Financial Reporting for Taxes Current Developments

Financial Reporting for Taxes Current Developments Rick Favor Director, Deloitte Tax LLP Tax Executives Institute - Detroit, MI December 9, 2015

Standard setting update

Balance sheet classification of deferred taxes

Balance sheet classification of deferred taxes Accounting guidance Classification Current New ASU 2015-17 ASC 740-10-45-7 provides A deferred tax liability or asset for a temporary difference that is related to an asset or liability shall be classified as current or noncurrent based on the classification of the related asset or liability ASC 740-10-45-9 provides A deferred tax liability or asset that is not related to an asset or liability for financial reporting including deferred tax assets related to carryforwards, shall be classified according to the expected reversal date of the temporary difference Classify all deferred taxes as noncurrent ASC 740-10-45-9 removed 5 Copyright 2015 Deloitte Development LLC. All rights reserved.

Balance sheet classification of deferred taxes Accounting guidance Jurisdictional netting Current New ASU 2015-17 ASC 740-10-45-6 provides For a particular tax-paying component of an entity and within a particular tax jurisdiction, all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. ASC 740-10-45-6 provides For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. 6 Copyright 2015 Deloitte Development LLC. All rights reserved.

Balance sheet classification of deferred taxes Timeline January 22, 2015 FASB issued proposed ASU 2015-210 as part of a simplification initiative November 20, 2015 ASU 2015-17 issued Transition guidance Entities may apply the amendments either retrospectively or prospectively Effective date Public entities annual periods, including interim periods within those annual periods, beginning after December 15, 2016 (one year later for non-public entities) Early adoption is permitted for any period in which the financial statements have not yet been issued (or available to be issued for private entities) 7 Copyright 2015 Deloitte Development LLC. All rights reserved.

Intra-entity asset transfers

Intra-entity asset transfers Accounting guidance Seller Buyer Current ASC 810-10-45-8 provides If income taxes have been paid on intra-entity profits on assets remaining within the consolidated group, those taxes shall be deferred or the intra-entity profits to be eliminated in consolidation shall be appropriately reduced ASC 740-10-25-3(e) prohibits recognition of a deferred tax asset for the intra-entity difference between the tax basis of the assets in the buyer s tax jurisdiction and their cost as reported in the consolidated financial statements Proposed The proposed ASU removes the prohibition on recognition of income tax expense for taxes paid for intraentity transactions The proposed ASU removes the prohibition on recognition of deferred tax asset on intra-entity differences between the tax basis of the assets in a buyer s tax jurisdiction and their cost as reported in the consolidated financial statements 9 Copyright 2015 Deloitte Development LLC. All rights reserved.

Intra-entity asset transfers Timeline January 22, 2015 FASB issued proposed ASU 2015-200 as part of a simplification initiative May 29, 2015 Comment period ended October 5, 2015 FASB redeliberated the proposals Proposed transition guidance Modified retrospective with a cumulative catch-up adjustment to opening retained earnings in the period of adoption Proposed effective date Public entities annual periods, including interim periods within those annual periods, beginning after December 15, 2016 (one year later for non-public entities) Early adoption is permitted for non-public entities, but not before the effective date for public entities 10 Copyright 2015 Deloitte Development LLC. All rights reserved.

Intra-entity asset transfers Comment letter responses and FASB s reaction 31 comment letters were received, with mixed views, including Proponents New guidance will be simpler to apply New guidance more closely aligns with IFRS New guidance better presents the economic reality of intra-entity transactions and is more meaningful for users of financial statements Opponents New guidance would result in greater cost and complexity than the current guidance New guidance results in greater volatility and distortion of earnings and the ETR Changes will not provide meaningful information to investors Several respondents also suggested a practical expedient to continue the exception only for intra-entity transfers of inventory October 5, 2015 After redeliberating, the Board instructed its staff to further research the issues of cost and complexity raised in the comment letters and perform outreach with respect to continuing the exception only for intra-entity asset transfers of inventory 11 Copyright 2015 Deloitte Development LLC. All rights reserved.

