In this discussion, we will consider "Deferred Tax Liabilities, Net" and "Deferred Tax Assets, Net" that are two specific elements in the 2015 draft of the US GAAP taxonomy ("UGT"). The reason for discussing these two concepts is to highlight issues with the UGT modeling, which is the first of three pillars that contribute to Data Quality. The other two pillars of Data Quality consist of proper implementation of the UGT and data normalization; all three pillars of Data Quality are achievable and will be addressed in future discussions.
For this discussion, we will refer to Johnson Controls Inc.'s ("JCI") financial statements and footnote disclosures as of and for the year ended September 30, 2014, included as Item 8. Financial Statements and Supplementary Data to its Form 10-K filed on November 19, 2014.
Example:
In its Consolidated Balance Sheet as of September 30, 2014, JCI reported:
| 18. INCOME TAXES | |||||||||
| Deferred taxes were classified in the consolidated statements of financial position as follows (in millions): | |||||||||
| Other current assets | $ | 558 | |||||||
| Other noncurrent assets | 1,834 | ||||||||
| Other current liabilities | 51 | ||||||||
| Other noncurrent liabilities | 427 | ||||||||
| Net deferred tax asset | $ | 1,914 | |||||||
The components of deferred tax assets and liabilities are disclosed in the footnotes to the financial statements as:
| 18. INCOME TAXES | |||||||
| Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included (in millions): | |||||||
| Deferred tax assets: | |||||||
| Accrued expenses and reserves | $ | 197 | |||||
| Employee and retiree benefits | 243 | ||||||
| Net operating loss and other credit carryforwards | 3,233 | ||||||
| Research and development | 118 | ||||||
| Total deferred tax assets | 3,791 | ||||||
| Less: Valuation allowances | 1,285 | ||||||
| Deferred tax assets, net of valuation allowance | 2,506 | ||||||
| Deferred tax liabilities: | |||||||
| Property, plant and equipment | 128 | ||||||
| Intangible assets | 275 | ||||||
| Other | 189 | ||||||
| Total deferred tax liabilities | 592 | ||||||
| Net deferred tax assets | $ | 1,914 | |||||
For purposes of generally accepted accounting principles in the U.S. ("US GAAP"), accounting for income taxes is primarily established by Statement of Financial Accounting Standards ("SFAS") No. 109 Accounting for Income Taxes that was substantially codified in Accounting Standards Codification ("ASC") Topic 740 Income Taxes. Although amended by other pronouncements (e.g., FIN 48, SFAS 141(R)), the bulk of SFAS No. 109 has remained unchanged in the twenty-two years since its effective date, which was for fiscal years beginning after December 15, 1992. SFAS No. 109 establishes, among other concepts, the accounting for and financial statement presentation of deferred income taxes.
In a classified Balance Sheet, US GAAP requires an entity to offset (i.e., net) current and non-current deferred tax liabilities and assets for each tax-paying component of an entity (e.g., subsidiary), by each tax jurisdiction. Therefore, as shown by JCI above, a classified Balance Sheet could potentially display four deferred tax positions consisting of a current deferred tax asset (e.g., $558 million above), current deferred tax liability (e.g., $51 million above), non-current deferred tax asset (e.g., $1,834 million above), and non-current deferred tax liability (e.g., $427 million above). For a non-classified Balance Sheet, two deferred tax positions potentially may be displayed consisting of a deferred tax asset and a deferred tax liability. The Balance Sheet presentation is netted by Balance Sheet classification (if applicable), by entity tax-paying component (e.g., subsidiary), by each tax jurisdiction to which the entity tax-paying component is subject.
US GAAP requires that public entities disclose in the footnotes to the financial statements the total components of the deferred tax positions netted (i.e., offset) by Balance Sheet classification, by entity tax-paying component, and by taxing jurisdiction as reported on the Balance Sheet. In other words, the total amount of deferred tax liabilities (e.g., $592 million above), deferred tax assets (e.g., $3,791 million above), and valuation allowance recognized for deferred tax assets (e.g., $1,285 million above) (ASC 740-10-50-2). Additionally, for public companies, US GAAP requires disclosure of the approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets (before allocation of valuation allowances) (ASC 740-10-50-6).
In the above excerpts from JCI's financial statements and footnote disclosures, it is clear that JCI is complying with the requirements of US GAAP relevant to the accounting for deferred income taxes. Additionally, many companies like JCI go a step beyond the minimum required disclosure requirement and provide users of their financial statements the difference between total deferred tax liabilities and total deferred tax assets, net of valuation allowance (e.g., $1,914 million above).
