Вы находитесь на странице: 1из 85

www.pwc.

com

Current issues in income tax accounting (US GAAP & IFRS)

May 16, 2012

Agenda
Introductions Basic overview of the model Uncertain tax positions Unremitted foreign earnings Special topics (Intraperiod Allocations, Noncontrolling interest, Passthrough Accounting) Interim accounting Q&A
Current issues in income tax accounting (US GAAP & IFRS) PwC

Basic model

Current issues in income tax accounting (US GAAP & IFRS) PwC

Basic principles of ASC 740


ASC 740 rests on four basic principles (balance sheet focused): A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year (ASC 740-10) (Including Liabilities Pursuant to ASC 740-10) A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards (including ASC 740-10 liabilities) (ASC 740-10). The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated (ASC 740-10). The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized (ASC 740-10).
Current issues in income tax accounting (US GAAP & IFRS) PwC

Income tax components


Current tax provision is an estimate of taxes payable or refundable on tax returns for the current year (ASC 740-10). (Includes liabilities for unrecognized tax benefits) Deferred tax provision is the change in the estimated future tax effects attributable to temporary differences and carryforwards (ASC 740-10). Total income tax provision is the combination of the both the current and deferred components of the provision.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Tax provision process


1. Adjust pretax income for permanent differences. 2. Identify all temporary differences and carryforwards. 3. Calculate the current income tax expense or benefit. 4. Recognize deferred tax assets and liabilities. 5. Evaluate the need for a valuation allowance for gross deferred tax assets. 6. Calculate the deferred income tax expense or benefit.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Permanent differences (Step 1) Adjust Pre-tax income for permanent differences


Permanent Differences - These are book versus tax items or book/tax differences that will not reverse in future periods. Permanent Differences Do - Impact the total tax provision. That is, an increase in current tax expense (I/S debit) is not offset by any deferred tax benefit (I/S credit) of equal amount or vice versa. Impact the overall effective rate on the total tax provision. Common Permanent Differences - Percentage Depletion in excess of Tax Basis - Section 199 Deduction - State Taxes
Current issues in income tax accounting (US GAAP & IFRS) PwC

Temporary differences (Step 2) Identify all temporary differences & carryforwards


The objective of deferred tax accounting is to: - Recognize a liability or asset related to temporary differences The objective is accomplished by: - Comparing the aggregate GAAP amount of any one item to that items aggregate tax basis (book basis balance sheet versus tax basis balance sheet) - Recognizing deferred taxes for those items that will produce taxable or deductable differences when the GAAP balance amount is recovered or settled And - Recording deferred taxes for items without related balance sheet captions (i.e. tax credits and carryforwards)
Current issues in income tax accounting (US GAAP & IFRS) PwC

Deferred tax terminology (Step 2) Identify all temporary differences & carryforwards
Current Provision Focuses on the change in gross temporary differences Deferred Tax Assets / Liabilities Is the tax effect of the cumulative temporary differences plus carryforward attributes Valuation Allowance Reduces the Deferred Tax Asset to a Realizable Amount

Current issues in income tax accounting (US GAAP & IFRS) PwC

Examples of deferred tax assets (Step 2) Identify all temporary differences & carryforwards
Temporary Depletion (Cost or Percentage) Depreciation Development Costs Deferred Stripping Reclamation Compensation accruals (vacation, bonus, commission) Contingency accruals (legal, environmental) Tax carryforward items, for example: Foreign tax credits in worldwide taxation regimes that allow credits for foreign taxes paid Net operating losses AMT Credits
Current issues in income tax accounting (US GAAP & IFRS) PwC

Deferred tax summary (Step 2) Identify all temporary differences & carryforwards
Asset Deferred Tax Benefit / (DTA) Tax Basis > Book Basis Liabilities Tax Basis < Book Basis Tax Carry-forwards Only

Deferred Tax Expense / Tax Basis < Book Basis (DTL)

