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By Denise Lugo
Potential changes to income tax accounting disclosures would create information overload and could lead to inaccurate conclusions about companies, according to a professional association for thousands of in-house tax executives for businesses.
Tax Executives Institute Inc. told the Financial Accounting Standards Board that many of the revisions in the board’s July proposal would also expand existing financial statement disclosures for income taxes and add new ones without providing clear benefits.
“We believe there is a real risk that changes in the proposed update will create information overload and confusion for readers leading to inaccurate conclusions,” TEI said in a Dec. 12 comment letter on the proposal.
Among other comments, TEI has concerns that proposed disclosures related to foreign source earnings would be duplicative, subjective and would raise the cost of preparing financial disclosures.
Overall, TEI says the volume of change and additions would be cumbersome and in many cases not helpful or useful.
The organization pointed to areas where disclosures would be duplicative and costly for financial statement preparers without added benefit to users. One area TEI cited would require pretax income and loss—along with income tax expense and benefit—to be broken out between “foreign” and “domestic” in the financial statements.
Moreover, some of the disclosure provisions would introduce subjectivity and unintended consequences, the organization says. Specifically, the requirement that companies explain the circumstances that would cause a change in assertion about their intention to repatriate or not to repatriate earnings and the corresponding amount of those earnings. This rule won’t be useful to financial-statement readers “because it would be based on anticipated events that may never occur,” it said.
Another requirement—that companies disclose an enacted change in tax law that would likely affect the company in a future period—also introduces subjectivity and judgment into the disclosures. That type of information is non-verifiable, future-oriented and causes concern “because actual future events or conditions may be materially different than the internal projection,” TEI said.
FASB’s July 26 income tax disclosure proposals would require multinationals and other firms to disclose cash, cash equivalents and marketable securities held by foreign subsidiaries. The proposed changes intend to bring simplicity and greater transparency to income tax disclosures, particularly in relation to foreign-source earnings.
FASB issued the proposal as part of its broader effort to improve footnote disclosures to financial statements via a disclosure framework—a type of internal conceptual guide the board would use to determine disclosure requirements so that they are consistent.
The proposed revisions to income tax disclosures are part of efforts to test the disclosure framework with the potential of finalizing new disclosures for ASC 740, Income Taxes, and three other accounting standards.
FASB chose income tax disclosures for revision because of the current complexity around those rules and because investors and other financial statement users have asked for a simpler, clearer picture of companies’ operations—particularly as they relate to foreign source earnings.
What companies disclose in footnotes typically provide vital information to investors and other financial statement users because they highlight items that could significantly affect the financial health of a company and its ability to generate profit.
FASB has said its work is far from over on this topic. The board plans on holding roundtable discussions in March on its overall disclosures work and will hear feedback before redeliberations and decisions on how to proceed.
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