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ASC 740 and other accounting standards require disclosures for other transactions that have income tax effects. These are discussed in the following sections.

16.7.1 Income tax-related disclosures for stock-based compensation

ASC 718-740 requires disclosures related to the income tax effects of stock-based compensation. See FSP 15 for these required disclosures.

16.7.2 Income tax-related disclosures for pass-through entities

Some business entities are treated as a conduit for tax purposes, where the business entity’s income is not taxed directly as a legal entity but is instead passed to its owners or investors. These entities can include partnerships, certain limited liability companies, and other entities disregarded for tax purposes. As provided under ASC 740-10-50-16, a public entity that is not subject to income taxes because its income is taxed directly to its owners should disclose that fact, as well as the net difference between the tax bases and the reported amounts of the reporting entity’s assets and liabilities.
Question FSP 16-5
Regulated investment companies (RICs) and real estate investment trusts (REITs) are taxable entities, but are not subject to income tax on income they distribute currently to shareholders if they meet certain requirements. In practice, most RICs and REITS distribute substantially all of their income such that they are effectively nontaxable. Do the disclosure requirements of ASC 740-10-50-16 apply to RICs and REITs?
PwC response
Yes. RICs and REITs are not subject to tax (by means of a dividends paid deduction) if distribution requirements and other conditions are met. Therefore, ASC 740-10-50-16 requires RICs and REITs that are publicly traded to disclose the fact that they are not taxed. In addition, it also requires such entities to disclose the net difference between the tax bases and the reported amounts of their assets and liabilities. Presumably this disclosure is meant to indicate to an owner (or prospective owner) what future taxable income or deductions, disproportionate to reported amounts, will be generated for his/her ownership interest by the entity’s future operations. However, for some entities the depreciation or depletion deductions available to individual owners will not be pro rata to ownership interest but will instead reflect the different outside tax bases of the individual owners. Further, each owner’s tax accounting (e.g., depletion calculations for mineral properties) might depend on his or her individual tax position. Thus, the entity itself frequently will not have information about individual owners’ tax bases.
It does not appear that disclosure of the aggregate tax bases would be meaningful, since individual owners will not share the tax basis pro rata. We believe that if these circumstances make it impracticable for an entity to determine the aggregate tax basis of the individual owners, the entity should indicate this in the financial statements and explain that the amount would not be meaningful.
As RICs and REITs do not “pass through” tax losses to owners (as partnerships do), they must disclose the amount of any operating or capital loss carryforward.
When a pass-through entity is a member of a group that files a consolidated tax return, ASC 740-10-30-27A provides an accounting policy election for allocating consolidated income tax expense to the reporting entity if it is both (1) not subject to tax and (2) disregarded by the taxing authority. For example, this election would be available to a single-member LLC that did not “check the box” and elect to be taxed as an association, but would not be available to a partnership because it is not disregarded by the tax authority. This accounting policy election can be applied on an entity-by-entity basis even if the separate entities are included in the same consolidated income tax return. A reporting entity that meets this criteria and elects to include the allocated amount of current and deferred tax expense in its separately issued financial statements must disclose that fact, along with the disclosures discussed in FSP 16.7.3.

16.7.3 Tax disclosures in separate financial statements of a subsidiary

In accordance with ASC 740-10-50-17, when a reporting entity is a member of a group that files a consolidated tax return, it must disclose the following items in its separately issued financial statements:
  • The aggregate amount of current and deferred tax expense for each income statement presented, and the amount of any tax-related balances due to or from affiliates as of the date of each balance sheet presented
  • The principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to members of the group, and the nature and effect of any changes in that method (and in determining related balances to or from affiliates) during the years for which the disclosures are presented

These disclosure requirements are in lieu of, rather than in addition to, the general disclosure requirements required under ASC 740. However, we believe that it may be helpful in separately issued financial statements to also include a description of the types, and potentially the amounts, of significant temporary differences and uncertain tax positions.
ASC 740-10-30-27A provides an accounting policy election for allocating consolidated income tax expense to the reporting entity if the reporting entity is both not subject to tax and disregarded by the taxing authority (e.g., single-member LLCs that did not “check the box” and elect to be taxed as an association). A reporting entity that meets this criteria and elects to include the allocated amount of current and deferred tax expense in its separately issued financial statements must disclose that fact.
In SAB Topic 1.B, Allocation Of Expenses And Related Disclosure In Financial Statements Of Subsidiaries, Divisions Or Lesser Business Components Of Another Entity (codified in ASC 220-10-S99-3), the SEC staff indicates that the separate return basis is the preferred method for computing the income tax expense of a subsidiary, division, or lesser business component of another entity included in consolidated tax returns. When the historical income statements in the filing do not reflect the tax provision on the separate return basis, the SEC staff typically requires a pro forma income statement for the most recent year and interim period reflecting a tax provision calculated on the separate return basis.
When a reporting entity has been included in a consolidated US tax return, it is jointly and severally liable with other members of the consolidated group for any additional taxes that may be assessed. There may be circumstances in which it is appropriate to disclose this contingent liability based on the disclosure requirements for loss contingencies.
For more information on separate financial statements of a subsidiary that is a member of a consolidated tax group, see TX 14.

16.7.4 Significant income tax risks and uncertainties disclosures

ASC 275 requires disclosures in annual and interim financial statements of risks and uncertainties (e.g., use of estimates) related to certain key information that helps users in assessing future performance.
The disclosure requirements in ASC 275 are relevant for other income tax matters, such as uncertain tax positions, valuation allowances, and indefinite reversal assertions for unremitted earnings of foreign subsidiaries. Additional disclosures may be required with respect to assumptions that management uses to estimate its balance sheet and income statement tax accounts.
When it is at least reasonably possible that a material adjustment will occur in the near term (generally considered one year), the financial statements should disclose this potential uncertainty along with a range of potential changes to the recorded amounts. This requirement is discussed in ASC 275-10-50-6 and ASC 740-10-50-15(d), and an example relating to valuation allowances is provided in ASC 740-10-55-218 through ASC 740-10-55-222.
The threshold for disclosure is “reasonably possible,” indicating that probability is more than remote. The premise behind this threshold is that significant one-time charges or benefits, such as a change in the assessment of the need for a valuation allowance, should not surprise the reader of the financial statements. The more significant the change in estimate, the more difficult it may be for a reporting entity to justify that a significant one-time event was not reasonably foreseeable at the time of its most recent previous filing. This is particularly important for SEC registrants because of their quarterly reporting requirements.
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