Tax Basis > Book Basis

Current issues in income tax accounting (US GAAP & IFRS) PwC

Current income tax expense/Benefit (Step 3) Calculate the current income tax expense or benefit
Pre-tax book income +/- Permanent & temporary items Taxable income before NOLS - NOL carryforwards Taxable income X applicable tax rate Current tax provision before tax credits Tax credits = Expected current tax liability (expense) +/- Changes within uncertain tax positions = Total current tax provision
Current issues in income tax accounting (US GAAP & IFRS) PwC

Deferred tax terminology (Step 3) Calculate the current income tax expense or benefit
Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law; effects of future changes in tax laws or rates are not anticipated. Measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Recognize deferred tax assets and liabilities (Step 4) Recognize deferred tax assets and liabilities
The deferred tax expense or benefit for the current year is computed as the change during the year in an enterprises deferred tax liabilities and assets.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Annual computation of net deferred tax provision (Step 5) Evaluate the need for a valuation allowance for gross deferred tax assets
1. Identify types and amounts of cumulative temporary differences and carryforwards (Step 2)

2. Measure total deferred tax liability for taxable temporary differences using applicable enacted tax rate (Step 4)

3. Measure total deferred tax asset for deductible temporary differences and carryforwards using applicable enacted tax rate (Step 4)

4. Reduce the deferred tax asset by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized (Step 5)
Current issues in income tax accounting (US GAAP & IFRS) PwC

Calculate deferred tax expense/Benefit (Step 6) Calculate the deferred income tax expense or benefit
Deductible (Taxable) Temporary Differences: Cumulative Adjust Cum. Current Year Temporary Temp. Differences Differences BOY Differences BOY Cumulative Temporary Differences EOY Total Deferred Taxes @ 35.00%

Current Temporary Differences: Litigation Accrual Inventory Reserve Subtotal Current Temporary Differences Noncurrent Temporary Differences: Accumulated Depreciation Subtotal Noncurrent Temporary Differences Total Temporary Differences Applicable Tax Rate Total Deferred Taxes EOY Cumulative Temporary Differences BOY Cumulative Temporary Differences Deferred Tax Expense / (Benefit) (50,000) (50,000) (30,000) 35.00% (10,500) (31,500) (10,500) 21,000 (100,000) (100,000) (60,000) 35.00% (21,000) (150,000) (150,000) (90,000) 35.00% (31,500) (52,500) (52,500) (31,500) 20,000 20,000 30,000 10,000 40,000 50,000 10,000 60,000 17,500 3,500 21,000

Current issues in income tax accounting (US GAAP & IFRS) PwC

Uncertain tax positions

Current issues in income tax accounting (US GAAP & IFRS) PwC

Key definitions and concepts


1. Tax Position Position in a previously filed tax return or expected to be taken in a future tax return (ASC 740-10-20 Glossary) 2. Unit of Account That which is being measured by reference to the level at which an asset or liability is aggregated or disaggregated (ASC Master Glossary) 3. Recognition A tax benefit from a UTP may only be recognized if it is more-likely-than-not that the position is sustainable based solely on technical merits and any relevant administrative practices (ASC 740-10-55-3) 4. Measurement Greatest amount of benefit cumulatively >50% likely of being realized (ASC 740-10-30)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Key definitions and concepts (cont)


5. Subsequent recognition and measurement Recognition and measurement subject to change based on new information (ASC 74010-35) 6. Effective settlement The point at which an Uncertain Tax Position becomes certain. (ASC 740-10-25-10) 7. Interest/Penalties - Required accrual of interest and penalties (ASC 740-10-25-56) - Classification is an accounting policy election (ASC 740-10-25-57) 8. Balance sheet classification Non-current treatment for liability for unrecognized tax benefit unless cash payment is expected within 12 months

Current issues in income tax accounting (US GAAP & IFRS) PwC

Key definitions and concepts (cont)


9. Disclosures (ASC 740-10-50-15) - Tabular roll-forward of aggregated unrecognized tax benefits (UTBs) - The total amount of UTBs that, if recognized, would affect the effective tax rate - The total amount of interest and penalties recognized in the income statement and accrued on the balance sheet - Discussion of reasonably possible changes in the UTBs in the next 12 months - Description of open tax years by major jurisdictions

