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Plan to Amend U.S. GAAP’s Tax Disclosures on Hold Until Congress Completes Tax Reforms

As the House and Senate advance their bills to overhaul the tax system, the FASB is keeping tabs on lawmakers’ actions — waiting to determine whether it needs to update U.S. GAAP to keep pace should the tax reforms become law. The board may have to revise the recognition and measurement guidance for income taxes in addition to updating the disclosure rules for taxes.

As Congress debates major changes to tax law, the FASB is following lawmakers’ decisions to see how its plan to amend the guidance for tax disclosures might be affected.

Speaking to the accounting board’s Investor Advisory Committee (IAC) on November 9, 2017, FASB Chairman Russell Golden said the board was closely following political developments and, if change materializes, will take action.

“First, we need to stand ready to see if any questions that companies, auditors, or investors have about the impact about whatever that will come about from tax reform,” Golden said. “Then, we’re going to reevaluate the tax disclosure proposal; it was obviously written under current legislation.”

Golden was referring to the FASB’s July 2016 Proposed Accounting Standards Update, (ASU) No. 2016-270, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes, which called for a bevy of new information in financial statement footnotes about tax obligations.

The proposal was an attempt to address investor and analyst concerns that U.S. GAAP’s income tax disclosure requirements leave investors guessing about the magnitude of a company’s tax liabilities. The proposal attempted to offer more information about taxes on foreign profits, a hot topic as more U.S. companies shift operations abroad.

The proposal says businesses would be required to separate foreign and domestic taxes, describe changes in tax law, and explain the circumstances that cause a change in the assertion about the indefinite reinvestment of undistributed foreign earnings.

The proposal also called for disclosure in financial statement footnotes of the aggregate of cash, cash equivalents, and marketable securities held by foreign subsidiaries. Public companies would have to provide extra information, including the total of the unrecognized tax benefits that offset the deferred tax assets for carry-forwards. They also would have to disclose the line items in the financial statement in which the unrecognized tax benefits are presented and the related amounts of these benefits.

How the FASB ultimately revises the proposal depends on some factors largely beyond its control. First comes the uncertainty about what Congress will ultimately do. President Trump wants to sign the final tax reform bill before Christmas, and House Speaker Paul Ryan hopes to approve the House version of the reforms during the week of November 13. The Senate wants to vote on its reform bill shortly after Thanksgiving.

But the chambers are far apart and may have trouble negotiating a final package, particularly if they insist on sticking to their tight deadlines. A few hours after the House Ways and Means Committee on November 9 approved the bill, advancing it to the full house, the Senate unveiled a plan that differs on some key points. Both bills seek reductions in corporate taxes, but they have different treatments for some of the most widely used deductions for individual taxpayers — mortgage interest, state and local taxes, and the adoption tax credit. It is far from clear how the House and Senate can reconcile the differences, which adds to the FASB’s uncertainty about completing the proposed changes to the income tax disclosure guidance.

The FASB is also contending with a lack of clear support for its proposed changes.

Proposed ASU No. 2016-270 generated mixed feedback when the FASB sought public comment about the changes. One-fifth of the businesses, professional groups, and individuals responding to the proposal opposed it, FASB staffers told the board in January. Others expressed concerns with key parts of it.

In September, the FASB said it would put the project on hold pending congressional action.

“If this moves forward, what are the additional disclosures we no longer need versus that you now need?” Golden said.

The FASB also is considering whether it should update the recognition and measurement guidance in Topic 740, Income Taxes .

If Congress lowers corporate taxes and phases in the reduction over several years, a company’s deferred tax assets reported in U.S. GAAP may need to be adjusted each reporting period to reflect the phase-in, FASB Vice Chairman James Kroeker said.

“We’re trying to track what are not just the things companies need to do, but what are the things investors would need to know,” Kroeker said.

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