Search within this section
Select a section below and enter your search term, or to search all click Financial statement presentation
Favorited Content
16.6 Presentation and disclosure of uncertain tax positions
Publication date: 30 Oct 2021 (updated 30 Sep 2023)
us Financial statement presentation guide
Uncertain tax positions represent tax positions taken that are subject to varied interpretations of applicable tax law. ASC 740 prescribes a comprehensive two-step model for recognizing, measuring, and disclosing uncertain tax positions. This section includes discussion of the presentation and disclosure requirements related to uncertain tax positions. See TX 15 for discussion of the recognition and measurement requirements related to uncertain tax positions.
16.6.1 Presentation of unrecognized tax benefits
ASC 740-10-45-11 indicates that the balance sheet classification of a liability for an unrecognized tax benefit as current versus noncurrent is determined based on the expected timing of cash payments, if any. That is, to the extent that cash payments are anticipated within one year or the operating cycle, if longer, a liability for an unrecognized tax benefit is classified as a current liability. Otherwise, such amounts should be reflected as noncurrent liabilities.
Balance sheet classification should be based on management’s expectation of future cash payments. For example, if $40 of a $100 liability for an unrecognized tax benefit is expected to be paid within 12 months, only $40 should be classified as a current liability; the remaining $60 should be classified as a noncurrent liability. Similarly, if management expects that its liability for an unrecognized tax benefit will reverse without cash consequences within 12 months (e.g., because the statute of limitation will expire), the associated liability should be classified as noncurrent because no cash payments are anticipated to settle the liability.
16.6.2 Uncertain tax positions in foreign registrants
Foreign registrants that present a US GAAP reconciliation must present the reconciliation in accordance with Item 18 of Form 20-F, and therefore are required to provide the complete disclosures. A non-issuer foreign business that provides a quantitative reconciliation under Item 17 of Form 20-F is not required to apply the disclosure provisions established in ASC 740-10-50-15, 50-15A and ASC 740-10-50-19.
16.6.2.1 Netting unrecognized tax benefits with carryforwards
ASC 740-10-45-10A and ASC 740-10-45-10B clarify the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Unrecognized tax benefits should be presented in the financial statements as a reduction to the deferred tax asset related to an NOL carryforward, a similar tax loss, or a tax credit carryforward. This presentation is not appropriate if:
- the NOL, similar tax loss, or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income generated by disallowance of a tax position, or
- the tax law does not require the entity to use, or the entity does not intend to use, the NOL, similar tax loss, or tax credit carryforward to offset additional income generated by disallowance of a tax position.
If either of these exceptions exist, the unrecognized tax benefit should be presented as a liability and not netted against the deferred tax asset for an NOL, similar tax loss, or tax credit carryforward.
Example FSP 16-3 illustrates how the unrecognized tax benefit should be considered when measuring the valuation allowance necessary to reduce deferred tax assets to their realizable value.
EXAMPLE FSP 16-3
Netting unrecognized tax benefits with NOL carryforwards
Netting unrecognized tax benefits with NOL carryforwards
As of December 31, 20X1, Company A has $800 in NOL carryforwards. The related deferred tax assets (DTAs) are offset by a full valuation allowance as a result of significant negative evidence.
In 20X2, Company A expects to report taxable income of $100 on its tax return. This taxable income includes a $20 deduction that does not meet the ASC 740-10-25 recognition threshold and therefore constitutes an unrecognized tax benefit. Assume that the tax rate is 25% and that the assessment of the need for a full valuation allowance has not changed as of December 31, 20X2.
Should Company A reduce the DTA for the NOLs carried forward from 20X1 on its balance sheet for the unrecognized tax benefit recorded in 20X2?
Analysis
Yes. Company A should present the NOL carryforwards net of the liability for unrecognized tax benefit of $5 ($20 deduction x 25%). The $5 liability would be a source of income for the purposes of assessing whether a valuation allowance is necessary and would therefore reduce the valuation allowance required.
Balance sheet reporting as of December 31, 20X2, is as follows:
DTA-NOL carryforward
|
$170
|
Valuation allowance
|
(170) |
Net DTA
|
0 |
16.6.3 Disclosure requirements for uncertain tax positions
ASC 740 requires a qualitative discussion of only those positions where a change is reasonably possible within the next 12 months. Further, for public entities as defined in ASC 740 (see FSP 16.3.1), the quantitative rollforward of unrecognized tax benefits is prepared on a worldwide aggregated basis. The specific disclosure requirements are discussed in the following sections.