Current issues in income tax accounting (US GAAP & IFRS) PwC

Recognition
Two-step model (recognition then measurement) beginning with whether the tax position should be recognized (i.e. whether any benefit should be recorded) Recognition is based on the following criteria: - More-likely-than-not (>50%) that the position will be sustained upon examination by taxing authority (including any appeal or litigation process) - Technical merits of the position - No consideration of detection risk - Past administrative practices accommodation

Current issues in income tax accounting (US GAAP & IFRS) PwC

Recognition
Temporary differences are considered to have met the recognition threshold Positions do not generally affect the aggregate amount of taxes payable over time, they can generate an economic benefit by delaying the tax payment Historically, may have only accrued for interest ASC 740 requires separation into two parts - Sustainable book/tax difference pursuant to ASC 740's recognition criteria - A liability for any "unrecognized" benefit.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Measurement
Assuming the recognition threshold has been met, the company then needs to measure the benefit to be sustained: Tax positions should be measured at the largest amount that has a cumulative probability >50% of being the ultimate outcome Consider the amounts and probabilities of various outcomes

Current issues in income tax accounting (US GAAP & IFRS) PwC

Measurement
Example Enterprise takes a deduction in a tax return that results in a tax benefit of $100. This position meets the recognition threshold (i.e., MLTN). Distribution of potential outcomes:
Potential benefit $100 $80 $60 $40 $20 Individual probability 15% 20% 20% 30% 15% Cumulative probability 15% 35% 55% 85% 100%

Recognition of the largest amount that has a cumulative probability of >50% of being ultimately realized is $60
Current issues in income tax accounting (US GAAP & IFRS) PwC

Subsequent recognition and measurement


Key areas of judgement and challenges - Evaluating new information that leads to changes in recognition and measurement - Tracking reversals of temporary differences

Current issues in income tax accounting (US GAAP & IFRS) PwC

Subsequent recognition and measurement


Recognition and measurement should be reassessed (using ASC 74010 model) at each reporting date. - ASC 740-10 assessment (recognition and measurement) subject to change based on new information Changes to prior year tax positions would be treated as discrete items in the period the change occurs Changes to current year tax positions would be accounted for under ASC 270-10-45-12 - May occur prior to final to resolution of matter - Subsequent event disclosure considerations

Current issues in income tax accounting (US GAAP & IFRS) PwC

Subsequent recognition and measurement


Potential Sources of New Information Developments in the audit Developments in the law Audit plans Public statements by tax authority Oral statements by tax authority Audit guidelines Pre-filing agreements Designation for litigation LIFE audits Listing of transactions Experience in prior audits Taxing authority program changes APA, competent authority Notice of Proposed Adjustment Revenue Agents Report
Current issues in income tax accounting (US GAAP & IFRS) PwC

Settlement
In order to apply ASC 740 model for tax uncertainties, Companies must - Maintain an inventory of Unsettled UTPs - Monitor and track settlement of UTPs Key Question When is an Uncertain Tax Position settled ?

Current issues in income tax accounting (US GAAP & IFRS) PwC

Effective settlement
What does Effective Settlement mean? Three considerations on Effective Settlement - Whether a tax position has been specifically examined - Whether the examination has been completed. - Whether there is only a remote likelihood of re-examination

Current issues in income tax accounting (US GAAP & IFRS) PwC

Effective settlement
Taxing authority has completed examination procedures including appeals and administrative reviews required Taxpayer does not intend to appeal or litigate any aspect of tax position included in completed examination It is remote that the taxing authority would examine or reexamine any aspect of the tax position

Current issues in income tax accounting (US GAAP & IFRS) PwC

Unremitted foreign earnings

Current issues in income tax accounting (US GAAP & IFRS) PwC

Unremitted foreign earnings


Calculation of US DTL on Unremitted Foreign Earnings Effective Tax Rate implications Unborn Foreign Tax Credits Withholding Taxes Classification of US DTL

