Global Reporting: FASB Wants to Know About Your Foreign Earnings

The Financial Accounting Standards Board (FASB) has released for public comment a proposal that adds new disclosure requirements about income taxes, including foreign earnings and global tax strategies. The proposal is more than a year in the making and is part of the board’s overall project to improve the disclosures in the footnotes to financial statements. Comments are due by September 30.

Why is the FASB targeting foreign earnings?

On July 26, the FASB issued proposed Accounting Standards Update (ASU) No. 2016-270, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes. The proposal modifies existing disclosure requirements and also adds some new ones, particularly about foreign earnings.

In part, the FASB is reacting to a changing business culture. With more U.S. companies doing business abroad, investors and analysts want to know global tax strategies.

The largest U.S. companies had more than $2.4 trillion in earnings in overseas subsidiaries that were subject to domestic taxes in 2015, according to an analysis by Citizens for Tax Justice. The group estimates that these companies paid an average tax rate of 6.4% to foreign governments and would owe $695 billion in U.S. taxes had they brought the earnings back home.

What would change?

Under the FASB’s proposal, businesses would be required to separate foreign and domestic taxes, describe enacted changes in tax law, and explain circumstances that cause a change in the assertion about the indefinite reinvestment of undistributed foreign earnings. Additionally, the proposal calls for details about the domestic and foreign components of income or loss from continuing operations before income tax expense or benefit; income tax expense or benefit from continuing operations; and income taxes paid. This information also would be broken down by country.

Publicly traded businesses would have to provide additional information, including the total amount of unrecognized tax benefits that offsets the deferred tax assets for carryforwards. 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.

What’s the main goal?

The proposal is a response to requests from analysts and investors for three key pieces of information about an organization’s taxes in the financial statements:

1. The tax exposure in different countries,
2. The tax consequences from the remittance of undistributed foreign earnings, and
3. A prediction of whether the tax rate is sustainable.

At a time when the FASB is hoping to streamline disclosures, the board is trying to make its requirement more effective without overloading financial statements with extraneous information.

What about deferred tax breakdowns?

The board decided not to require disclosures that would give a breakdown of deferred tax liabilities recorded for unremitted foreign earnings by country or estimates about the amount of unrecognized deferred tax liabilities. It also isn’t looking for details about conditions or events that could change a company’s plans for undistributed earnings.

A deferred tax liability represents the difference between the U.S. tax the company expects to pay once foreign earnings are brought back to this country and the taxes paid overseas. Accounting Standards Codification Topic 740, Income Taxes, requires disclosure of unrecognized deferred tax liabilities for indefinitely reinvested foreign earnings, but it provides what the standard-setters call a “practicability exception” if the number can’t be calculated.

Of the 500 largest U.S. companies, 89% use this exception, according to estimates from the FASB’s research staff members. The FASB ultimately decided that requiring companies to do the full calculation of unrecognized deferred tax liabilities for indefinitely reinvested foreign earnings would be too much work for companies — and a simplified version of the calculation wouldn’t be helpful to investors.

Instead, the FASB’s proposal calls for a disclosure of cash, cash equivalents and marketable securities held by foreign subsidiaries. This would provide a data point that, in combination with other financial and tax disclosures, would give investors a general sense of a company’s exposure to income taxes.

How would the proposal be implemented?

If finalized, the amendments in the proposed update would be applied prospectively, meaning they’d be applied on the date the updates became effective. The FASB plans to decide on an effective date and whether early adoption should be permitted after collecting feedback on the proposal.

Sidebar: Will the SEC expand its requirements for tax disclosures?

Over the past several years, several U.S. companies have made headlines for “parking” their profits in subsidiaries overseas, where tax rates are lower, rather than at home. The IRS has been investigating tax abuses, and Congress has sought to close corporate tax loopholes involving those subsidiaries. Now some pro-investor reform groups want the Securities and Exchange Commission (SEC) to require public companies to provide more information about their use of offshore tax havens.

In July, 21 pro-investor organizations, including the American Federation of State, County and Municipal Employees (AFSCME) and Americans for Democratic Action, told the SEC, “Changes in government regulations, including tax rates, in the nations hosting those subsidiaries, can have a material effect on the health of the parent corporation in America. Yet current SEC regulations and enforcement practices allow corporations to withhold important information about their offshore subsidiaries, even including how many there are.”

Those comments were submitted in response to Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K, which was published in April. Regulation S-K is the set of rules covering information outside the financial statements that companies must provide in their annual and quarterly reports.

Some pro-investor groups want the SEC to require companies to disclose all subsidiaries without exception and require information on a country-by-country basis of those subsidiaries’ revenues, profits, income tax paid, effective tax rate, accumulated profits and number of employees. In addition, the Financial Accountability and Corporate Transparency Coalition, a group of more than 100 organizations, asked the SEC to revise Regulation S-K so that companies would have to:

• Explain a tax rate significantly lower than the statutory rate in the countries in which they do business,
• Use a weighted average statutory rate based on their geographic revenue mix instead of their home country’s statutory rate in the tax rate reconciliation schedule,
• Explain an increasing unrecognized tax benefit balance,
• Disclose intracompany debt transactions,
• Explain the tax incentives in a foreign jurisdiction, and
• Identify legal proceedings by foreign governments related to taxes regardless of whether the matter is material to the company’s financial position.

Conversely, business groups generally oppose expanding the required disclosures on foreign subsidiaries and global tax strategies. The Business Roundtable, an association of CEOs of leading U.S. companies, told the SEC in its comment letter that listing all overseas subsidiaries “would add potentially voluminous immaterial information to disclosures and would add complexity and expense to disclosures that are not relevant to most reasonable investors.”

© 2016