ASC 740-10-55-217 provides an illustrative disclosure about uncertainty in income taxes.
Question FSP 16-3 addresses the periods for which unrecognized tax benefit disclosures should be included in annual financial statements.
Question FSP 16-3
For what periods should unrecognized tax benefit disclosures be provided for purposes of annual financial statements?
For what periods should unrecognized tax benefit disclosures be provided for purposes of annual financial statements?
PwC response
ASC 740-10-50-15 requires reporting entities to provide disclosures as of the end of each annual reporting period presented in the financial statements.
To meet this requirement, we believe disclosures related to historical information reflected in the financial statements (e.g., the tabular reconciliation of unrecognized tax benefits discussed in FSP 16.6.5) should cover the years for which income statements are presented.
For disclosures that are primarily forward-looking in nature (e.g., the total amount of unrecognized tax benefit that, if recognized, would affect the effective tax rate discussed in FSP 16.6.6), we believe a reporting entity could present this information as of the most recent balance sheet date only. However, in practice, some reporting entities have taken an alternative point of view that the requirements related to unrecognized tax benefits should be presented for all periods presented. We believe either approach is acceptable for disclosures that are primarily forward-looking in nature.
16.6.4 Reasonably possible changes within the next 12 months
Reporting entities must disclose the nature of uncertain tax positions and related events if it is reasonably possible that the positions and events could change the associated recognized tax benefits within the next 12 months. This includes previously unrecognized tax benefits that are expected to be recognized upon the expiration of a statute of limitations within the next year.
ASC 740-10-50-15(d) requires the following disclosures:
- Nature of the uncertainty
- Nature of the event that could occur within the next 12 months to cause the change
- Estimate of the range of the reasonably possible change, or statement that an estimate of the range cannot be made
In preparing this disclosure, all facts and circumstances should be considered. In certain instances, an uncertain tax position may not meet the recognition threshold, but management expects the statute of limitations to expire within the next 12 months and does not expect the taxing authority to identify the exposure. When this occurs, the total amount of the unrecognized tax benefit should be disclosed as being expected to change within the next 12 months.
Management will need to exercise judgment in determining the level of aggregation that is appropriate for this disclosure. While some level of aggregation is expected, we believe that the information should be appropriately detailed to provide a reader of the financial statements with some context as to which circumstances may cause the unrecognized tax benefits to significantly change.
The disclosure requirements related to unrecognized tax benefits apply annually as noted in ASC 740-10-50-15(d). However, the early warning disclosure requirements of ASC 275, Risks and Uncertainties, are also still applicable. Accordingly, reporting entities should disclose reasonably possible significant changes in unrecognized tax benefits on a rolling 12-month basis.
16.6.5 Tabular reconciliation of unrecognized tax benefits
ASC 740-10-50-15A requires public entities to disclose a reconciliation of the beginning and ending balances of the unrecognized tax benefits from uncertain positions. This rollforward must include all unrecognized benefits—whether they are reflected in a liability or as a decrease in a deferred tax asset (irrespective of whether a valuation allowance would be required). The rollforward should cover all income statement periods presented and include the following items.
Excerpt from ASC 740-10-50-15A(a)
- The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period
- The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during the current period
- The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities
- Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations.
Public entities may consider including additional line items such as reclassifications of a liability to or from a deferred tax liability to reflect exposures that only affect timing. Public entities may also consider disaggregating the above line items to provide further details. For instance, they may disaggregate details about changes that affected the effective tax rate, or changes that were recorded outside the income statement (e.g., recorded as a component of other comprehensive income, against goodwill for uncertainties arising from business combinations, or decreases due to the disposal of a business unit).
An investor in a pass-through entity (e.g., partnerships, S-corporations, limited liability companies) should include in its tabular reconciliation its respective interest in the pass-through entity’s underlying unrecognized tax benefits, regardless of whether the pass-through entity is consolidated or accounted for under the equity method. Conversely, an investor in a non-pass-through entity (e.g., an investment in a C-corporation) that is accounted for under the equity method would not be expected to include the uncertain tax positions of the non-pass-through investee in its tabular reconciliation. However, disclosures of significant tax uncertainties of a non-pass-through investee that could affect the investor may be appropriate.
16.6.5.1 Unrecognized tax benefits for positions taken in prior years
Amounts reported on the “unrecognized tax benefits for positions taken in prior years” line item typically represent an uncertain tax position taken in a prior year for which measurement has changed for one of two reasons: (1) the reporting entity met one of the subsequent recognition thresholds in ASC 740-10-25-8, or (2) new information supported a change in measurement.