Current issues in income tax accounting (US GAAP & IFRS) PwC

Unremitted foreign earnings


Permanent Reinvestment Assertion Support Required to Substantiate the Assertion Effect of assertion on current year earnings and EAETR Distributions Frequency of updating the assertion Partial reinvestment assertion Effect of a change in assertion

Current issues in income tax accounting (US GAAP & IFRS) PwC

Special topics

Intraperiod allocation, non-controlling interest, & Passthrough

AFIT - Intraperiod Allocation, Interim Reporting and Intercompany Transactions PwC

May 2012

Intraperiod tax allocation

Current issues in income tax accounting (US GAAP & IFRS) PwC

What does Intraperiod Tax Allocation mean


Income tax expense (benefit) can be reflected in: - Continuing operations - Discontinued operations - Extraordinary Items - Cumulative effect of accounting change - Other comprehensive income (OCI) - APIC - Goodwill (or other intangible assets)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Intraperiod tax allocation


ASC 740-20-45-2 states that income tax expense or benefit for the year shall be allocated among continuing operations, discontinued operations, extraordinary items, other comprehensive income, and items charged or credited directly to shareholders equity. Rule of Thumb - the tax follows the items of income, gain, expense or loss

Current issues in income tax accounting (US GAAP & IFRS) PwC

Authoritative guidance
ASC 740-20-45-7 states that The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations (an incremental approach) PwC Guidance in Guide to Accounting for Income Taxes Chapter 12.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Intraperiod allocation issues


Intraperiod allocation is a mechanical process: Calculate the total tax expense from all sources Calculate the tax expense from continuing operations without regard to other categories If there is only one category other than continuing operations, allocate the entire difference between (1) and (2) to that category If there is more than one category other than continuing operations, allocate the difference among the other items in proportion to their individual effects on total tax expense (ASC 740-20-45-14)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Tax effects specifically allocated to continuing operations


Changes in tax laws or rates (ASC 740-20-45-8(b); see also ASC 74010-25-47 & 48) Change in tax status (ASC 740-20-45-8(c); see also ASC 740-10-25-32) Changes in the assessment about the realizability of deferred tax assets that existed at the beginning of the year because of a change in the expectation of taxable income available in future years that are not related to source-of-loss items (ASC 740-20-45-8(a); see also ASC 740-10-45-20)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Tax effects specifically allocated to continuing operations


Tax deductible dividends paid to shareholders (ASC 740-20-45-8(d)) Tax effect of changes in assertion on plans for repatriation of prior years unremitted earnings of foreign subsidiaries (ASC 740-30-25-19)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Tax effects allocated to specific components other than continuing operations (ASC 740-20-45-11)
Other comprehensive income - Cumulative translation adjustments (ASC 830) - Gains and losses on cash flow hedges - hedging derivatives (ASC 815) - Unrealized gains and losses of available-for-sale debt and equity securities (ASC 320) - Net unrecognized gains and losses and unrecognized prior service cost related to pension and other OPEB (ASC 715)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Tax effects allocated to specific components other than continuing operations (ASC 740-20-45-11)
Adjustments of the opening balance of retained earnings for certain changes in accounting principles or a correction of an error Gains and losses included in comprehensive income but excluded from net income (i.e., translation, changes in carrying value of net marketable securities) An increase or decrease in contributed capital (for example deductible expenditures recorded as a reduction in the proceeds from issuing capital stock) An increase in the tax basis of assets acquired in a taxable business combination accounted for as a pooling of interests and for which a tax benefit is recognized at the date of the business combination

Current issues in income tax accounting (US GAAP & IFRS) PwC

Tax effects allocated to specific components other than continuing operations (ASC 740-20-45-11)
Expenses for employee stock options recognized differently for financial reporting and tax purposes (see ASC 718-740) Dividends that are paid on unallocated shares held by an ESOP and that are charged to retained earnings Deductible temporary differences and carryforwards that existed at the date of a quasi-reorganization (except as set forth in (ASC 852740-55)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Intraperiod allocations issues-valuation allowances


