Tax Accounting Hot Topics

Transcription

1 Tax Accounting Hot Topics Kathleen McEligot, Deloitte Tax LLP Robin Miller, PwC June 20, 2014

2 Agenda State Taxes Identifying and measuring deferred taxes Hot topics Valuation Allowances Reminders and traps for the unwary Legislative and Regulatory Update PCAOB overview Other regulatory challenges SEC guidance, speeches and comment letters MD&A disclosure guidance Presentation & Disclosure

3 State Taxes

4 Identifying and measuring deferred taxes

5 Measuring deferred taxes ASC Deferred taxes determined separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each taxing jurisdiction DTAs and DTLs for temporary differences are measured using the applicable tax rate (ATR) 4

6 State ATR Deferred tax computations State ATR is the product of the enacted tax rate and the business apportionment factor (federal ATR simply uses the enacted tax rate) Tax rate expected to apply when temporary differences reverse (generally marginal rates unless graduated rates have material impact) Apportionment factors can significantly impact the state ATR As a shortcut, entities sometimes use prior year apportionment factors and current year statutory rates Apportionment percentages should be adjusted for significant current year changes, such as recent changes in business activities (certain expected changes, such as acquisitions or divestitures should not be included until they are reflected in the financial statements) Note: Consultation with your attest firm is recommended 5

7 State ATR and deferred tax computations (cont'd) Base shift planning, income tax credits and permanent differences should not impact the state ATR and deferred state income tax expense Only reduces current state income tax expense Blended state tax rate As a shortcut, when not expected to result in a material difference, entities sometimes use an average of the state ATR for multiple taxpaying components then apply it to the cumulative temporary differences of the consolidated financial reporting group Generally, state ATR should be Calculated for each taxpaying component (an individual entity or group of entities) within the consolidated financial reporting group Applied to that taxpaying component s cumulative temporary differences Note: Consultation with your attest firm is recommended 6

8 Blended versus separate company ATR Example Entity X Entity Y Total Temporary differences ,000 Current year taxable income State tax rate 3% 5% Tax Blended Blended state rate ($13 divided by $300) 4.33% Consolidated temporary differences 1,000 Deferred tax assets 43 Separate company Separate company state rates 3% 5% Separate company temporary differences Deferred tax assets [a] [b] Difference = 11 ([a] [b]) Note: Consultation with your attest firm is recommended 7

9 Effective tax rate (ETR) versus ATR Example Facts Corp X has multistate activity that requires it to file in States A and B, each a separate filing state with a statutory rate of 7% Corp X decides to form NewCo, which will hold its third-party licensing function, which accounts for $200 of Corp X s book and taxable income Corp X will continue to file returns in States A and B and NewCo will be required to file in State C (a separate filing state) with a statutory rate of 2% Corp X s current book income is $1,000 and it has unfavorable temporary differences of $800 Question What are the ETR and ATR before and after the tax planning? 8

10 ETR versus ATR Example (cont d) Solution Before planning After planning Corp X Book income 1,000 [a] Corp X NewCo Total Book income ,000 [c] Temp differences 800 Temp differences _ State taxable income 1,800 State taxable income 1, _ State tax rate 7% State tax rate 7% 2% _ Current tax expense State 126 Current tax expense State Deferred tax expense State (56) Deferred tax expense State (56) 0 (56) Income tax expense State 70 [b] Income tax expense State [d] ETR = [b] [a] = 7% ATR to measure temps = 7% ETR = [d] [c] = 6% ATR to measure temps = 7% 9

11 ETR versus ATR Example (cont d) Observations After planning, Corp X must use its ATR of 7% not its new ETR of 6% to measure temporary differences Base shift approach has no effect on Corp X s ATR (statutory rate x apportionment percentage) If Corp X were to measure its temporary differences at the new ETR of 6%, it could understate the impact temporary differences have on income taxes payable in the year of reversal (see continuation of example) 10