Share-based payments

Share-based payments Accounting guidance Excess tax benefits Realization Cash flow Current Realized benefits of tax return deductions in excess of compensation cost recognized are accounted for as a credit to additional paid-in capital A tax benefit and a credit to additional paid-in capital for the excess deduction would not be recognized until that deduction reduces taxes payable Present excess tax benefits as a cash inflow from financing activities and a cash outflow from operating activities Proposed All excess tax benefits and tax deficiencies would be recognized as income tax expense or benefit in the income statement An entity would recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period Excess tax benefits would not be separated from other income tax cash flows and, thus, would be classified along with other cash flows as an operating activity 13 Copyright 2015 Deloitte Development LLC. All rights reserved.

Share-based payments Timeline June 8, 2015 FASB issued a proposed ASU for stock-based compensation as part of a simplification initiative. The proposed ASU includes, but is not limited to, changes to the accounting for income taxes. August 14, 2015 Comment period ended November 23, 2015 FASB redeliberated the proposals Proposed transition guidance Excess tax benefits and deficiencies Prospective Previously unrecognized excess tax benefits Modified retrospective Cash flow statement presentation Prospective or Retrospective Proposed effective date Public entities annual periods, including interim periods within those annual periods, beginning after December 15, 2016 (one year later for non-public entities) Early adoption is permitted 14 Copyright 2015 Deloitte Development LLC. All rights reserved.

Income tax disclosures

FASB s review of income tax disclosures Undistributed foreign earnings disclosures February 11, 2015 meeting The FASB deliberated additional proposed disclosure requirements related to undistributed foreign earnings and tentatively decided that entities should disclose The domestic and foreign components of income before income taxes Separately disclose income before income taxes of individual countries that are significant in relation to total income before income taxes Domestic tax expense recognized in the period related to foreign earnings Unremitted foreign earnings that, during the current period, are no longer asserted to be indefinitely reinvested and an explanation of the circumstances that caused the entity to no longer assert that the earnings are indefinitely reinvested In the aggregate and for each country for which the amount no longer asserted to be indefinitely reinvested is significant in relation to the aggregate amount The accumulated amount of indefinitely reinvested foreign earnings for any country that is at least 10 percent of the aggregate amount 16 Copyright 2015 Deloitte Development LLC. All rights reserved.

FASB s review of income tax disclosures Unrecognized tax benefit disclosures August 26, 2015 meeting The FASB deliberated additional proposed disclosure requirements related to unrecognized tax benefits and tentatively decided to Add a disclosure requirement related to the tabular reconciliation to disaggregate settlements between cash and noncash (e.g., settlement by using existing net operating loss or tax credit carryforwards) Add a disclosure requirement to provide a breakdown of the amount of total unrecognized tax benefits shown in the tabular reconciliation by the respective balance sheet lines on which such unrecognized tax benefits are recorded Eliminate the requirement in ASC 740-10-50-15(d) for entities to provide details of positions for which it is reasonably possible that the total unrecognized tax benefits will significantly increase or decrease in the next 12 months 17 Copyright 2015 Deloitte Development LLC. All rights reserved.

FASB s review of income tax disclosures Income tax disclosures October 21, 2015 meeting The FASB tentatively decided to require the following additional income tax disclosures Income taxes paid (1) When a change in tax law has been enacted that is probable of affecting the reporting entity in a future period and (2) the disaggregation of the income taxes paid between foreign and domestic jurisdictions Deferred income taxes The balance sheet line item(s) in which deferred taxes are presented (i.e., a mapping of total deferred taxes to the balance sheet line items in which they are reported) Valuation allowances Explanation of the nature and amounts of the valuation allowance recorded and released during the reporting period 18 Copyright 2015 Deloitte Development LLC. All rights reserved.