Question FSP 16-4 addresses how a public entity should reflect an unrecognized tax benefit that reduces a deferred tax asset for an NOL carryforward, similar tax loss, or a tax credit carryforward when there is a change in corporate tax rate.
Question FSP 16-4
The tabular rollforward of unrecognized tax benefits should include the unrecognized tax benefits reported in the financial statements as a direct reduction to the deferred tax asset for the NOL carryforward, a similar tax loss, or the tax credit carryforward to which it relates. In instances when an unrecognized tax benefit reduces an NOL and there is a corporate tax rate change in the period, should the unrecognized tax benefit (as disclosed in the tabular rollforward) be adjusted to reflect the reduced corporate tax rate (e.g., from 35% to 21%)?
The tabular rollforward of unrecognized tax benefits should include the unrecognized tax benefits reported in the financial statements as a direct reduction to the deferred tax asset for the NOL carryforward, a similar tax loss, or the tax credit carryforward to which it relates. In instances when an unrecognized tax benefit reduces an NOL and there is a corporate tax rate change in the period, should the unrecognized tax benefit (as disclosed in the tabular rollforward) be adjusted to reflect the reduced corporate tax rate (e.g., from 35% to 21%)?
PwC response
Yes. The tabular rollforward reflects tax benefits that have not yet been recognized in the financial statements. In this scenario, the tax benefit that would be recognized upon a favorable resolution of the tax position would result in an NOL carryforward that would provide a 21% tax benefit. As a result, the tabular rollforward should reflect the unrecognized tax benefit at the reduced rate. This conclusion applies both when the unrecognized tax benefit is directly associated with a tax position taken in a tax year that resulted in the recognition of the NOL, and when the unrecognized tax benefit itself did not generate the NOL, but rather the NOL is available to offset any additional income if the tax position is disallowed.
16.6.5.2 Unrecognized tax benefits for current year positions
On occasion, a public entity may take an uncertain tax position during the year, and then change its assessment of the amount of benefit to be recognized within the same annual reporting period. When this occurs, the tabular reconciliation should only reflect the net addition in existence at the end of the year when disclosing the gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during the entire year.
16.6.5.3 Settlement of unrecognized tax benefits with tax authorities
Certain settlements with taxing authorities may result in no cash payments (e.g., a taxing authority may concede a position taken on a tax return resulting in no cash payments to the taxing authority for that position). Only amounts paid, or tax attributes (e.g., net operating losses) used in lieu of payment, should be included in this line item of the tabular reconciliation. Public entities should reflect a decrease in unrecognized tax benefits resulting from concessions or adjustments by the taxing authority as a change to prior-period unrecognized tax benefits.
If unrecognized tax benefits on a prior-year uncertain tax position were both established and paid out in the same year, public entities should report the movement gross. That is, an increase should be reflected in “The gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period” line, while the payment of cash to settle the position should be reflected in “The amounts of decreases in the unrecognized tax benefits relating to settlements with taxing authorities” line.
As illustrated in Example FSP 16-4, an increase in unrecognized tax benefits on one position and the settlement of an unrelated position during the same period, even if for a similar amount, should be reported gross.
EXAMPLE FSP 16-4
Tabular reconciliation — settlement of uncertain tax positions
Tabular reconciliation — settlement of uncertain tax positions
In a prior year, FSP Corp had two unrecognized tax benefits (UTBs) of $100 and $150 (UTBs A and B, respectively) related to two different uncertain tax positions. For UTB A, FSP Corp reached an agreement with the taxing authority to settle the position for $80. For UTB B, it is in the appeals process and FSP Corp does not expect to settle the position until the following year. The $80 settlement for UTB A is paid after year end.
How should FSP Corp reflect the year’s activity associated with these unrelated positions in its disclosure?
Analysis
A settlement reached with a taxing authority as of year-end should generally be shown in the line item “Decrease in unrecognized tax benefits relating to settlements with taxing authority,” notwithstanding that the actual cash payment is made subsequent to year end. This is because the uncertainty related to these particular tax positions has been resolved as of the balance sheet date and it is clear that a payment will be made subsequent to year-end.
In this example, FSP Corp’s line item “Decrease in unrecognized tax benefits relating to settlements with taxing authority” would show a decrease of $80 to reflect the $80 settlement for UTB A. The line item “Gross amounts of increases and decreases in unrecognized tax benefits as a result of tax positions taken during a prior period” would reflect a decrease of $20 due to the unrecognized tax benefit of $100 for UTB A being resolved for $80.
No change would be reflected for UTB B because it is still in the appeals process.
