Tax Accounting and Disclosures

In last week’s blog, I mentioned three recent proposals from the Financial Accounting Standards Board (FASB), but only discussed the one on disclosure improvements in depth. This week, I’m going to go back and talk a little more about the proposals on income tax accounting and disclosures.

The proposal on accounting for income taxes mainly focused on eliminating exceptions to the general rules for accounting for income taxes. By eliminating limited use exceptions, the accounting should become easier, with fewer “gotchas” for unusual circumstances. One of the proposals was to clarify that franchise and other “non-income taxes” (by name) that are effectively based on income should follow the income tax accounting requirements, at least for the portion of the tax that equates to the amount that is computed based on income. This could potentially impact the accounting for the Texas business margin tax, so CPAs with Texas business clients should pay particular attention to how the final standard is worded.

The proposal on income tax disclosures covered a lot of ground and included eliminating some disclosures. Don’t get too excited though; different disclosures were proposed to be added. In the end, I think disclosures net/net will expand rather than contract. One of the proposals is to include a five-year table of the reversals of tax liabilities. Having to show the reversals by year will be a new level of detail that many preparers don’t currently calculate, even for internal purposes. This disclosure could also be a challenge for auditors to get comfortable with, because it will be based on many estimates and future information.

Another auditor nightmare could occur related to the disclosure on pretax income from continuing operations before intra-entity eliminations. The term intra-entity eliminations has not been previously defined in generally accepted accounting principles (GAAP) and, because the number will involve multiple entities and potentially not tie to any amount in the presented financial statements, auditors might have difficulty coming to terms with how to exactly audit such an amount.

TXCPA responded on your behalf to both proposals. If you would like to learn a little more about both proposals and TXCPA’s responses, the response on Income Tax Disclosures can be found here, while the response on Income Tax Accounting can be found here.


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