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FASB Financial Reporting Update on Uncertain Tax Position Disclosures

March 28, 2016

Financial Accounting Standards Board (FASB) decides to streamline the disclosures about UTPs in financial statements.

Uncertain tax positions (UTPs) are one of the more complicated areas of financial reporting. Your company may be required to report a UTP when you’re unsure about whether a position taken on the company’s income tax return will be upheld, often because the tax law regarding a deduction or credit is ambiguous.
Disclosures about UTPs give stakeholders insight into how aggressive a company’s tax strategy is. But how much detail do investors and lenders really need? The Financial Accounting Standards Board (FASB) recently decided to streamline the disclosures about UTPs in financial statements.

More Common Than You Might Think

Most companies would prefer not to report on UTPs because it raises a red flag to the IRS and investors. However, under U.S. Generally Accepted Accounting Principles (GAAP), a company may be required to record a liability on its balance sheet for a UTP, usually based on the expected result of an unresolved audit or pending litigation.

An example of a tax benefit that may have some ambiguity is the research and development tax credit. It’s one of the leading causes of UTPs, according to IRS statistics. Now that recent legislation has made this R&D tax credit permanent and expanded it to allow certain small companies to apply the credit against AMT liabilities and FICA taxes, more companies may need to report UTPs.

What Stays and What Goes?

The FASB won’t require businesses to break down UTPs by jurisdiction, type of tax matter or scheduled expiration. It also erased from existing GAAP the requirement to disclose UTPs that could significantly change in the next 12 months.

The FASB will still expect companies to provide a table of opening and closing balances of unrecognized tax benefits on a gross basis. And it agreed that companies should add more details to these tables about cash and noncash settlements of tax benefits. Such tabular presentations will only apply to public companies.

Which Disclosures Are on the FASB’s Agenda?

This decision is part of the FASB’s broader effort to weed out irrelevant information in the footnotes. Disclosure requirements currently being reviewed relate to:

  • Fair value measurement
  • Government assistance
  • Income taxes
  • Inventory
  • Interim reporting
  • Defined benefit plans

In addition, the FASB is evaluating its disclosure framework overall, including how to decide what is “material” enough to disclose in financial statement footnotes.

Staying Atop Changing Requirements

Preparing disclosures can be confusing and cumbersome, especially when it comes to UTPs. We can help you stay atop the changing requirements and focus on providing stakeholders with useful information about your company’s performance. Please contact us for more information.

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