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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
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Special topics
May 2012
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
Current issues in income tax accounting (US GAAP & IFRS) PwC
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
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
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
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
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
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