In the case of a change in the valuation allowance applicable to beginning-of-year deferred tax assets that results from changes in circumstances that cause the assessment of the likelihood of realization of these assets by income in future years to change, the effect is reflected in continuing operations. (ASC 740-10-45-20) When income in the current year allows for the release of a valuation allowance, the benefit from the release of the valuation allowance is allocated to the current year component of income that allows for its recognition.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Intraperiod allocations issues-valuation allowances


However, there is an exception to the extent that the valuation allowance relates to source-of-loss items. For the initial recognition of source-of-loss items the benefits are allocated back to the prior-year source that generated the loss. Source-of-loss items - Tax benefits relating to certain equity items.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Non-controlling interest
The financial statement amounts reported for income tax expense and net income attributable to non-controlling interest differ based on whether the subsidiary is a C-corporation or a partnership. The tax status of each type of entity causes differences in the amounts a parent company would report in its consolidated income tax provision and net income attributable to non-controlling interest.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Non-controlling interest
A C-Corporation is generally a taxable entity and is responsible for the tax consequences of transactions by the corporation. Therefore, a parent that consolidates a C-corporation would include the income taxes of the C-corporation, including the income taxes attributable to the non-controlling interest, in the consolidated income tax provision. Net income attributable to the non-controlling interest would be calculated as the non-controlling interests share of the Ccorporations net income, which would include a provision for income taxes.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Non-controlling interest
The legal liability for income taxes of a partnership generally dones not accrue to the partnership itself. Instead, the investors are responsible for income taxes on their share of the partnerships income. Therefore, a parent that consolidates a partnership would only reort income taxes on its share of the partners income in the consolidated income tax provision. This would result in a reconciling item in the parents effective tax rate reconciliation that should be disclosed, if material.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Partnerships and other flow-through entities


Generally, deferred taxes related to investment in a foreign or domestic partnership (and other flow-through entities that are taxes as partnerships, such as multi-member LLCs) should be measured based on the differences between the financial statement investment and its tax basis (i.e. outside basis differences).

Current issues in income tax accounting (US GAAP & IFRS) PwC

Partnerships and other flow-through entities


Exceptions to the general guidance have been made in practice. Specifically, different views exist regarding if and when deferred taxes should be provided on the portion of an outside basis difference attributable to nondeductible goodwill.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Partnerships and other flow-through entities


We believe that an entity must adopt a consistent policy to (1) look through the outside basis of the partnership and exclude it from the computation of deferred taxes on all underlying items for which ASC 740 provides an exception to its comprehensive model of recognition -or(2) not look through the outside basis of the partnership and record deferred taxes based on the entire difference between the book and tax bases of its investment.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim period reporting

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 70-270-30-6 (Interim Reporting) states that At the end of each interim period the company should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. In some cases, the estimated annual effective tax rate will be the statutory rate modified as may be appropriate in particular circumstances. In other cases, the rate will be the entity's estimate of the tax (or benefit) that will be provided for the fiscal year, stated as a percentage of its estimated ordinary income (or loss) for the fiscal year (see paragraphs 740-270-30-30 through 3034 if an ordinary loss is anticipated for the fiscal year).

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 70-270-30-8 (Interim Reporting) further states that The estimated effective tax rate shall also reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives. However, in arriving at this estimated effective tax rate, no effect shall be included for the tax related to significant unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
PwC Guidance at Guide to Accounting for Income Taxes Chapter 17.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Basic rules
Calculate the tax effects of current-year ordinary income or loss using an estimated full year effective tax rate. All other items are recorded discretely, which includes: - Significant, unusual or infrequent items - Extraordinary items - Discontinued operations - Cumulative effects of changes in accounting principles Concept is that each interim period is primarily an integral part of the annual period.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 740-270-25-9 states that The tax effects of losses that arise in the early portion of a fiscal year shall be recognized only when the tax benefits are expected to be either: a. Realized during the year b. Recognizable as a deferred tax asset at the end of the year in accordance with the provisions of Subtopic 740-10.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 740-270-25-5 states that The effects of new tax legislation shall not be recognized prior to enactment. The tax effect of a change in tax laws or rates on taxes currently payable or refundable for the current year shall be recorded after the effective dates prescribed in the statutes and reflected in the computation of the annual effective tax rate beginning no earlier than the first interim period that includes the enactment date of the new legislation. The effect of a change in tax laws or rates on a deferred tax liability or asset shall not be apportioned among interim periods through an adjustment of the annual effective tax rate.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 740-270-25-6 adds that The tax effect of a change in tax laws or rates on taxes payable or refundable for a prior year shall be recognized as of the enactment date of the change as tax expense (benefit) for the current year. See Example 6 (paragraph 740-270-55-44) for illustrations of accounting for changes caused by new tax legislation.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 740-270-25-2 states the general rules that The tax (or benefit) related to ordinary income (or loss) shall be computed at an estimated annual effective tax rate and the tax (or benefit) related to all other items shall be individually computed and recognized when the items occur. Other items often are referred to as discrete items.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
Key questions: - What is the definition of the tax (or benefit)? - What is the definition of ordinary income? - What are other (discrete) items?