The only difference between the Balance Sheet presentation and the footnote disclosure of "Net deferred tax assets" above is how the components of deferred tax liabilities and deferred tax assets, net of valuation allowance are being offset. Both the Balance Sheet and footnote disclosure presentations must arrive at the same difference between the total value of deferred tax liabilities and deferred tax assets, net of valuation allowances, unless the entity included or excluded something (e.g., erroneously reported) in one of the two presentations (see Apple, Inc.'s Form 10-K filed October 27, 2014 "Net deferred tax liabilities" reported on the Balance Sheet as of September 27, 2014 of $15,941 million ($20,259 million, included in "Other non-current liabilities" minus $4,318 million) versus "Net deferred tax liabilities" of $15,120 million ($21,664 million minus $6,544 million) reported in Note 5 – Income Taxes. An explanation of the $821 million difference is not apparent in the financial statement footnote disclosure or elsewhere in the Form 10-K. Reasonable expectations suggest that these values should always agree because the Balance Sheet is being netted by classification, by entity tax-paying component, by tax jurisdiction and the footnote disclosure is being netted across entity tax-paying components, across tax jurisdictions, but there is only a single net total; no matter how you slice it, there is only one pie.
Remember that substantially in its current state, Accounting for Income Taxes is a US GAAP principle that has been incorporated, implemented, and applied by the accounting and financial reporting profession for twenty-two years. The promulgated principle related to the accounting for deferred income taxes is not overly complex. In fact, at the most basic level, the principle can be summarized as follows:
| Temporary Difference |
Jurisdictional | Deferred Tax |
||||||||||||
| Book Asset | > | Tax Asset | = | Liability | x | Effective Tax Rate (%) | = | Liability | ||||||
| Book Asset | < | Tax Asset | = | Asset | x | Effective Tax Rate (%) | = | Asset | ||||||
| Book Liability | > | Tax Liability | = | Asset | x | Effective Tax Rate (%) | = | Asset | ||||||
| Book Liability | < | Tax Liability | = | Liability | x | Effective Tax Rate (%) | = | Liability |
No deferred tax liability or deferred tax asset, net of valuation allowance can exist, if not for a governmental body (e.g., country, state, county) or local board that is legally authorized to and does assess, levy, and collect taxes based on income (i.e., tax jurisdiction). Whether netted by entity tax-paying component, by tax jurisdiction or netted in aggregate, the difference between a single deferred tax liability and deferred tax asset, net of valuation allowance, or the difference between total deferred tax liabilities and total deferred tax assets, net of valuation allowance must be either netted within a jurisdiction or netted across jurisdictions, respectively. It is this very reason that JCI's Balance Sheet "Net deferred tax assets" (i.e., $1,914 million netted by Balance Sheet classification, by entity tax-paying component, by tax jurisdiction) equals its component disclosure of "Net deferred tax assets" (i.e., $1,914 million total deferred tax assets, net of valuation allowance less total deferred tax liabilities).
Issue:
The UGT includes the following two elements:
| Element | Element | ||||
| ● | Name | DeferredTaxLiabilities | DeferredTaxAssetsLiabilitiesNet | ||
| ● | Data type | monetaryItemType | monetaryItemType | ||
| ● | Balance type | credit | debit | ||
| ● | Period type | instant | instant | ||
| ● | Standard label | Deferred Tax Liabilities, Net | Deferred Tax Assets, Net | ||
| ● | Documentation label | Amount, after deferred tax asset, of deferred tax liability attributable to taxable differences, before jurisdictional netting. | Amount, after allocation of valuation allowances and deferred tax liability, of deferred tax asset attributable to deductible differences and carryforwards, before jurisdictional netting. | ||
| ● | Change Label 2015 | Clarification: The definition of this element has been significantly revised to clarify its intended purpose for amounts representing measurement before jurisdictional netting. This change may require reconsideration of its use. Possible alternative element for amounts after jurisdictional netting may be DeferredIncomeTaxLiabilitiesNet. | Clarification: The definition of this element has been significantly revised to clarify its intended purpose for amounts representing measurement before jurisdictional netting. This change may require reconsideration of its use. Possible alternative element for amounts after jurisdictional netting may be DeferredIncomeTaxAssetsNet. | ||
| ● | Reference | ASC
740-10-45-6 ASC 740-10-50-2 |
ASC 740-10-50-2 |
Observations:
Both elements are defined (i.e., Documentation label) as "before jurisdictional netting", which was previously established as being illogical and irrational.
Given that any deferred tax liability and deferred tax asset, net of valuation allowance results from the tax effected [temporary] difference resulting from the difference between the basis of measurement for tax purposes and the basis of measurement for financial reporting purposes, such difference between the liability and asset can never be "before jurisdictional netting".
