The purpose of this posting is to respond to a recent conversation in which an individual adamantly expressed the mistaken belief that it is appropriate to characterize the difference between a deferred tax liability and a deferred tax asset, net of valuation allowance as "before jurisdictional netting".
On January 22, 2015, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft, Two Proposed Accounting Standards Updates ("Exposure Draft"). The Exposure Draft proposes a change to the Accounting Standards Codification ("ASC") Income Taxes (Topic 740). The change would remove the netting of deferred tax liabilities and assets, net of valuation allowance by tax-paying component of the reporting entity, by Balance Sheet classification of the tax-paying component, by tax jurisdiction. In its place, the Exposure Draft proposes that for a classified Balance Sheet presentation, all deferred tax liabilities and assets, net of valuation allowance be classified as non-current on the Balance Sheet, netted by tax-paying component of the reporting entity, by tax jurisdiction (http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176164732790&acceptedDisclaimer=true page 23.).
Discussion
The discussion addresses the issues identified above in reverse order.
Proposed Accounting Standards Update ("ASU") Two Proposed Accounting Standards Updates
The only change proposed by Item II. Balance Sheet Classification of Deferred Taxes (File Reference No. 2015-210) in the aforementioned Exposure Draft is to classify deferred tax liabilities and deferred tax assets, net of valuation allowance as non-current amounts in a classified Balance Sheet presentation (see Exposure Draft ¶740-10-45-4).
Other than removing the current deferred tax classification from a classified Balance Sheet presentation, the Exposure Draft does not change ASC 740-10-45-6, which promulgated standard, as modified by the Exposure Draft, will still require "For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions."
So, other than removing the netting of amounts by a current Balance Sheet classification, each tax-paying component of a reporting entity will still be netting its deferred tax liabilities and deferred tax assets, net of valuation allowance by tax jurisdiction, in accordance with existing promulgated generally accepted accounting principles in the United States ("US GAAP"). There is no other change to the accounting and financial reporting of deferred tax liabilities and deferred tax assets, net of valuation allowance suggested by Item II Balance Sheet Classification of Deferred Taxes in the Exposure Draft.
Difference Between Deferred Tax Liability and Deferred Tax Asset, Net of Valuation Allowance
As demonstrated and supported in all previously posted discussions regarding this topic, the difference between a deferred tax liability and deferred tax asset, net of valuation allowance can NEVER be "before jurisdictional netting".
Whether the difference is (i) between a single deferred tax liability and deferred tax asset, net of valuation allowance or (ii) between total deferred tax liabilities and total deferred tax assets, net of total valuation allowance, the difference must be either an amount netted:
By tax-paying component, by tax jurisdiction (i.e., netting within a tax jurisdiction), or
Across tax-paying components, across tax jurisdictions (i.e., netting across tax jurisdictions)
There is no rational justification for the mistaken belief that it is appropriate to characterize the difference between a deferred tax liability and a deferred tax asset, net of valuation allowance as "before jurisdictional netting".
Example
The following example illustrates that the difference between:
A single deferred tax liability and deferred tax asset, net of valuation allowance, or
Total deferred tax liabilities and total deferred tax assets, net of total valuation allowance, is respectively
- Netted by tax-paying component, by tax jurisdiction, or
- Netted across tax-paying components, across tax jurisdictions
Assumptions:
The reporting entity has a classified Balance Sheet presentation
The reporting entity has three tax-paying components
Tax-paying component one ("1") is subject to a single tax jurisdiction
Tax-paying component two ("2") is subject to a single tax jurisdiction
Tax-paying component three ("3") is subject to a single tax jurisdiction
Tax-paying component 1 and 2 are subject to the same tax jurisdiction - - Tax jurisdiction "A"
Tax-paying component 3 is subject to a different tax jurisdiction then tax-paying component 1 and 2 - - Tax jurisdiction "B"
The following table displays the deferred tax liabilities and deferred tax assets, net of valuation allowance amounts of each of the tax-paying components of the reporting entity.