16.6.5.4 UTB sustained due to lapse of the applicable statute of limitations
Amounts reported in this line represent tax benefits that were sustained by the reporting entity because the taxing authority’s period of assessment has passed.
16.6.5.5 Examples of the UTB tabular reconciliation
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
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?
Analysis
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
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?
Analysis
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).
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
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?
Analysis
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 on 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. The unrecognized tax benefit amount would need to be included in the tabular reconciliation. In addition, FSP Corp must disclose the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate (see FSP 16.6.6 for discussion of this disclosure requirement).
16.6.5.6 Items to exclude from the UTB tabular reconciliation
Indirect effects between jurisdictions
An unrecognized tax benefit in one jurisdiction could have an impact on a tax liability in another jurisdiction (such as a state unrecognized tax benefit affecting the amount of state taxes that would be deductible for US federal purposes). When this occurs, the tabular reconciliation of unrecognized tax benefits should not include consideration of the effect in other jurisdictions (e.g., the corresponding deferred tax asset related to the federal deduction for state taxes). Instead, these indirect effects between jurisdictions are recorded in the financial statements if recognition and measurement have been met under ASC 740 and are therefore recognized and not a part of the disclosure of unrecognized tax benefits). See TX 15.3.1.6 for further discussion.
Interest and penalties
Interest and penalties should not be included in the annual tabular reconciliation as unrecognized tax benefits, even if a reporting entity has elected an accounting policy to classify interest and penalties as a component of income taxes. Refer to ASC 740-10-50-15A for the tabular reconciliation requirements.
Treatment of deposits
If a reporting entity makes an advance deposit (regardless of whether it is refundable on demand or considered by the taxing authority as a payment of taxes), it should have no impact on the amount of unrecognized tax benefit that is reflected in the tabular reconciliation. This is because advance deposits are essentially equivalent to advance tax payments. As such, they should not be included as an offset to unrecognized tax benefits in the annual tabular reconciliation disclosure. Advance tax payments or tax deposits do not serve as indicators of the uncertain tax positions sustainability; their effect is neutral with regard to the liability for unrecognized tax benefits.
16.6.6 Unrecognized tax benefits that would affect the ETR
ASC 740-10-50-15A(b) requires public entities to disclose the total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate. Therefore, this disclosure should include only unrecognized tax benefits that affect (if recognized) the tax provision within continuing operations.
Although this guidance specifically requires disclosure related to items that would affect the tax provision within continuing operations, public entities should also provide supplemental disclosures for resolutions of uncertain tax positions that, if sustained, would affect items other than the tax provision from continuing operations. Examples of unrecognized tax benefits that may not affect the tax provision within continuing operations include acquisition-related measurement period adjustments pursuant to ASC 805, Business Combinations, and measurement period adjustments occurring in connection with reorganizations in fresh-start balance sheets pursuant to ASC 852, Reorganizations.
In addition, as discussed in FSP 16.6.5.6, the indirect effects of uncertain tax positions in other jurisdictions should not be included within the tabular rollforward of unrecognized tax benefits. We understand, however, that for purposes of applying the disclosure requirements specified in ASC 740-10-50-15A(b), a public entity might consider the indirect effects in other jurisdictions.
Further, uncertain tax positions embedded in a net operating loss carryforward that carries a full valuation allowance would not affect the effective tax rate, as long as the uncertainty is expected to be resolved while a full valuation allowance is maintained. The guidance does not specify whether any of these positions are required to be included in this disclosure. However, we believe public entities should consider providing additional transparency in this disclosure. For example, consider an uncertain tax benefit that could create an additional net operating loss carryforward, along with an additional valuation allowance. In this situation, a public entity may disclose that if the unrecognized tax benefit is recognized, it would be in the form of a net operating loss carryforward, which is expected to require a full valuation allowance based on present circumstances.
16.6.7 Tax years subject to examination by major jurisdictions
ASC 740-10-50-15(e) requires reporting entities to disclose all tax years that remain open to assessment by a major tax jurisdiction. We believe, in certain situations, this disclosure would include a jurisdiction where the reporting entity has not filed a tax return. For example, the reporting entity may have taken a tax position regarding a tax status of one of its legal entities whereby the potential tax exposure related to the reporting entity could be significant. In this fact pattern, the reporting entity may need to identify the tax jurisdiction as still being subject to examination.
1 NOL at 12/31/X1 of $800 – 20X2 taxable income of $100 = $700; $700 × 25% = $175 – $5 (liability for unrecognized tax benefit) = $170
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.
Link copied