12 ETR versus ATR Example (cont d) Additional Facts and Solution Corp X has $2,000 of pre-tax income in Year 2 when temporary difference reverses, as follows: Corp X New Co Total Book income $1,800 $ 200 $2,000 Temporary difference (800) -0- (800) Taxable income 1, ,200 State tax rate 7% 2% Current tax expense State Deferred tax expense State* Income tax expense State State ETR 7% 2% 6.5% * Temporary difference results in a tax savings at the rate of 7% in Year 2. If the DTA had been incorrectly recorded at the ETR of 6% in Year 1, the ETR in Year 2 would have been 6.1%. 11

13 Scheduling of ATR Example Facts A single entity Company Y files tax returns in Jurisdiction C that has an enacted statutory tax rate of 9% In 20X0, Company Y apportioned 100% of its income to Jurisdiction C At the end of 20X0, Company Y had net taxable temporary differences of $500 expected to reverse at various times over the next 5 years During 20X0, Jurisdiction C enacts a phased-in triple weighted apportionment sales factor that will decrease Company Y s total apportionment factor in Jurisdiction A to 60% over the next 5 years 12

14 Scheduling of ATR Example (cont d) Solution Item Deductible temporary differences Total balance sheet amount Scheduled to reverse in: 20X1 20X2 20X3 20X4 & later Total as scheduled $4,500 $4,250 $ 250 $ 0 $ 0 $ 4,500 Taxable temporary differences (5,000) (250) (250) (500) (4,000) (5,000) Net temporary differences ($ 500) $4,000 $ 0 ($ 500) ($4,000) ($ 500) Apportionment 100% 90% 80% 60% 60% Rate 9% 9% 9% 9% 9% State tax effect current applicable rate (incorrect) ($ 45) State tax effect correct $ 324 $ 0 ($ 27) ($ 216) $ 81 Net temporary differences (500) Expected apportionment 60% Rate 9% Expected deferred ($ 27) Without consideration of scheduling (incorrect) 13

15 Valuation allowances State considerations State tax attributes may be more difficult to utilize than federal tax attributes and jurisdiction specific laws have to be considered when assessing the need for a state valuation allowance (VA) Only a minority of states (approximately 15) permit a carryback of a net operating loss (NOL) Some states have a much shorter NOL carryforward period than federal (20 years) or have enacted NOL suspensions that may affect utilization Some states impose a limitation on the amount of NOL utilized and/or type of income offset Some state credits can only be carried forward and some may have a short carryforward period 14

16 Valuation allowances State considerations (cont d) Certain state attributes may have little or no likelihood of being utilized Change in business footprint State specific tax regimes e.g., New Jersey some taxpayers may have Alternative Minimum Assessment nexus but not income tax nexus and will never be able to utilize credits since they are not subject to income tax Is a VA appropriate or should the DTA be written off? Forecasts of future taxable income may be particularly unreliable for state purposes Forecasts related to future income should be consistent with estimates used for other purposes Many forecasts are not on a legal entity basis Future changes in apportionment percentages and impact on state applicable tax rate are difficult to anticipate Note: Consultation with your attest firm is recommended 15

17 Valuation allowances State considerations (cont d) A VA is not a substitute for an UTB State tax attributes, especially in separate states, may have been generated through aggressive tax planning (e.g., NOLs) The realization of these attributes should be assessed first for possible uncertain tax positions, then any remaining attribute amount should be subject to VA assessment 16

18 State tax hot topics

19 State tax law changes Overview Many states are implementing tax law changes (e.g., economic nexus standards, statutory tax rates, attribute utilization, apportionment, filing method changes) California bright line nexus thresholds (effective Jan. 1, 2012) Michigan replaced the MBT with the Corporate Income Tax (effective Jan. 1, 2012) ASC provides the effect of a change in tax laws or rates shall be recognized at the date of enactment through continuing operations ASC DTLs and DTAs shall be adjusted for the effect of a change in tax laws or rates A change in tax laws or rates may also require a reevaluation of a VA for DTAs 18

