The following is the text of SAB Topic 6.I, Accounting Series Release 149—Improved Disclosure of Income Tax Expense (Adopted November 28, 1973 and Modified by ASR 280 Adopted on September 2, 1980).
- Facts: ASR 149 and 280 amend Regulation S-X to include:
- 1. Disclosure of tax effect of timing differences comprising deferred income tax expense.
- 2. Disclosure of the components of income tax expense, including currently payable and the net tax effects of timing differences.
- 3. Disclosure of the components of income [loss] before income tax expense [benefit] as either domestic or foreign.
- 4. Reconciliation between the statutory Federal income tax rate and the effective tax rate.
- 1. Tax Rate
- Question 1: In reconciling to the effective tax rate should the rate used be a combination of state and Federal income tax rates?
- Interpretive Response: No, the reconciliation should be made to the Federal income tax rate only.
- Question 2: What is the \"applicable statutory Federal income tax rate\"?
- Interpretive Response: The applicable statutory Federal income tax rate is the normal rate applicable to the reporting entity. Hence, the statutory rate for a U.S. partnership is zero. If, for example, the statutory rate for U.S. corporations is 22% on the first $25,000 of taxable income and 46% on the excess over $25,000, the \"normalized rate\" for corporations would fluctuate in the range between 22% and 46% depending on the amount of pretax accounting income a corporation has.
- 2. Taxes of Investee Company
- Question: If a registrant records its share of earnings or losses of a 50% or less owned person on the equity basis and such person has an effective tax rate which differs by more than 5% from the applicable statutory Federal income tax rate, is a reconciliation as required by Rule 4-08(g) necessary?
- Interpretive Response: Whenever the tax components are known and material to the investor's (registrant's) financial position or results of operations, appropriate disclosure should be made. In some instances where 50% or less owned persons are accounted for by the equity method of accounting in the financial statements of the registrant, the registrant may not know the rate at which the various components of income are taxed and it may not be practicable to provide disclosure concerning such components.
- It should also be noted that it is generally necessary to disclose the aggregate dollar and per-share effect of situations where temporary tax exemptions or \"tax holidays\" exist, and that such disclosures are also applicable to 50% or less owned persons. Such disclosures should include a brief description of the factual circumstances and give the date on which the special tax status will terminate. See Topic 11.C.
- 3. Net of Tax Presentation
- Question: What disclosure is required when an item is reported on a net of tax basis (e. g., extraordinary items, discontinued operations, or cumulative adjustment related to accounting change)?
- Interpretive Response: When an item is reported on a net of tax basis, additional disclosure of the nature of the tax component should be provided by reconciling the tax component associated with the item to the applicable statutory Federal income tax rate or rates.
- 4. Loss Years
- Question: Is a reconciliation of a tax recovery in a loss year required?
- Interpretive Response: Yes, in loss years the actual book tax benefit of the loss should be reconciled to expected normal book tax benefit based on the applicable statutory Federal income tax rate.
- 5. Foreign Registrants
- Question 1: Occasionally, reporting foreign persons may not operate under a normal income tax base rate such as the current U.S. Federal corporate income tax rate. What form of disclosure is acceptable in these circumstances?
- Interpretive Response: In such instances, reconciliations between year-to-year effective rates or between a weighted average effective rate and the current effective rate of total tax expense may be appropriate in meeting the requirements of Rule 4-08(h)(2). A brief description of how such a rate was determined would be required in addition to other required disclosures. Such an approach would not be acceptable for a U.S. registrant with foreign operations. Foreign registrants with unusual tax situations may find that these guidelines are not fully responsive to their needs. In such instances, registrants should discuss the matter with the staff.
- Question 2: Where there are significant reconciling items that relate in significant part to foreign operations as well as domestic operations, is it necessary to disclose the separate amounts of the tax component by geographical area, e.g., statutory depletion allowances provided for by U.S. and by other foreign jurisdictions?
- Interpretive Response: It is not practicable to give an all-encompassing answer to this question. However, in many cases such disclosure would seem appropriate.
- 6. Securities Gains and Losses
- Question: If the tax on the securities gains and losses of banks and insurance companies varies by more than 5% from the applicable statutory Federal income tax rate, should a reconciliation to the statutory rate be provided?
- Interpretive Response: Yes.
- 7. Tax Expense Components v. \"Overall\" Presentation
- Facts: Rule 4-08(h) requires that the various components of income tax expense be disclosed, e.g., currently payable domestic taxes, deferred foreign taxes, etc. Frequently income tax expense will be included in more than one caption in the financial statements. For example, income taxes may be allocated to continuing operations, discontinued operations, extraordinary items, cumulative effects of an accounting change and direct charges and credits to shareholders' equity.
- Question: In instances where income tax expense is allocated to more than one caption in the financial statements, must the components of income tax expense included in each caption be disclosed or will an \"overall\" presentation such as the following be acceptable?
- The components of income tax expense are:
![](\"/asc-img/GUID-F323072E-D562-4DC8-AE06-1D9D3FD683B9-low.gif\")
Currently payable (per tax return): Federal \" $350,000 \" Foreign \" 150,000 \" State \" 50,000 \" Deferred: Federal \" 125,000 \" Foreign \" 75,000 \" State \" 50,000 \" \" $800,000 \"
- Income tax expense is included in the financial statements as follows:
![](\"/asc-img/GUID-55FC18A3-F422-4E41-AB46-AB3C0C24B415-low.gif\")
Continuing operations \" $600,000 \" Discontinued operations \" (200,000)\" Extraordinary income \" 300,000 \" Cumulative effect of change in accounting principle \" 100,000 \" \" $800,000 \"
- Interpretive Response: An overall presentation of the nature described will be acceptable.