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Accounting for income taxes requires the application of significant judgment and the use of estimates. The SEC staff has focused on the quality of the disclosures around these judgments and estimates, frequently commenting on:
  • effective tax rate reconciliations, including the nature of the reconciling items, the drivers behind significant changes between periods, and whether those changes are expected to impact future periods; and
  • valuation allowances, specifically when no valuation allowance was recorded despite objective and verifiable negative evidence, and the circumstances supporting a full or partial valuation allowance release.
Comment Examples
Guidance references
  • Please explain to us and revise your disclosure to describe the nature of the significant reconciling item related to "Change in U.S. tax status of foreign entities" in your tax rate reconciliation table. Refer to ASC 740-10-50-12. Further, to the extent your current effective tax rate is not indicative of future results, tell us and revise to include a discussion in MD&A of the impact such shift may have on your future results of operations. Refer to Item 303(a)(3) of Regulation S-K and Section III.B. of SEC Release 33-8350.
  • Please tell us each of the individual components of the benefits in your "other, net" reconciling item in your rate reconciliations. In addition, tell us your consideration for disclosing those items that account for more than 1.05 percentage points of your effective tax rate as stipulated in Rule 4-08(h)2) of Regulation S-X.
  • We note that you have not recorded a valuation allowance against your significant U.S. jurisdiction deferred tax assets, other than the U.S. interest limitation. In light of the objective and verifiable negative evidence in the form of cumulative losses over the three years ended December 31, 2019, please tell us your consideration of providing more robust critical accounting policy disclosures regarding the various judgments and assumptions made in determining the deferred tax assets are realizable, including a discussion of the degree of uncertainty associated with key assumptions. Such discussion would desirably provide specifics (e.g., projected future taxable income assumes revenue and margin growth rates of X% and positive net income by what year) as well as a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions. Please refer to Item 303(a)(3)(ii) of Regulation S-K and SEC Release No. 34-48960.
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