FASB s review of income tax disclosures Income tax disclosures October 21, 2015 meeting Rate reconciliation The Board tentatively decided that Nonpublic entities would be required to present a rate reconciliation in the notes to the financial statements, as ASC 740-10-50-12 currently requires for public entities A disaggregation of a component of the rate reconciliation would be required if the individual component is greater than or equal to 5 percent of the tax at the statutory rate in a manner consistent with SEC Regulation S-X An entity would be required to disclose a qualitative description of the items that have caused a significant year-over-year change to the effective tax rate 19 Copyright 2015 Deloitte Development LLC. All rights reserved.

FASB s review of income tax disclosures Income tax disclosures October 21, 2015 meeting Other disclosures The Board tentatively decided to require disclosures about Gross amounts and expiration dates of carryforwards recorded on a tax return Tax-effected amounts and expiration dates of carryforwards that give rise to a deferred tax asset Total amount of unrecognized tax benefits that offset deferred tax assets related to carryforwards The additional disclosure requirements would apply to both public and nonpublic entities Next Steps The Board instructed its staff to Conduct further outreach with stakeholders including discussions with the Private Company Council Begin drafting a proposed ASU for public comment for all the tentative decisions reached to date regarding income tax disclosure requirements including disclosure requirements related to indefinitely reinvested foreign earnings and unrecognized tax benefits (discussed earlier) 20 Copyright 2015 Deloitte Development LLC. All rights reserved.

SEC/PCAOB matters

SEC and PCAOB highlights regarding income taxes 2014 AICPA conference on current SEC and PCAOB developments SEC observations Staff continues to issue comments on 1) potential tax and liquidity ramifications regarding the repatriation of foreign earnings, 2) valuation allowances, 3) rate reconciliation, and 4) unrecognized tax benefits To improve MD&A disclosures avoid boilerplate and instead Start with tax rate reconciliation and describe material items Discuss significant foreign jurisdictions Statutory and effective rates Current/future impact of reconciling items Provide meaningful disclosures about known trends and uncertainties PCAOB focus areas Undistributed earnings Internal controls over financial reporting Auditing management estimates, including taxes Use of management s specialists 22 Copyright 2015 Deloitte Development LLC. All rights reserved.

Tax-related material weaknesses and restatements Material weaknesses Restatements Period End Process 9% Lack of Documentation 6% Sytems Technology 6% Other 6% Lack of Review 18% Inadequate Reconciliation 6% Acquisition/ Disposal 10% Uncertain Tax Positions 4% Other 6% Accounting for Income Tax (General) 27% Non-routine Transactions 6% Improper Treatment / Recording 18% General Procedure / Process 25% Valuation Allowances 12% Deferred Taxes 41% Material weaknesses and restatements in SEC filings from 1/1/14 12/31/14 23 Copyright 2015 Deloitte Development LLC. All rights reserved.

Other developments

IFRS Tax implications of IFRS Local tax compliance and planning Computing tax owed and preparing required forms Planning Income tax accounting Global tax and treasury planning Implementing structures and undertaking exercises that often involve multiple tax jurisdictions Moving cash around the organization to where it is needed in a tax efficient manner Income tax accounting The link between tax compliance process and amounts reported in the financial statements Reflects tax consequences of pre-tax events reflected in the financial statements Tax department operations How the tax department gets the work done Involves people, processes, technology, and data Global tax and treasury planning Tax department operations Local tax compliance and planning 25 Copyright 2015 Deloitte Development LLC. All rights reserved.

Speaker bios 1 313 396 37337 rfavor@deloitte.com Rick Favor is a Director with Deloitte Tax LLP serving both public and private companies in various industries for over 26 years. He is on of the Regional Competency Leaders of the Financial Reporting for Taxes group. Rick currently serves as the Lead Tax Partner on several global strategic clients (public and private). Throughout his career, Rick has been a significant contributor to the thought leadership developed on ASC 740 (FAS 109 and FIN 48). He frequently speaks on tax topics at internal and external conferences on tax topics involving accounting for income taxes including client roundtables, external training, client-specific training and Dbriefs for executives and students. Rick received a Bachelor of Science degree in Accounting from the University of Detroit and a Masters in Business Administration from the University of Michigan. 27 Copyright 2015 Deloitte Development LLC. All rights reserved.

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