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting Definitions


Tax (or benefit) is the total income tax expense (or benefit), including the provision (or benefit) for income taxes both currently payable and deferred. (ASC 740-270-20 Glossary) Ordinary income (or loss) refers to income (or loss) from continuing operations before income taxes (or benefits) excluding significant unusual or infrequently occurring items. Extraordinary items, discontinued operations, and cumulative effects of changes in accounting principles are also excluded from this term. The term is not used in the income tax context of ordinary income versus capital gain. The meaning of unusual or infrequently occurring items is consistent with their use in the definition of the term extraordinary item. (ASC 740-270-20 Glossary)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting Definitions


Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item: a.Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates (see paragraph 225-20-60-3). b. Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates (see paragraph 225-20-60-3). (ASC 740270-20 Glossary)
Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim period tax provisions


Discrete items are excluded from the annual effective tax rate computation and are separately reported in interim reports or reported net of tax effects in interim reports. (ASC 740-270-30-11 through 13).

Current issues in income tax accounting (US GAAP & IFRS) PwC

Potential discrete tax items


Tax true-ups Resolution of tax audits Statute of limitation expiration Changes in prior years unrecognized tax benefits Certain changes in valuation allowances Changes in tax laws or rates Changes in judgment about unremitted earnings

Current issues in income tax accounting (US GAAP & IFRS) PwC

ASC 740-270 interim reporting


The annual ETR also includes the effect of valuation allowances on: - Temporary differences arising in the current year - Beginning-of-the-year DTAs if attributable to changes in estimates of the current years income (ASC 740-270-30-7) The ETR estimate applies to year-to-date ordinary income. The ETR estimate excludes - Jurisdictions with losses and no tax benefit - Jurisdictions with no reliable estimate

Current issues in income tax accounting (US GAAP & IFRS) PwC

ASC 740-270 interim reporting


The ETR represents the best estimate of the composite tax provision in relation to the best estimate of worldwide pretax book ordinary income. The composite tax provision should include federal, foreign and state income taxes, and should reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives. (ASC 740-270-30-8)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting Computation


Steps to compute the interim tax provision using the annual effective tax rate - Determine projected annual taxable income using projected pretax income, permanent and temporary differences, credits and carryforwards for the entire year for each tax component of each jurisdiction - Compute the tax for the year for each component - Aggregate the pretax book income and tax expense for the year - Compute the estimated effective tax rate for the year - Apply this rate to year-to-date consolidated book ordinary income/(loss)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting Computation (cont)


Steps to compute the interim tax provision using the annual effective tax rate - Determine the tax impacts of discrete items occurring during the year-to-date interim period - Sum the two computed tax amounts to derive income tax for the year-to-date interim period - Current quarters provision = the difference between the year-todate provision for the current quarter and the previous quarters year-to-date provision

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
Exclude from the consolidated annual estimated tax rate computation loss jurisdictions for which no benefit can be recognized on those losses (ASC 740-270-30-36) Compute a separate annual estimated rate for each such loss jurisdiction