20 2013 tax rate changes State Changes Alaska Changes to graduated tax rates, highest marginal rate remains at 9.4% Arizona for 2013, 6.5% for 2014, 6.0% for 2015, 5.5% for 2016, 4.9% after 2016 Connecticut Extension of 20% surcharge through the end of tax year 2015 Indiana New Mexico New York North Carolina North Dakota Texas 8.0% after June 30, 2012, 7.5% after June 30, 2013, 7.0% after June , 6.5% after June ; rates are pro-rated (i.e tax rate for calendar year filers is 7.75%) Reduction of highest tax rate: 7.6% for 2013, 7.3% for 2014, 6.9% for 2015, 6.6% for 2016, 6.2% for 2017, 5.9% after 2017 Rate reduction phased in for qualified in-state manufacturers after 2013, eventually down from 6.5% to 4.875%. MTA surcharge extended through years ending before 12/31/2018 Lowered from 6.9% to 6% for 2014, 5% for 2015, and if certain net revenue targets are met 4% for 2016 and 3% for 2017 Tax rates for each bracket reduced, with the highest marginal rate decreasing from 5.15% to 4.53% Reports originally due during calendar 2014 reduced from 1% to.975% and from 0.5% to % for qualified wholesalers Due during calendar % if certain revenue targets are met Due on or after 1/1/2016 1% West Virginia Reduced from 7% to 6.5% for periods beginning after

21 NOL suspension Overview Several states have adopted laws that will suspend the use of NOL carryforwards for a specified number of years The NOL suspension could impact both the current and deferred income tax provisions for an entity expected to utilize NOLs Illinois has issued guidance to address taxpayers filing final returns (where NOLs may not ultimately be utilized) and fiscal year filers NOL suspension could result in a change in judgment about an entity s ability to realize a deferred tax asset associated with the state NOL Any related change to the valuation allowance should be recorded in the period of enactment through continuing operations pursuant to ASC

22 NOL suspension Example Facts Company A has an NOL carryforward of $100,000 that will expire in 20X6 DTA recorded is $9,000 as of 20X0 Company A has two DTLs as of 20X0 totaling $9,000 that are expected to reverse pro-rata over the next two years, 20X1 and 20X2 Company A considers the DTL reversal as a source of taxable income for purposes of its VA analysis Assume that in 20X1 the state enacts a tax law that will suspend the use of NOLs for years 20X1 and 20X2, but will allow Company A to tack the suspended two years onto the NOL carryforward period 21

23 NOL suspension Example (cont d) Solution Before NOL suspension 20X0 20X1 20X2 Expected reversal DTA $9,000 ($4,500) ($4,500) DTL #1 ($5,000) $2,500 $2,500 DTL #2 ($4,000) $2,000 $2,000 Current tax expense (benefit) $ 0 $ 0 Deferred tax expense (benefit) $ 0 $ 0 Company A expects that the reversing DTLs will be an available source of taxable income and therefore has concluded that its DTA recorded is morelikely-than-not to be realized and no VA is needed 22

24 NOL suspension Example (cont d) Solution After NOL suspension 20X0 20X1 20X2 Expected reversal DTA $9,000 $ 0 $ 0 DTL #1 ($5,000) $2,500 $2,500 DTL #2 ($4,000) $2,000 $2,000 Current tax expense (benefit) $4,500 $4,500 Deferred tax expense (benefit) ($4,500) ($4,500) Deferred tax expense VA $9,000* Since the DTLs will reverse in a year outside of the NOL utilization period, Company A can no longer consider the DTLs a source of taxable income for utilizing the DTA and should consider the need for a VA * Company A determined in 20X0 that a full VA was required 23

25 State apportionment changes Overview Single-sales factor weighting Recently, several states have adopted laws that provide for a mandatory or elective single-sales factor weighting of apportionment The increase to the weight of the sales factor and elimination of the property and payroll factors in the apportionment of taxable income may cause an entity s state ATR and ETR to change significantly Market-based sales sourcing Several states have also adopted laws requiring market-based sales sourcing for determining the sales apportionment factor Market-based sourcing has raised many issues during implementation where states do not have detailed guidance on market Similar to single-sales factor apportionment, market-based sales sourcing could have a significant impact on an entity s ATR and ETR 24

