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16.5 Disclosures related to income statement income tax amounts
Publication date: 30 Oct 2021 (updated 30 Sep 2023)
us Financial statement presentation guide
ASC 740-10-50-9 through ASC 740-10-50-14 require certain disclosures about income statement amounts related to income taxes. In addition, 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) should be disclosed. For SEC registrants, S-X 4-08(h) requires certain incremental disclosures.
16.5.1 Amount of income tax expense or benefit
As discussed in ASC 740-10-50-10, reporting entities are required to disclose the amount of income tax expense or benefit allocated to continuing operations. In practice, this is frequently presented on the face of the income statement. In addition, reporting entities must also disclose amounts separately allocated to other categories of income in accordance with the intraperiod tax allocation provisions, such as discontinued operations and a cumulative effect of a change in accounting principle.
16.5.2 Effective tax rate reconciliation
As discussed in ASC 740-10-50-12, public entities (see FSP 16.3.1 for definition) are required to provide a tax rate reconciliation that reconciles income tax expense attributable to continuing operations to the statutory federal income tax rate applied to pretax income from continuing operations (see FSP 16.8 for private entity disclosure requirements). Foreign public entities should use the income tax rate in the entity’s country of domicile. When a rate other than the US federal corporate income tax rate is used, the rate and basis for using that rate should be disclosed.
Public entities can present the reconciliation using either dollar amounts or percentages. The reconciliation should include the estimated amount and the nature of each significant reconciling item.
Although ASC 740 does not define what “significant” means with regard to the rate reconciliation, S-X 4-08(h) does provide guidance. It requires disclosure of individual reconciling items that are more than 5% of the amount computed by multiplying pretax income by the statutory tax rate (e.g., for a US-based entity subject to the 21% statutory tax rate, any item that increases or decreases the tax rate by 1.05% or more). SEC registrants should ensure that items are not aggregated or disaggregated to avoid this requirement, that reconciling items below this threshold are displayed in appropriate categories, and that groupings are consistent from year to year.
16.5.3 Significant components of income tax expense
Both public and nonpublic entities are required to disclose significant components of income tax expense attributable to continuing operations.
The significant components of income tax expense attributable to continuing operations for each year presented shall be disclosed in the financial statements or notes thereto. Those components would include, for example:
- Current tax expense (or benefit)
- Deferred tax expense (or benefit) (exclusive of the effects of other components listed below)
- Investment tax credits
- Government grants (to the extent recognized as a reduction of income tax expense)
- The benefits of operating loss carryforwards
- Tax expense that results from allocating certain tax benefits directly to contributed capital
- Adjustments of a deferred tax liability or asset for enacted changes in tax laws or rates or a change in the tax status of the entity
- Adjustments of the beginning-of-the-year balance of a valuation allowance because of a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years. For example, any acquisition-date income tax benefits or expenses recognized from changes in the acquirer’s valuation allowance for its previously existing deferred tax assets as a result of a business combination (see paragraph 805-740-30-3).
The sum of the amounts disclosed for the components of tax expense should equal the amount of tax expense that is reported in income from continuing operations. Insignificant components can be grouped in an “other” category. These items are typically discussed in a narrative disclosure.
ASC 740-10-55-212 through ASC 740-10-55-216 provides three examples that illustrate this disclosure requirement.
16.5.3.1 Investment tax credit disclosures
ASC 740-10-50-20 requires disclosures detailing the method of accounting (either the deferral method or the flow-through method) used to account for investment tax credits and the amounts involved. See TX 3 for investment tax credit accounting considerations.
16.5.3.2 Current and deferred taxes for changes in tax laws, rates, or status
As discussed in FSP 16.4.3, the effects of changes in tax laws or rates are recognized in income from continuing operations in the period that includes the enactment date. The tax effect of the enacted tax rates on current and deferred tax assets and liabilities should be determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment.
Changes in tax rates may be retroactive to the beginning of the current year. In these instances, we believe it would generally be sufficient to disclose (1) the effect of the rate change on beginning-of-year deferred tax balances, and (2) the effect of the rate change on current and deferred taxes provided prior to the enactment date. Both of these items should be considered in the rate reconciliation. In any case, the amount(s) disclosed should be clearly described.
As discussed in ASC 740-10-45-19, if a reporting entity experiences a change in tax status (e.g., change from a nontaxable partnership to a taxable corporation), the deferred tax effects of that change should be disclosed as a component of income tax expense attributable to continuing operations. See TX 8.1 for discussion of changes in tax status.