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
Exercise 2-1

Current issues in income tax accounting (US GAAP & IFRS) PwC

Changes in valuation allowances


If realization of deferred tax asset is driven by future years income projections the change in valuation allowance is considered a discrete event in the quarter as of the date the change in circumstances occurs. If realization of deferred tax asset is driven by current years income projections the change in valuation allowance is part of the annualized effective tax rate computation. To apply these rules the deferred tax assets must be divided between those expected to be realized in the current year and those expected to be realized in future years.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Change in valuation allowance during an interim period (FAS 109, 193 and 194, uncodified)
Need to segregate the effect of the change into two portions: 1. The amount of the change that relates to the current year 2. The amount of the change that relates to future years The first portion is reflected as an element of the effective annual tax rate The second portion is recognized on a discrete basis

Current issues in income tax accounting (US GAAP & IFRS) PwC

Valuation allowances Release in interim period


Facts: Assume that an enterprise has $3,000,000 of net operating loss carryforwards available at the beginning of year 20X7. At that date, the enacted tax rate was 35%. Because of uncertainty related to realizability, management established a valuation allowance of $1,000,000 at the end of 20X6. Although the company broke even for the first six months of 20X7, due to a recent increase in sales orders and firm contracts, the company now estimates it will have income of $200,000 for the current year, and income in future years is expected to be sufficient to allow recognition of the entire deferred tax asset. This will permit a full reversal of the valuation allowance for NOL carryforwards that existed at the beginning of the year Question: How should the reversal be accounted for in Q2 of 20X7?
Current issues in income tax accounting (US GAAP & IFRS) PwC

Changes in tax laws or rates


Changes impacting deferred taxes - discrete event in the quarter the date of enactment occurs Changes impacting current year taxes payable or receivable annualized effective tax rate item beginning the first interim reporting period as of the date of new legislation Changes impacting prior year taxes payable or receivable - discrete event in the quarter in which the date of enactment occurs

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
Reliability of estimates - When a company operates in a jurisdiction where a "reliable estimate" of the translated effective tax rate cannot be made, ASC 740-270-30-36(b) requires the company to exclude the "ordinary" income (or loss) in that jurisdiction and the related tax (or benefit) attributable to ordinary income in that jurisdiction from the overall estimate of the ETR and interim period tax (or benefit)

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
ASC 740-270-30-17 states Paragraph 740-270-25-3 requires that if an entity is unable to estimate a part of its ordinary income (or loss) or the related tax (or benefit) but is otherwise able to make a reliable estimate, the tax (or benefit) applicable to the item that cannot be estimated be reported in the interim period in which the item is reported. ASC 740-270-30-18 further states that if a "reliable estimate" of the ETR cannot be made, the actual tax rate for the year-to-date may represent the most appropriate estimate of the annual effective tax rate.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
These paragraphs make it clear that the effective tax rate approach must be used to the extent that, but only to the extent that, a reliable estimate can be made.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
Disclosure considerations: - The tax effects of significant unusual or infrequent items that are recorded separately or reported net of their related tax effect (ASC 740-270-30-8) - Significant changes in estimates or provisions for income taxes (ASC 270-10-50-1(d)), e.g., changes during the period in the assessment of the need for a valuation allowance

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting Disclosure


ASC 740-270-50-1 states that Application of the requirements for accounting for income taxes in interim periods may result in a significant variation in the customary relationship between income tax expense and pretax accounting income. The reasons for significant variations in the customary relationship between income tax expense and pretax accounting income shall be disclosed in the interim period financial statements if they are not otherwise apparent from the financial statements or from the nature of the entity's business.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Interim reporting
Disclosure considerations - SAB 74 - Material changes to uncertain tax positions, amounts of uncertain tax benefits that, finalized would affect the effective tax rate, total amounts of interest and penalties and positions that are expected to change within the next 12 months and open tax years.

Current issues in income tax accounting (US GAAP & IFRS) PwC

Questions & Answers

Current issues in income tax accounting (US GAAP & IFRS) PwC

Thank you
Sharon Powers sharon.powers@us.pwc.com Carolyn Iacobelli carolyn.iacobelli@us.pwc.com James Terry james.terry@us.pwc.com

Current issues in income tax accounting (US GAAP & IFRS) PwC

2012 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.