26 State apportionment changes ASC 740 implications Deferred tax provision May cause remeasurement of recorded DTAs and DTLs, which should be included as a discrete item in the period the law change is enacted as prescribed by ASC The effect of remeasuring DTAs and DTLs should be presented as an item of income from continuing operations even if the DTA or DTL was originally established through an item other than continuing operations, e.g., OCI, discontinued operations, pursuant to ASC Current tax provision The effect of the law change in the current year should be recorded after the effective date and reflected in the entity s annualized ETR pursuant to ASC

27 Common state non-conformity topics Examples Deferral and ratable inclusion of income arising from debt discharged by reacquisition of a debt instrument under federal IRC Section108(i)* Bonus depreciation deduction under federal IRC Section 168(k)(5)** Although many states conform to NOL limitations under IRC Section 382***, there is a lot of discrepancy and lack of guidance related to the limitation calculation on a state by state basis Note: IRC = Internal Revenue Code * Election to defer COD income recognition ** Special rule for property acquired during certain pre-2012 periods *** Limitation on net operating loss carryforwards and certain built-in losses following ownership change 26

28 Valuation Allowance Reminders

29 Valuation Allowances - Scheduling Scheduling of future income and future originating and reversing temporary differences should be performed when the amount of VA could vary materially depending on the timing of taxable income (e.g., where expiration dates on attributes are a factor). Scheduling to determine whether an NOL carryback will arise in time to make use of taxable income in carryback periods. Scheduling of the timing of the implementation of a tax planning strategy may be important if the amounts of future income or losses are expected to vary from year to year. The particular years in which temporary differences result in taxable or deductible amounts generally are determined by the timing of the recovery of the related asset or settlement of the related liability. 28

30 Valuation Allowances - Reversals of DTLs Illustration A DTL that relates to an asset with an indefinite useful life generally cannot be used as a source of taxable income. The taxable income related to indefinite-lived assets should typically not be scheduled as occurring in the foreseeable future The related DTL should not be considered a source of taxable income to realize DTAs unless those DTAs are also indefinite (e.g., AMT credit carryforward). DTA/(DTL) Reversal NOL $1,000 Expires over next 20 years Stock compensation 300 Options expire over next 10 years and carry forward for additional 20 years Tradename (400) When impaired or sold timing unknown Fixed assets (200) Reverses pro-rata over next 15 years Net DTA/DTL 700 VA (1,100) DTA/DTL after VA $ (400) Equal to DTL on Tradename naked DTL 29

31 Valuation Allowance - Classification Accounting guidance ASC provides that the valuation allowance for a particular tax jurisdiction shall be allocated between current and non-current DTAs for that tax jurisdiction on a pro-rata basis. Potential risk Are tax amounts appropriately classified in the balance sheet? Balances could be misclassified between current and non-current, which could result in incorrect financial statements or inaccurate ratios. 30

32 Classification Illustration Current assets INCORRECT DTA DTL Net DTA (DTL) Bad debts $ 100 $ 100 Inventory $ 80 $ 80 Prepaid items $ (40) $ (40) Non-current assets Allocate VA DTA (DTL) Net of VA $ 180 $ (40) $ 140 $ 140 Depreciation $ (100) $ (100) Amortization $ (80) $ (80) NOL $ 300 $ 300 Capital loss $ 80 $ 80 VA $ 380 $ (180) $ 200 $ (340) $ (140) NOL $ (260) $ 260 $ - Capital loss $ (80) $ 80 $ - Net DTA (DTL) $ (340) $ 340 $ - 31