If one of the values of JCI's difference were "after" jurisdictional netting and the other "before" jurisdictional netting, as suggested by these definitions, it would be virtually impossible for JCI, a global entity with operations in multiple tax jurisdictions, to report the same value for "Net deferred tax assets" in its Balance Sheet and in its deferred tax components disclosure.
The 2015 Change label states, "The definition of this element has been significantly revised to clarify its intended purpose for amounts representing measurement before jurisdictional netting. This change may require reconsideration of its use…"
The change to these element definitions is not a clarification; it substantively alters the concepts. Isolated to the definition, the change renders the elements unusable, since no difference between a deferred tax liability and a deferred tax asset, net of valuation allowance can ever be "before" jurisdictional netting. The difference, as previously established, can be netted by (i.e., within a) taxing jurisdiction or netted across taxing jurisdictions, but never "before considering taxing jurisdictions".
If the definitional change "…may require reconsideration of its [the element's] use…", the change to the definition changes the substance of the concept.
The change to these definitions is in direct conflict with the SEC EDGAR Filing Manual ("EFM") 6.6.24, which in its explanatory paragraph states: "The definition is an element’s most important attribute and must be consistent with the financial concept reported. An element should be interpreted by the substantive meaning provided in its definition. Definitions cannot be changed. As important as they are, all definitions have limitations, so preparers should not base their choice of an element simply on minor, immaterial differentials in definitions. Determining whether a definition is consistent with the financial concept requires judgment, and other attributes of the element must be considered."
The other attributes consist of period type, data type, etc. Additionally, the relationships provided elements in the UGT (e.g., Calculation linkbase) are very helpful in understanding how elements relate to one another (EFM 6.6.29), which is a strong indication of the intended implementation and basis for the element.
That element definitions cannot be changed is a RULE that significantly impacts Data Quality when not adhered to -- XBRL is a STANDARD after all -- which will be addressed in future discussions.
Interestingly, both elements have not been provided identical references to the ASC and neither element is a specifically required disclosure.
For presentation on the Balance Sheet, US GAAP requires offsetting (i.e., netting) of deferred tax liabilities and deferred tax assets by Balance Sheet classification (if applicable), by tax-paying component of the entity, by tax jurisdiction (ASC 740-10-45-6).
In the footnotes to the financial statements, US GAAP requires disclosure of the total of each of deferred tax liabilities, deferred tax assets, and valuation allowance recognized for deferred tax assets (ASC 740-10-50-2). The subject of the sentence that prefaces these specifically required disclosure items is the net deferred tax liability or asset recognized on the Balance Sheet, but the offsetting of the total amounts [required to be disclosed] is not itself a required disclosure; although, as demonstrated by JCI above, many entities disclose the total offset amount (e.g., $1,914 million "Net deferred tax assets" above).
Note the UGT Calculation linkbase relationships of the above elements:
| Balance Type |
Calculation Weight |
|||
| Deferred Tax Liabilities, Net | credit | |||
| Deferred Tax Liabilities, Gross | credit | +1 | ||
| Deferred Tax Assets, Net of Valuation Allowance | debit | -1 | ||
| Deferred Tax Assets, Net | debit | |||
| Deferred Tax Liabilities, Gross | credit | -1 | ||
| Deferred Tax Assets, Net of Valuation Allowance | debit | +1 | ||
It is obvious from the Calculation linkbase relationships above that the substance of each of these two elements is:
Deferred Tax Liabilities, Net – Total deferred tax liabilities in excess of total deferred tax assets, net of valuation allowance.
Deferred Tax Assets, Net - Total deferred tax assets, net of valuation allowance in excess of total deferred tax liabilities.
The inconsistency between the definition provided in the UGT and the substance of these two elements has been previously observed and communicated. Additionally, note that the definition of "Deferred Tax Liabilities, Net" refers to "Deferred tax asset", which is not consistent with the Calculation linkbase relationship above nor the same as "Deferred Tax Assets, Net" which refers to "Deferred Tax Assets, Net of Valuation Allowance" in its definition.
Conclusion:
XBRL formatted data provides immeasurably valuable benefits to the US Capital Markets, both individual and institutional investors, and promises even greater value to management's information needs. However, until such inconsistencies in the UGT are corrected, it is incumbent on financial statement issuers [SEC registrants] and consumers of the publicly available XBRL data to provide consistency to standard UGT elements.
The three pillars of Data Quality:
UGT modeling - - the standard taxonomy currently used as the template by SEC registrants
Implementation - - the proper and consistent use of the UGT by all financial statement issuers
Data normalization - - Providing the US Capital Markets a consistent, complete database of publicly available financial information upon which to layer their individual analytical criteria
will be the focus of future discussions.