Tuesday, October 11, 2016

Commenters discuss SEC/FASB overlap and tax disclosure

By Jacquelyn Lumb

The SEC extended the comment period on its proposal to amend certain disclosure requirements that may be redundant, duplicative, overlapping or outdated. The comment period was originally intended to end on October 3, 2016 but was extended to November 2 to give interested parties more time to analyze the issues and submit their comments. Among the recent commenters are Deloitte & Touche, the Center for Audit Quality (CAQ), Citizens for Tax Justice (CTJ), and the Financial Accountability and Corporate Transparency Coalition (FACT).

SEC/GAAP overlap. Deloitte submitted its input on a number of amendments, deletions, and potential referrals to FASB in addition to overlapping GAAP and SEC disclosure requirements. The firm said it supports the SEC’s efforts to work with FASB to determine whether certain incremental requirements in the SEC’s rules should be incorporated into GAAP. If the SEC chooses to retain disclosure requirements that are similar, but not identical, to the GAAP requirements, Deloitte said the disclosure objective should be clearly distinguished. The firm also urged the SEC and FASB to avoid duplicative and overlapping disclosure as new standards are developed and the SEC’s disclosure regime is modernized.

Deloitte supports the SEC’s proposal to eliminate many of the bright line disclosure requirements, which it said is consistent with FASB’s proposed elimination of “at a minimum” disclosures in GAAP. With respect to the disclosure about legal proceedings, Deloitte said a referral to GAAP may not be appropriate. The SEC should reconsider the disclosure objective of Item 103, in Deloitte’s view, to determine whether it should make substantive changes or eliminate the incremental disclosure requirements.

CAQ said that codifying the disclosure requirements related to financial statements in one place would be beneficial for all stakeholders, but agreed with Deloitte that if the SEC retains its requirements, it should include the disclosure objective beyond those addressed in FASB’s standard setting process. CAQ does not support combining the SEC’s Item 303 legal proceedings with FASB’s ASC 450, but also agreed with Deloitte that it should evaluate the Item 303 disclosure requirements and better articulate its objective. Both Deloitte and CAQ noted that if the SEC integrates Item 103 and ASC 450, the American Bar Association’s statement regarding lawyers’ responses to auditors’ requests for information and the PCAOB’s auditing standards may have to be revised.

Tax disclosure. CTJ wrote that there is clearly a need for additional income tax disclosure. Current disclosure does not provide the definitive information needed to have a robust debate over the current corporate tax code, CTJ explained, with international tax and income the most lacking.

One of the central features of the corporate income tax code is that it allows corporations to defer paying taxes on foreign income until it is repatriated back to the U.S. Many countries have single digit or zero tax rates which create an enormous incentive for U.S. companies to avoid taxes by claiming that as much income as possible is earned in these tax haven countries, according to CTJ, with estimates as high as $2.4 trillion in earnings offshore, or a loss of over $100 billion in U.S. tax revenue every year.

CTJ said that requiring companies to disclose in their Forms 10-K more information about their operations and tax provisions on a country-by-country basis would help inform the policy debate. In addition, investors need to know how exposed the companies they invest in are to increases in taxes on their international profits. CTJ said the offshore operations of companies are too critical to the U.S. economy to remain in the shadows.

FACT noted that, contrary to concerns about information overload, most commenters have called for increased disclosure to better assess emerging risks. FACT also referred to the detailed comments it submitted in response to the SEC’s earlier concept release on the disclosure requirements regarding the need for additional disclosure about the tax strategies of multinational corporations. In those comments, FACT highlighted the increase in offshore profits, Apple’s $14.5 billion miscalculation based on the tax benefits provided by Ireland, and Dell’s $28 billion discrepancy in valuation based on differing estimates of how to appraise the value of a company’s offshore profits given the potential tax liabilities.

Aggregated foreign tax disclosures are of little use to investors who want to assess the risk associated with aggressive tax strategies, according to FACT. The IRS recently finalized a rule to require country-by-country reporting of revenues, profits, and taxes paid and of certain operations by larger multinational corporations. The EU also has established new country-by-country reporting requirements for larger firms. FACT said the SEC should take steps to require the disclosure of this critically important information as well.

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