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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 740-718 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 (after adoption of ASU 2019-12)

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.
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 the reporting entity is both not subject to tax and 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, as well as the disclosures discussed in TX 16.8.1.

16.7.2A Income tax-related disclosures for pass-through entities (before adoption of ASU 2019-12)

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.
New guidance
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions to the general principles of ASC 740 and simplifies several other areas.
ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. For all other entities, it is effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. If an entity chooses to early adopt, it must adopt all changes as a result of the ASU. The transition provisions vary by amendment.
One of the amendments within ASU 2019-12 specifies that an entity is not required to allocate income tax expense to a legal entity that is both not subject to tax and disregarded by the taxing authority, but an entity may elect to do so. This amendment should be applied on a retrospective basis for all periods presented.

16.7.3 Tax disclosures in separate financial statements of a subsidiary

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.
As amended by ASU 2019-12, 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.
Although ASC 740-10-50-15(d) essentially codifies ASC 275 for uncertain tax positions, the disclosure requirements in ASC 275 are still relevant for other income tax matters, such as 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 approximately 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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