33 Classification Illustration (cont d) Current assets CORRECT DTA DTL Net DTA (DTL) Bad debts $ 100 $ 100 Inventory $ 80 $ 80 Prepaid items $ (40) $ (40) Non-current assets Allocate VA DTA (DTL) Net of VA $ 180 $ (40) $ 140 $(109) $ 31 Depreciation $(100) $(100) Amortization $ (80) $ (80) NOL $ 300 $ 300 Capital Loss $ 80 $ 80 VA $ 380 $(180) $200 $(231) $ (31) NOL $(260) $ 260 $ - Capital loss $ (80) $ 80 $ / 560 x $340 = $ / 560 x $340 = $ 231 Net DTA (DTL) $ (340) $ 340 $ - 32

34 Legislative and Regulatory Update

35 PCAOB Overview

36 Public Company Accounting Oversight Board (PCAOB) Overview Established by Congress (Sarbanes-Oxley Act) to oversee audits of: Public companies Broker/dealers Powers granted allow the organization to write, inspect, interpret, and enforce the auditing standards for public companies SEC has oversight authority Began work in January 2003 Today: 2013 budget of $246 million 766 staff at December 31, 2012 (60% work in registration and inspections) Global influence Inspections of non-u.s. registered firms Leadership role in the International Forum of Independent Audit Regulators Membership includes regulators in 44 countries 35

37 PCAOB Registration and inspection 2363 registered public accounting firms as of December 31, in the United States Member firms of global networks register separately Firms with more than 100 public company audit clients inspected annually 9 such firms in 2013 Other registered firms are generally inspected once every three years Inspections are designed to identify weaknesses and deficiencies related to how a firm conducts audits Evaluation of selected audits (Part I) Evaluation of design and operating effectiveness of a firm s quality controls (Part II) 36

38 PCAOB Issuer inspection approach and focus Typically focuses on issuers and areas presenting the more significant risks of financial reporting misstatements and related auditing challenges. Office of Research and Analysis assists inspection teams in screening Usually 3 focus areas are initially selected Teams of 5 or 6 inspectors conduct 1 to 2 week inspections Considerable attention and focus on: Issuer s transaction flows and record keeping processes Specific issuer control activities at the financial statement assertion level Controls over information produced by the entity that is used in the performance of the issuer s control activities 37

39 PCAOB Common areas of focus and considerations related to income taxes Audit evidence associated with management estimates Valuation allowance Indefinite reversal criteria Internal controls Completeness and accuracy of data Valuation assertion Considerations Professional skepticism 38

40 Other regulatory challenges

41 Evolving financial reporting environment How did we get here? Shift from income statement to balance sheet focus SOX 302/404 Process and Controls Regulatory Focus on Income Taxes Material Weaknesses and Restatements Provision Proofs (e.g., Tax Basis Balance Sheets) Where are we today? Tax-related reporting risks are more visible ~ both inside and outside the organization 40

42 Common areas of tax-related reporting risks Management estimates Valuation allowances Unrecognized tax benefits Indefinite reinvestment of foreign earnings Other reporting risks Changes in laws or rates Changes in estimate versus correction of errors Subsequent events Acquisition accounting Interim reporting Indirect tax contingencies Other considerations Internal controls Use of technology Tax basis balance sheets IFRS Resources 41

43 SEC guidance, speeches and comment letters

44 MD&A disclosures SEC guidance* Management s discussion and analysis (MD&A) of financial condition and results of operations MD&A should be a discussion and analysis of a company s business as seen through the eyes of those who manage that business. Management has a unique perspective on its business that only it can present. As such, MD&A should not be a recitation of financial statements in narrative form or an otherwise uninformative series of technical responses to MD&A requirements, neither of which provides this important management perspective. * Financial Reporting Release 72, Interpretation: Commission Guidance Regarding Management s Discussion and Analysis of Financial Condition and Results of Operations, issued December 9,

45 MD&A disclosures PCAOB guidance* Other information in documents containing audited financial statements The auditor s responsibility with respect to information in a document does not extend beyond the financial information identified in his report, and the auditor has no obligation to perform any procedures to corroborate other information contained in a document. However, he should read the other information and consider whether such information, or the manner of its presentation, is materially inconsistent with information, or the manner of its presentation, appearing in the financial statements. * AU

