The Financial Accounting Standards Board (FASB) today ratified the accounting guidance proposed by the Emerging Issues Task Force (EITF) consensus for Issue 13-C, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. We expect the final Accounting Standards Update (ASU) to be issued within the next few weeks.
This new standard requires the netting of unrecognized tax benefits (UTBs) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. This departs from the original guidance provided by the FASB staff, and currently reflected in the PwC Guide to Accounting for Income Taxes.
The new standard requires prospective adoption but allows optional retrospective adoption (for all periods presented). For public entities, the standard must be adopted in annual reporting periods beginning after December 15, 2013 and interim periods therein. Private companies must adopt the standard in annual periods beginning after December 15, 2014 and interim periods therein. Early adoption is permitted. The standard does not require any new/additional recurring disclosures.
Settlement of a liability for a UTB often occurs through a cash payment, but may also occur, for example, through reduction of a net operating loss (NOL) or other tax carryforward. Until today, accounting standards did not explicitly address whether or when an entity should present the UTB as a liability (gross presentation) or as a reduction of the deferred tax asset for a loss or other tax carryforward (net presentation).
In practice, many companies have only been netting UTBs related to tax positions taken in a tax year which resulted in the recognition of a loss or other tax carryforward for that year. That practice was consistent with the response previously provided by the FASB staff when addressing technical inquiries about whether gross or net presentation is appropriate. FASB staff responses are not authoritative, however, and diversity existed in practice. The consensus approved today attempts to address that diversity.
The new standard requires that an entity net its liability for UTBs against all same-jurisdiction loss or similar tax carryforwards that would apply if the UTBs were settled for the presumed amount at the balance sheet date. Whether settlement by use of carryforwards is available under the tax law would be based on facts and circumstances as of the balance sheet date. The anticipated use of a carryforward against future income, or the anticipated expiration of a carryforward which would nonetheless be available under the law to offset a settled UTB, would not be considered.
The new standard does not require any new recurring disclosures. However, a public entity would still be required to include all UTBs (gross) within its UTBs footnote disclosures. At this time there is no indication as to whether the SEC will modify existing guidance regarding disclosure of UTBs in the contractual obligations table required by Regulation S-K 303(a)(5).
The new standard applies to public entities for annual reporting periods beginning after December 15, 2013 and interim periods therein. For private companies, the effective date is annual periods beginning after December 15, 2014 and interim periods therein. The new standard requires prospective adoption and applies to all UTBs as of the adoption date. Retrospective adoption and early adoption are permitted.
When assessing whether UTB liabilities and carryforward assets should be netted, careful consideration should be given to the character of both the UTBs and the carryforward attributes within the context of specific jurisdictional tax laws. Companies should ensure that, upon settlement of the UTB, the carryforward attribute would be used to offset the taxable income or tax generated by the settlement. For example, it may be that foreign tax credit carryforwards are not available to offset UTBs that would not generate appropriate foreign source income upon settlement. Nor would additional ordinary income resulting from settlement of a UTB be offset by a capital loss carryforward.
Similarly, consideration should be given to attributes that could be carried back to offset UTBs relating to tax return positions taken in prior years. In effect, the period in which the tax position was taken will no longer impact the requirement to present on a net basis, assuming the attributes would be used to offset the additional taxable income or tax.
An effect of the new standard will be that most UTB liabilities shown on the balance sheet should accrue interest. Prior to adopting the new standard a company may have presented a gross UTB liability on the balance sheet which did not accrue interest. This was due to the existence of a carryforward attribute that could be used to offset the liability if the uncertain tax position was not sustained. However, under the new standard most UTB liabilities shown on the balance sheet are those that cannot be offset by carryforwards. An exception would be UTBs that would be offset by carryforwards attributable to windfall stock compensation benefits not yet recognized as additional paid-in capital.
If after having netted a UTB liability against a carryforward the carryforward is utilized on a tax return in a later period but prior to settlement of the UTB, a liability for the UTB should be recorded in the period the carryforward is utilized with interest accruing thereafter.
Companies should remain conscious of the need to track and ensure appropriate accounting for carryforwards even if they are currently netted against UTBs. For example, assume that after consideration of relevant facts and circumstances an NOL carryforward that would otherwise attract a full valuation allowance is presented net of a UTB. If the uncertain tax position is subsequently upheld, a valuation allowance may then need to be recorded.
We believe footnote disclosure of the amounts of loss and other tax carryforwards should be on the same basis as presented on the balance sheet (i.e., net of UTBs). If companies additionally present the carryforwards in the footnote on a gross or "as filed" tax return basis, additional disclosures may be necessary to help a reader understand the difference between that amount and the balance sheet position.
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Ken Kuykendall, Partner Edward Abahoonie, Partner Patrick Young, Senior Manager |