant items, as discussed in ASC 740-10-50-8. See FSP 16.8 for additional disclosure considerations for nonpublic entities.
Question FSP 16-2
When disclosing deferred tax assets and deferred tax liabilities that relate to the same lease transaction, can a public entity net the two in its deferred tax asset and liability disclosures?
PwC response
Although the deferred tax asset and deferred tax liability relate to the same transaction, they are two separate temporary differences that will typically reverse in different patterns over the life of the lease. In accordance with the guidance in ASC 740-10-50-6, the deferred tax asset and deferred tax liability related to the lease should not be netted together and presented as a single number in the reporting entity’s disclosures. For more on deferred taxes related to lease transactions, refer to TX

16.3.2 Total valuation allowance and the net change during the year

As discussed in ASC 740-10-50-2, reporting entities must disclose the total valuation allowance and the net change in the valuation allowance for each period a balance sheet is presented.
Since judgment about future taxable income is necessary in determining the need for and amount of a valuation allowance, management should consider disclosing the basis for its valuation allowance assessment, including the reliance on projections of future taxable income (if applicable). In some cases, SEC comment letters have indicated that certain incremental disclosures with respect to the realizability of deferred tax assets are required. For example, the SEC staff has emphasized the need to provide disclosures regarding the relevant positive and negative factors considered when assessing the realization of deferred tax assets, such as sustained pretax profitability. The SEC staff also expects ample forewarning regarding any future valuation allowance increase or release. See FSP 24 for discussion of disclosure requirements associated with significant estimates.
Refer to TX for discussion of certain rare situations in which it may be appropriate to write off an asset against the valuation allowance when the likelihood of realization is remote.
Additionally, the SEC requires a rollforward of the valuation allowance account to be included in the filing as part of the Regulation S-X, Rule 12-09 “valuation and qualifying accounts” schedule (Schedule II); however, reporting entities may include it in the financial statement footnotes instead of Schedule II.

16.3.3 Amounts and expiration of loss and tax credit carryforwards

Reporting entities should disclose the amounts and expiration dates of operating loss and tax credit carryforwards for tax purposes. Further, reporting entities may want to consider including other carryforwards, like interest limitation carryforwards. We believe footnote disclosure of the amounts of loss and other tax carryforwards should be on the same basis as presented on the balance sheet (i.e., tax effected and net of unrecognized tax benefits). If a reporting entity also presents the carryforwards in a footnote on a gross or “as filed” tax return basis, additional disclosures may be necessary to help the reader understand the difference between that amount and the balance sheet position.
Additionally, reporting entities should disclose the nature and potential effects of any other tax law provision that might limit the availability or utilization of loss or tax credit carryforward amounts. For example, carryforwards may face limitations caused by changes in ownership.
If there are circumstances that make a change in ownership reasonably possible in the foreseeable future, a general description of those circumstances may be warranted. More specific disclosures concerning the limitation should be made if the triggering event is probable. Some examples of circumstances that might warrant such disclosure include a planned public offering or outstanding convertible debt with an exercise price that is below market.
It may also be appropriate for reporting entities to disclose the fact that an annual limitation exists (e.g., NOLs that can only be used to offset a percentage of taxable income in a given year) so that financial statement users understand the timeframe over which carryforwards can be used and the effect the limitation has on cash taxes each year.
Regulated investment companies may need to consider additional disclosures related to expiration dates as prescribed by ASC 946-740-55-2.

16.3.4 Unrecognized deferred tax liability for subsidiaries and JVs

In certain situations, reporting entities might not record a deferred tax liability for specific temporary differences. In these situations, as discussed in ASC 740-30-50-2, the following disclosures are required:
  • A description of the types of temporary differences and the types of events that would cause those differences to become taxable
  • The cumulative amount of each type of temporary difference
  • The amount of any unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries, and foreign corporate joint ventures that are essentially permanent in duration if determination of the amount of unrecognized deferred tax liability is practicable, or a statement that a determination is not practicable
    • We believe this disclosure should include unrecognized deferred liabilities related to the entire outside basis difference, including unremitted earnings and cumulative translation adjustments.
  • The amount of any unrecognized deferred tax liability for each type of temporary difference other than those in the previous bullet
    • In accordance with ASC 740-30-25-18, this would apply to unremitted earnings of a domestic subsidiary or corporate joint venture that are permanent in duration that were earned prior to the 1993 effective date of ASC 740.
    • No disclosure is required for unremitted earnings of domestic subsidiaries if such earnings are expected to be recovered in a tax-free manner. For more information on unremitted earnings and outside basis differences, see TX 11.
If it is at least reasonably possible that within one year there will be a change in either a reporting entity’s indefinite reversal assertion or in the expected method of recovery of the investment in a domestic subsidiary, disclosure under the risks and uncertainties guidance of ASC 275-10-50-9 may be required. See FSP 24.
The SEC staff also considers the consistency between a reporting entity’s MD&A disclosures of liquidity and capital resources and its indefinite reinvestment assertions related to foreign earnings. For example, a reporting entity’s MD&A might describe a business situation that necessitates significant cash, but the entity does not appear to have sufficient domestic cash available. The reporting entity’s foreign subsidiaries may have sufficient cash to fund the parent, but the parent has asserted indefinite reinvestment of those funds. The staff’s comments emphasize the need to provide accurate, transparent, and plain-language disclosures of significant tax-related assertions and estimates, including those associated with undistributed foreign earnings.

16.3.5 Other balance sheet disclosures required for income taxes

There are additional required balance sheet disclosures for deferred tax accounts:
  • As discussed in ASC 740-10-50-3(b), any portion of the valuation allowance for deferred tax assets for which subsequently recognized tax benefits will be credited directly to contributed capital
  • The amount of income tax expense or benefit allocated to each component of other comprehensive income, including reclassification adjustments, either on the face of the statements in which those components are displayed or in footnotes, as required by ASC 220-10-45-12
    • See FSP 4.4 for further discussion of these presentation options.
  • As discussed in ASC 220-10-50-1, a description of the accounting policy for releasing disproportionate income tax effects from AOCI (e.g., for available for sale debt securities, the “aggregate portfolio” or “investment-by-investment” approach)
  • As discussed in FASB Staff Q&A: Topic 740, No. 5, the accounting policy related to GILTI (i.e., accounting for GILTI as a period cost or recording GILTI deferred taxes) in accordance with ASC 235-10-50-1 through ASC 235-10-50-3
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