Example FSP 16-5, Example FSP 16-6, and Example FSP 16-7 illustrate the impact of various scenarios on the tabular reconciliation of unrecognized tax benefits.
EXAMPLE FSP 16-5
Tabular reconciliation — valuation allowances
FSP Corp has taken various tax positions on a tax return that resulted in a net operating loss carryforward with a potential benefit of $10,000. The related deferred tax asset, if recorded, would require a full valuation allowance. Assume that only $3,000 of the potential $10,000 tax benefit has met the threshold for financial statement recognition.
What amount should be included in the tabular reconciliation of unrecognized tax benefits?
FSP Corp should include $7,000 in the tabular reconciliation of unrecognized tax benefits. This represents the difference between the amount taken on the tax return ($10,000) and the amount recognized for financial reporting purposes ($3,000). In this case, the gross deferred tax asset and related valuation allowance reported in the income tax footnote should be $3,000. For balance sheet presentation purposes, no amount is recognized because the deferred tax asset of $3,000 is offset by the $3,000 valuation allowance.
The $7,000 reduction in the deferred tax asset is considered an unrecognized tax benefit and should be included in the annual tabular reconciliation, regardless of the fact that a valuation allowance would be required if the $7,000 were recognized.
In summary, all gross unrecognized tax benefits, whether they result in a liability or a reduction of deferred tax assets and/or refundable amounts, should be included in the tabular reconciliation.
EXAMPLE FSP 16-6
Tabular reconciliation — refund claim filed after the balance sheet reporting date
FSP Corp expects to file a refund claim (related to a current period tax position) after the balance sheet reporting date. An unrecognized tax benefit of $10,000 will be included within the refund claim.
Should this unrecognized tax benefit be included in the year-end tabular reconciliation, even though the refund claim that will give rise to the unrecognized tax benefit has not been filed as of the balance sheet date?
Yes. Though not recognized in the financial statements, the unrecognized tax benefit associated with this claim should be disclosed in the tabular reconciliation as required by ASC 740-10-50-15A
A public entity is required to evaluate tax positions in a refund claim regardless of whether the claim for refund is filed as of the current-period balance sheet date or is expected to be filed, provided it is related to a current-period or prior-period tax position.
EXAMPLE FSP 16-7
Tabular reconciliation — determining when to include items in the reconciliation
In the fourth quarter of 20X1, FSP Corp generates a loss of $1,000 related to the sale of an investment. Because FSP Corp does not have ordinary income or capital gains in the current year or the applicable carryback periods, the loss is a carryforward. Management expects to take a tax return filing position characterizing the loss as ordinary rather than capital in nature. There is some support in the law for the position; however, in applying ASC 740-10-25-6
, management concludes that the position does not meet the more-likely-than-not threshold for financial statement recognition.
The applicable tax rate in the jurisdiction is 25% for both ordinary income and capital gains; however, capital losses can only be used to offset capital gains. FSP Corp recognizes a $250 deferred tax asset because the carryforward constitutes a tax attribute regardless of the nature of the loss.
In 20X2, FSP Corp generates a profit that is all ordinary in nature and utilizes all of its loss carryforwards to reduce taxable income and taxes payable.
How should the unrecognized tax benefit be recorded and presented in 20X1 and 20X2?
We believe that $250 of unrecognized tax benefit should be included in the 20X1 tabular reconciliation. ASC 740 defines the term “tax position” as a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. As part of that definition, ASC 740 specifies that a tax position also encompasses the characterization of income.
In 20X2, a $250 unrecognized tax benefit liability should be recorded on the balance sheet because, at the time, FSP Corp began utilizing the “as filed” 20X1 loss carryforward to reduce taxable income and thus paid less income tax than it would have had the original $1,000 loss been determined to be capital in nature. In addition, a deferred tax asset for the future deductible amount associated with the capital loss should continue to be recorded during 20X2 (and possibly beyond) even though, on an “as filed” basis, FSP Corp utilized the loss carryforward on the 20X2 tax return.
With regard to the 20X2 tabular reconciliation, since the $250 unrecognized tax benefit was included in 20X1, no additional entry is necessary in 20X2.
It should be noted that in both 20X1 and 20X2, FSP Corp must assess the realizability of the deferred tax asset based upon whether there is sufficient future taxable income of the appropriate character (i.e., future capital gains). Otherwise, a valuation allowance would be required against the deferred tax asset. In that case, the unrecognized tax benefit amount would also be disclosed because it would affect the effective tax rate (see FSP 16.7.5 for discussion of this disclosure requirement).