| Assumptions | |||||||||||
| Tax-paying Component | Current deferred tax liability (a) |
Current deferred tax asset, net of valuation allowance (b) |
Non-current deferred tax liability (c) |
Non-current deferred tax asset, net of valuation allowance (d) |
Total (net) (a + b + c + d) |
||||||
| 1 | (10,000) | 25,000 | - | - | 15,000 | ||||||
| 2 | (20,000) | 15,000 | (50,000) | 150,000 | 95,000 | ||||||
| 3 | (1,000) | 7,000 | (42,000) | 37,000 | 1,000 | ||||||
| Total | (31,000) | 47,000 | (92,000) | 187,000 | 111,000 | ||||||
| Note: For presentation purposes, credit amounts are shown in parenthesis. |
Balance Sheet Presentation Amounts
In accordance with existing US GAAP, a classified Balance Sheet presentation requires the amounts in the Assumptions table above to be presented as follows:
| Balance Sheet Presentation - US GAAP (existing) | |||||||||
| Tax-Paying Component |
Tax Jurisdiction | Column Reference |
Amount | ||||||
| Current deferred tax liability | 2 | A | a + b | (5,000) | |||||
| Current deferred tax asset, net of valuation allowance | 1 plus 3 | A + B | b + a | 21,000 | |||||
| Non-current deferred tax liability | 3 | B | c + d | (5,000) | |||||
| Non-current deferred tax asset, net of valuation allowance | 2 | A | d + c | 100,000 | |||||
| Note: For presentation purposes, credit amounts are shown in parenthesis. |
Under existing US GAAP, it is possible for any given reporting entity to have presented on its Balance Sheet in any given period the following four assertions:
Current deferred tax liability
Current deferred tax asset, net of valuation allowance
Non-current deferred tax liability
Non-current deferred tax asset, net of valuation allowance
The amounts are NETTED by tax-paying component, by Balance Sheet classification, BY (i.e., WITHIN A) TAX JURISDICTION.
In accordance with the Exposure Draft, the amounts in the Assumptions table above may be summarized as follows:
| Balance Sheet Presentation - US GAAP (exposure draft) | |||||||||
| Tax-Paying | Tax Jurisdiction | Column | Amount | ||||||
| Component | Reference | ||||||||
| Non-current deferred tax liability | 2 plus 3 | A + B | (a + c) + (b + d) |
(10,000) | |||||
| Non-current deferred tax asset, net of valuation allowance | 1 plus 2 plus 3 | A + B | (b + d) + (a + c) |
121,000 | |||||
| Note: For presentation purposes, credit amounts are shown in parenthesis. | |||||||||
The only difference between existing US GAAP and the change proposed by the Exposure Draft is that for a classified Balance Sheet presentation, all deferred tax amounts are classified as "Non-current".
In accordance with the Exposure Draft, a classified Balance Sheet presentation requires the amounts summarized in the table above to be presented as follows:
| Balance Sheet Presentation - US GAAP (exposure draft) | |||||||||
| Tax-Paying Component |
Tax Jurisdiction | Column Reference |
Amount | ||||||
| Non-current deferred tax asset, net of valuation allowance | 1 plus 2 plus 3 | A + B | (b + d) + (a + c) | 111,000 | |||||
| Note: Credit amounts are shown in parenthesis to facilitate the presentation. | |||||||||
The Exposure Draft proposes offsetting (i.e., netting) all deferred tax liabilities and deferred tax assets, net of valuation allowance for each tax-paying component of an entity, by each tax jurisdiction and presenting the result as a single non-current amount.
As displayed in the Assumptions table above, each of the tax-paying components of the reporting entity only have operations in a single tax jurisdiction and each tax-paying component has a deferred tax asset, net of valuation allowance in excess of deferred tax liabilities within that tax jurisdiction.
Under the Exposure Draft, it is possible for any given reporting entity to have presented on its Balance Sheet in any given period the following two assertions:
Non-current deferred tax liability
Non-current deferred tax asset, net of valuation allowance
The amounts are NETTED by tax-paying component, BY (i.e., WITHIN A) TAX JURISDICTION and presented as non-current.
Amounts to be Disclosed
ASC 740-10-50-2 requires that:
| The components of the net deferred tax liability or asset recognized in an entity's statement of financial position shall be disclosed as follows: | ||||||||||||||
| a. | The total of all deferred tax liabilities measured in paragraph 740-10-30-5(b) | |||||||||||||
| b. | The total of all deferred tax assets measured in paragraph 740-10-30-5(c) through (d) | |||||||||||||
| c. | The total valuation allowance recognized for deferred tax assets determined in paragraph 740-10-30-5(e). | |||||||||||||
| The net change during the year in the total valuation allowance also shall be disclosed. | ||||||||||||||
In accordance with existing US GAAP, this requirement is not affected by the Exposure Draft.
As per the Assumptions table above, the amounts required for disclosure purposes for the tax-paying components of the reporting entity may be summarized as follows:
| Disclosure | |||||||||||
| Note: The exposure draft does not change the disclosure requirements in accordance with US GAAP as currently promulgated. | |||||||||||
| All Tax Jurisdictions | |||||||||||
| Tax-Paying Component |
Total deferred tax liabilities (e) |
Total deferred tax assets (f) |
Total valuation allowance (g) |
Total deferred tax assets, net of valuation allowance (f + g = h) |
Difference between deferred tax liabilities and deferred tax assets, net of valuation allowance (h + e) |
||||||
| 1 | (10,000) | 25,000 | 25,000 | 15,000 | |||||||
| 2 | (70,000) | 200,000 | (35,000) | 165,000 | 95,000 | ||||||
| 3 | (43,000) | 56,000 | (12,000) | 44,000 | 1,000 | ||||||
| Total | (123,000) | 281,000 | (47,000) | 234,000 | 111,000 | ||||||
| Note: For presentat | |||||||||||
The amounts displayed in the Total row of the above table are the amounts that are required to be disclosed in accordance with exiting US GAAP (ASC 740-10-50-2).
