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Foreign Earnings, Taxes Could Be Subject to Disclosure Rules

The FASB is starting to discuss how to improve the information investors get about U.S. companies’ overseas earnings and tax liabilities. The board is exploring whether to require companies to break down their earnings by country, which could help investors and policymakers understand how much tax liability they would have if they were to remit, or bring back their earnings to the U.S.

Multinational companies with large overseas earnings could have to provide more information about foreign tax payments if the FASB goes through with a plan to add to its rules for footnote disclosures.

Meeting on January 7, 2014, the FASB discussed ways to provide investors with more information about unremitted foreign earnings, a hot topic at a time when many large U.S. corporations generate significant earnings overseas, often to take advantage of lower tax rates.

Investors and policymakers want to know more about what the tax implications would be if the companies move, or remit, their earnings back to the U.S. Securities analysts also want to know how sustainable lower tax rates are in foreign jurisdictions, FASB staff accountants told the board.

The board didn’t make any decisions at the January 7 meeting, but most members seemed open to the idea of requiring companies to break out “significant” taxable income by country. Current SEC rules require companies to distinguish between foreign and domestic income, but companies aren’t required to name the countries individually, FASB staff accountants told the board.

FASB member Marc Siegel described it as a starting point to help investors do more detailed analysis.

“I think investors can then go and look at what the tax rates are in those significant jurisdictions and try to estimate what the cash payments are going to be for their model so they can discount it back,” Siegel said.

FASB members appeared to have little appetite, however, for requiring companies to estimate the amount of money they would have to pay in taxes if they had to remit their earnings to the U.S.

Topic 740, Accounting for Income Taxes, requires disclosure of unrecognized deferred tax liabilities for indefinitely reinvested foreign earnings, but it provides what the standard-setter calls a “practicability exception” if the number can’t be calculated.

Of Fortune 500 companies, 89 percent avail of this break, a FASB staffer told the board. The staffers working on the project asked board members if they wanted to require companies to either do the calculation or a simplified version of it. Most FASB members said neither a full calculation or a simplified variation would work.

“We would impose on them a requirement to do some sort of alternate calculation to come up with a number they know is not accurate and disclose that. I’m just thinking, what would a user do with that number?” said FASB member Daryl Buck.

Instead, Buck said it would be useful for investors to know the unremitted amount of earnings and apply an assumed rate of taxation to it.

“I’m concerned about the hypothetical number… to say, ‘Well the aggregate amount of taxes that would be paid if people would simply remit their earnings would be this number,’ which would have nothing to do with reality because it’d be a set of assumptions that may or may not be real,” FASB Vice Chairman James Kroeker said.

The FASB did not vote on potential disclosure requirements but decided that new foreign tax disclosures would be incorporated into a broader proposal to improve disclosures about income taxes.

Robert Willens, a tax and accounting consultant in New York, said he welcomed any additional disclosures about income taxes on foreign earnings, saying there was “a real information gap” in current disclosures.

“It would be interesting to know what the expenses would be if taxes were required to be accrued on unremitted earnings. I’d also like to see what countries the earnings were generated in,” Willens said. “That would be supplemental to the disclosure of the amount of taxes that would be due if the earnings were no longer indefinitely invested. You could infer from that whether earnings were accumulated in low-tax countries or high-tax countries.”

Attention to this topic has become more intense in light of high-profile media accounts about U.S. companies with substantial foreign earnings but little to no domestic tax liability.

“One of the few things that actually made it into the popular consciousness,” Willens said. “I don’t doubt that that was impetus for the SEC and FASB to decide to finally revisit this stuff.”

In November 2013, the FASB’s parent organization, the Financial Accounting Foundation released a review of SFAS No. 109, Accounting for Income Taxes, (FASB ASC 740), which found no significant problems with the two decades-old standard despite frequently cited concerns about its complexity.

In response to the review, the FASB decided to examine whether it could improve the accounting standard. The board in April 2014 decided it would focus on improving the disclosures associated with income tax accounting.

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