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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

Reporting entities are required to disclose total deferred tax assets and total deferred tax liabilities for each period a balance sheet is presented.
Disclosure requirements regarding temporary differences and carryforward information differ between public entities and nonpublic companies. ASC 740defines 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 company (i.e., a company that does not meet the definition of a public 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 company must disclose qualitative information on the nature of significant items. See FSP 16.8 for additional disclosure considerations for nonpublic companies.

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.
Judgment about future taxable income often enters into the determination of the valuation allowance. In such cases, management should consider disclosing the extent to which realization of the tax assets depends on such future taxable income. In some cases, SEC comment letters have indicated that certain incremental disclosures with respect to deferred tax assets are required. 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 4.3.3.5 for discussion of certain rare situations where it may be appropriate to write off an asset against the valuation allowance when the likelihood of realization is remote.

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. SEC staff comment letters have focused on required disclosures in this area. In certain instances, they have asked reporting entities to explain and disclose specifically why an estimate is not practicable if not provided.
  • 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-English 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 740-10-50-14, the nature and effect of any significant matters affecting comparability of information for all periods presented (unless otherwise evident from other disclosures)
  • 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, all reporting entities must disclose a description of their accounting policy for releasing disproportionate income tax effects from AOCI (e.g., for AFS securities, the “aggregate portfolio” or “investment-by-investment” approach). Refer to TX 12.3.3.3 for further discussion.
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