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Companies Often Not Providing Sufficient Detail on Tax Exposures, SEC Staff Says

Friday, December 13, 2013
By Steven Marcy

Dec. 11 --Many companies aren't clearly disclosing in their financial statements their tax exposures, including the reconciliation of their statutory tax rates with their effective tax rates, Securities and Exchange Commission accounting staff said.

Too often, preparers fail to provide “clear labeling of items within the reconciliation or have unclear disclosure of the underlying nature of the material reconciling items,” SEC Corporation Finance Associate Chief Accountant Tricia Armelin said Dec. 10 at the American Institute of CPAs National Conference on Current SEC and PCAOB Developments. She and other Corp Fin accounting staff said the views they expressed were only their own.

Companies also are aggregating tax items that should be disclosed separately, Armelin said. SEC rules require “separate line item disclosures for reconciling items that are 5 percent or greater in the amount calculated and also multiplying pretax income by the statutory rate,” she said.

“Please ensure that you look at each item individually to see if it meets the criteria for separate disclosure,” Armelin said. “In determining whether these analyses need to be separately presented, please ensure that you do not offset material expense items with material income items.”

Many companies also aren't reconciling their tax obligations in foreign jurisdictions with sufficient disclosure, including the tax rates involved and the exposure that each company has in each foreign tax jurisdiction, Armelin said.

Financial statement filers too often mischaracterize what are errors in their income tax reporting as changes in estimates, Armelin said.

Statement preparers sometimes don't fully disclose the sources and magnitude of taxable income that are used to underpin the valuation of a deferred tax asset, Armelin said. Failure to provide this information will prompt an SEC request for more information, she said. This is true for both domestic and foreign sources of income that may be used for a deferred tax asset. Filers also should provide disclosures about the uncertainties of the estimates of their deferred tax assets, she said.

To contact the reporter on this story: Steven Marcy in Washington at smarcy@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh in Washington at asartipzadeh@bna.com

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