16.5.4 Disclosures for investments in tax credit structures (after adoption of ASU 2023-02)
ASC 323-740 addresses investments in tax credit structures that provide income tax credits and other income tax benefits associated with the development of certain types of projects, such as low-income housing, rehabilitation of historic structures, investments in the infrastructure of economically-challenged geographic areas, and renewable energy projects such as solar and wind. Provided certain criteria are met, investors can make an election to apply the proportional amortization method to such investments.
New guidance
ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), expanded the availability of the proportional amortization method (PAM), previously allowed only for investments in low-income housing tax credit structures, to equity investments in other tax credit structures that meet certain criteria. See TX 3.3.6 for guidance regarding the application of PAM and the effective date of ASU 2023-02.
The disclosure requirements in ASC 323-740-50-1 through ASC 323-740-50-2 are meant to provide financial statement users with information about a reporting entity’s investments in tax credit structures and their impact on reported financial results, including amounts reflected in the balance sheet, income statement, and statement of cash flows from these investments.
These disclosures are required not only for investments accounted for under PAM, but all investments within the tax credit programs for which the reporting entity has elected to apply PAM, including investments within that elected program that do not meet the conditions to apply PAM. A reporting entity could also choose to provide information about investments in tax credit programs for which the entity has elected not to apply PAM to better highlight amounts reflected in pre-tax income and income tax expense associated with all investments in tax credit structures.
The following disclosure requirements are applicable for both annual and interim periods:
To meet the objectives in paragraph 323-740-50-1, a reporting entity shall disclose the following information about its investments that generate income tax credits and other income tax benefits from a tax credit program for which it has elected on a tax-credit-program-by-tax-credit-program basis to apply the proportional amortization method, including investments within that elected tax credit program that do not meet the conditions in paragraph 323-740-25-1:
- The amount of income tax credits and other income tax benefits recognized during the period, including the line item in the statement of operations and statement of cash flows in which it has been recognized
- The amount of investments and the line item in which the investments are recognized in the statement of financial position
- For investments accounted for using the proportional amortization method, the amount of investment amortization recognized as a component of income tax expense (benefit)
- For investments accounted for using the proportional amortization method, the amount of non-income-tax-related activity and other returns received that is recognized outside of income tax expense (benefit) and the line item in the statement of operations and statement of cash flows in which it has been recognized
- For investments accounted for using the proportional amortization method, significant modifications or events that resulted in a change in the nature of the investment or a change in the relationship with the underlying project.
In accordance with ASC 323-740-50-2, a reporting entity should also consider the following disclosures:
- The amount of investment income or loss included in pretax income (for investments accounted for using the equity method)
- Any commitments or contingent commitments (e.g., guarantees or commitments to provide additional capital contributions), including the amount of delayed equity contributions and the year(s) in which contingent commitments are expected to be paid
- The amount and nature of impairment losses during the year resulting from the forfeiture or ineligibility of income tax credits or other circumstances (e.g., in a qualified affordable housing project investment, those impairment losses may be based on actual property-level foreclosures, loss of qualification due to occupancy levels, compliance issues with tax code provisions, or other issues)
In addition to the ongoing disclosure requirements discussed in this section, reporting entities must make disclosures regarding the transition to the new guidance in ASU 2023-02, consistent with ASC 250 on accounting changes and error changes, in the financial statements of both the interim period of the change and the fiscal year of the change.
See ASC 323-740-50 for disclosure considerations prior to the adoption of ASU 2023-02.
16.5.5 Additional income tax disclosures for SEC registrants
S-X 4-08(h) requires certain additional disclosures that are not specifically required by ASC 740. They include:
- Identifying the components of income (loss) before tax expense (benefit) as either foreign or domestic
- Separately stating for each major component of income tax expense (i.e., current and deferred) the amounts applicable to US federal income taxes, foreign income taxes, and other income taxes
These disclosure requirements apply not only to continuing operations, but also to total pretax income and total tax expense. However, question 7 of SAB Topic 6.I., Accounting Series Release 149—Improved Disclosure Of Income Tax Expense, indicates that “overall” disclosures of the components of total income tax expense (i.e., current versus deferred, and US federal versus foreign versus other) are acceptable. In other words, it is not necessary to make such disclosures separately with respect to each of the different categories (continuing operations, discontinued operations, other comprehensive income, etc.) in which income tax expense is reported.
In addition, SAB Topic 11.C, Tax Holidays (codified in ASC 740-10-S99-2), requires disclosure of tax holidays from income taxes that the reporting entity has been granted for a specified period. The disclosure should include the aggregate dollar and per-share effects of the tax holiday, and briefly describe the facts and circumstances, including the date on which the special tax status will terminate.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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