46 SEC speeches 2009 AICPA National Conference on current SEC and PCAOB developments MD&A disclosures Registrants should consider income tax footnote disclosure when writing MD&A, not just a simple year-to-year comparison of income statement amounts Staff reminded registrants that Regulation S-X, Rule 4-08(h), requires separate disclosure of all significant reconciling items in the rate reconciliation and significant amounts should not be combined in an other category Staff reviews sufficiency of MD&A based on a mix of information from the footnote disclosure and rate reconciliation Nonrecurring nature of items in rate reconciliation (e.g., changes in uncertain tax positions) lends itself to MD&A disclosure 45

47 SEC speeches 2010 AICPA National Conference on current SEC and PCAOB developments MD&A disclosures Disclosures, or lack thereof, that may prompt comments Missing or incomplete disclosures required by US GAAP/SEC rules Expectations of the impact from external events (e.g., economy) Inconsistencies between different sources of information (e.g., articles, press releases) Accounting implications of underlying agreements filed as exhibits to the registrant s filings Limited discussion of changes in the registrant s business Changes in liquidity Lack of specificity in accounting policies Registrants should prepare disclosures for investors rather than to avoid comments from the SEC staff The SEC encourages registrants to describe accounting concepts rather than simply refer to particular Codification sections 46

48 SEC speeches 2012 AICPA National Conference on current SEC and PCAOB developments Valuation allowances Recognition SEC staff have difficulty regarding losses incurred during the economic downturn as aberrations Cumulative losses represent significant negative evidence that is difficult to overcome Reversal SEC staff advise registrants to consider magnitude and duration of past losses and current profitability and changes that drove them Objectively verifiable evidence carries more weight than evidence that is not In disclosures, discuss factors that led to reversal and answer why now? 47

49 SEC speeches 2013 AICPA National Conference on current SEC & PCAOB developments Tax rate reconciliation Unclear labels and inadequate descriptions of material reconciling items Inappropriate aggregation of material reconciling items Inconsistency with amounts disclosed elsewhere in filing Error corrections inappropriately reflected as changes in estimate Lack of disclosure of each material foreign jurisdiction and its tax rate and how it affects the amount in the rate reconciliation Valuation allowances Avoid boilerplate disclosures and discuss registrant specific factors (e.g., limitations on use of net operating losses and foreign tax credits) Disclose impact of each source of taxable income and relative magnitude Disclose material negative evidence evaluated to highlight uncertainties Indefinite reinvestment of foreign earnings Amounts and descriptions of the related temporary differences and the events that will cause those differences to become taxable, together with amount of unrecorded deferred tax liability or statement that determining amount is not practicable SEC evaluates an indefinite reinvestment assertion taking into account registrants potential liquidity needs and the availability of funds in US and foreign jurisdictions 48

50 SEC comment letters The SEC must review issuers financial filings at least once every three years Accounting for income taxes On the SEC s agenda when discussing critical matters One of the top areas of focus in its reviews of public company filings Example comment areas Effective tax rate and other reporting issues related to foreign operations Management estimates Valuation allowances Uncertain tax positions Indefinite reversal criteria Interim reporting 49

51 Example SEC comments (emphasis added) Valuation allowance We note your analysis supporting your conclusion that a valuation allowance is not necessary for net deferred tax assets at December 31, It appears that you did not book a valuation allowance against net deferred tax assets at March 31, 2012 despite continued losses. Please provide us with your detailed analysis of how you assessed the realization of your deferred tax assets under ASC at each reported balance sheet date, including March 31, Also, tell us how the results of the first quarter of 2012 compared with your projections since you asserted projected future taxable income as positive evidence of the realizability of net deferred tax assets in your analysis at December 31, We note in the paragraph bridging pages [XX] and [XY] you cite certain recent positive developments as a basis for concluding an additional amount of your deferred income tax assets were recoverable in 2011 considering the more likely than not standard. In light of the company s three consecutive years of taxable income and the developments cited in your disclosure, it is unclear why you did not consider the entire balance of your deferred tax assets fully recoverable in Please advise us and expand your disclosure here and within your income tax footnote to disclose the specific negative evidence identified by management that outweighed the positive evidence, when concluding that it is more likely that a portion of the deferred tax assets would not be realized. 50