Many entities choose to report the Total deferred tax assets, net of valuation allowance, which is $234,000 in the table above.
Additionally, many entities choose to report the difference between Total deferred tax liabilities and Total deferred tax assets, net of valuation allowance, which is $111,000 in the table above.
The amounts summarized in the table above might be presented in the disclosure to the financial statements of the reporting entity as follows:
| Disclosure | |||||||||
| Note: The exposure draft does not change the disclosure requirements in accordance with US GAAP as currently promulgated. | |||||||||
| Tax-Paying Component |
Tax Jurisdiction | Column Reference |
Amount | ||||||
| Total deferred tax assets | 1 plus 2 plus 3 | A plus B | f | 281,000 | |||||
| Less: Total valuation allowance | 1 plus 2 plus 3 | A plus B | g | (47,000) | |||||
| Total deferred tax assets, net of valuation allowance | 1 plus 2 plus 3 | A plus B | h | 234,000 | |||||
| Less: Total deferred tax liabilities | 1 plus 2 plus 3 | A plus B | e | (123,000) | |||||
| Total deferred tax assets, net of valuation allowance in excess of Total deferred tax liabilities | 111,000 | ||||||||
| Note: For presentation purposes, credit amounts are shown in parenthesis. | |||||||||
The $281,000, $47,000, and $123,000 amount in RED that are required to be disclosed in accordance with US GAAP are the only amounts in this example that are "BEFORE JURISDICTIONAL NETTING".
The $234,000 Total deferred tax assets, net of valuation allowance is NETTED across tax-paying components, across Balance Sheet classification, ACROSS TAX JURISDICTIONS because the Deferred tax assets (Column f) and Valuation Allowance (Column g) is the Total of all tax-paying components for all tax jurisdictions.
The $111,000, which is the difference between Total deferred tax liabilities and Total deferred tax assets, net of valuation allowance is NETTED across tax-paying components, across Balance Sheet classification, ACROSS TAX JURISDICTIONS because the Deferred tax liabilities (Column e) and Deferred tax assets, net of valuation allowance (Column h) is the Total of all tax-paying components for all tax jurisdictions.
Neither the $111,000 nor the $234,000 can EVER be "BEFORE JURISDICTIONAL NETTING". It is illogical and nonsensical to suggest otherwise.
Conclusion
The 2015 [Draft] US GAAP taxonomy ("UGT") includes the following two elements:
| Concept name | Standard label | Documentation label | |||
| DeferredTaxAssetsLiabilitiesNet* | Deferred Tax Assets, Net | Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, before jurisdictional netting. | |||
| DeferredTaxLiabilities** | Deferred Tax Liabilities, Net | Amount, after deferred tax asset, of deferred tax liability attributable to taxable differences, before jurisdictional netting. | |||
| * | Deferred tax assets, net of valuation allowance in excess of Deferred tax liabilities | ||||
| ** | Deferred tax liabilities in excess of Deferred tax assets, net of valuation allowance | ||||
In sports, a team can have the best Coach, the Coach can have a perfect game plan, but if the players do not execute, the team will, more often than not, lose. These elements are the product of a "deliberative process" (i.e., game plan).
The definitions of the elements above were modified in the 2015 [Draft] UGT. The UGT Change Label 2015 states, "The definition of this element has been significantly revised to clarify its intended purpose for amounts representing measurement before jurisdictional netting."
Significant revisions infer a change in substance. Elements once published should never be substantively changed because to do so is to invalidate a standard taxonomy.
Each UGT element and, for that matter, extended element must stand-alone based on its Period type attribute, Data type attribute, and its Documentation string (i.e., definition) in that order (EDGAR Filing Manual 6.6.29). Given the definition of these elements is inconsistent with US GAAP as promulgated and without basis since the difference between deferred tax liabilities and deferred tax assets, net of valuation allowance can NEVER be "BEFORE JURISDICTIONAL NETTING", the only means for these elements to be used is for financial statement issuers and consumers to intuit the "SPIRIT" of the taxonomy.
These elements are intended to be selected by financial statement issuers and understood by consumers of financial data in XBRL format on a consistent basis year-over-year, between companies, and across industries. It is inconceivable that financial statement issuers and consumers of XBRL data should be expected to employ an OUIJA board to prepare and use the financial data. Therefore, these elements should not be used under any circumstances and financial statement issuers should extend properly modeled elements representing (i) Total deferred tax liabilities in excess of Total deferred tax assets, net of valuation allowance and (ii) Total deferred tax assets, net of valuation allowance in excess of Total deferred tax liabilities, so that consumers can properly model their algorithms to interpret this data.