52 MD&A disclosure guidance

53 MD&A Required elements of MD&A (SEC Regulation S-K, Item 303) Results of operations Critical accounting policies Liquidity and capital resources Contractual obligations For additional information, see Discussion Document E, Disclosure of FIN 48, Liabilities in the Contractual Obligations Table from the April 2007 SEC Regulations Committee meeting 52

54 MD&A Tax law proposals or changes to existing tax rules Before the enactment of tax law proposals or changes to existing tax rules, SEC registrants should consider whether the potential changes represent an uncertainty that management reasonably expects to have a material effect on the results of operations, financial position, liquidity, or capital resources. If so, registrants should consider disclosing information about the scope and nature of any potential material effects of the changes. After the enactment, when material, registrants should consider disclosing the anticipated current and future impact on their results of operations, financial position, liquidity, and capital resources. In addition, registrants should consider disclosures in the critical accounting estimates section of MD&A to the extent the changes could materially impact existing assumptions used in making estimates of tax related balances. 53

55 MD&A Early warning disclosures The SEC staff asks registrants to provide early warning disclosures to help users understand various risks and how these risks potentially affect the financial statements. Examples of these risks include (1) the registrant may have to repatriate earnings to meet current liquidity demands, resulting in a tax payment that may not be accrued for; (2) the historical effective tax rate is not sustainable and may change materially; (3) the valuation allowance on net deferred tax assets may change materially; and (4) tax positions taken during the preparation of returns will ultimately not be sustained. Early warning disclosures give investors insight into the underlying assumptions made by management and conditions and risks facing the company before a material change or decline in performance is reported. 54

56 Presentation & Disclosure

57 Presentation matters Presentation matters (ASC ) Classification of deferred tax assets and liabilities between current and noncurrent Allocation of valuation allowance between current and noncurrent Prohibits offsetting DTLs and DTAs attributable to different taxpaying components or to different tax jurisdictions 56

58 Disclosures Disclosures (ASC ) Components of the net deferred tax asset or liability Certain carryforwards and certain valuation allowances Components of income tax expense (continuing operations) Income tax expense or benefit allocated to continuing operations and separately allocated to other items Rate reconciliation (public entities) Certain disclosures for separate financial statements of a member of a consolidated group 57

59 Other disclosure requirements Unrecognized Tax Benefits (UTBs) Disclosures (ASC ) A(a) A(b) (c) (d) (e) Tabular reconciliation of UTBs at the beginning and end of the year (public entities) Amount of UTBs that would impact the effective rate (public entities) Amount of interest and penalties recognized in the income statement and balance sheet Amount of UTBs that may significantly change within 12 months of the reporting date ( early warning disclosure ) Description of open tax years by major jurisdiction Other Disclosures (ASC ) Policy on classification of interest and penalties Investment tax credit recognition policy 58

60 Other disclosure requirements (cont d) a b c d Undistributed Earnings (ASC ) A description of the types of temporary differences for which a deferred tax liability has not been recognized and the types of events that would cause those temporary differences to become taxable The cumulative amount of each type of temporary difference The amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration if determination of that liability is practicable or a statement that determination is not practicable The amount of the deferred tax liability for temporary differences other than those in (c) that is not recognized in accordance with the provisions of paragraph

61 Other disclosure requirements (cont'd) Interim Reporting Disclosures (ASC ) Reasons for significant variations in customary relationships between income tax expense and pretax accounting income Cash Flow (ASC ) Supplemental cash flow information for income taxes paid when an indirect method is used Business Combinations (ASC ) (d) Total amount of goodwill that is expected to be deductible for tax purposes Subsequent Events (ASC ) Disclosure of nonrecognized subsequent events when financial statements would be considered misleading without such disclosure 60

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