iasb, us gaap, local country gaap: upcoming...

IASB, US GAAP, Local Country GAAP: Upcoming Changes and DifferencesTEI 66thMidyear ConferenceMarch 14, 2016

Eric L. Johnson, ModeratorRoss Stores, Inc.

Patrice M. ManoDeloitte Tax LLP

Jenna SummerKPMG LLP

2 Financial Reporting for Taxes Copyright © 2016 Deloitte Development LLC. All rights reserved.

Agenda

Topic

Background

IFRS/US GAAP Differences

Standards Update

Current Developments

Background


What is IFRS?• Comprehensive, globally accepted set of accounting standards

promulgated by the International Accounting Standards Board (IASB)Principles-based versus US GAAP’s more rules-based approachGreater emphasis on interpretation; less reliance on bright-line rulesFocuses on assessing the substance of transactions and evaluating whether

the accounting presentation reflects the economic reality• Similar to US GAAP Comprehensive asset and liability approach Deferred taxes provided on all temporary differences unless an

exception applies Deferred tax assets (DTAs) reduced to amount ‘more likely than not’

to be recoverable

Background


• Convergence is a process by which the FASB and IASB work together to align individual accounting standards with an overall objective to align US GAAP with IFRS over an extended period of time by jointly developing new accounting standards – e.g. business combination standards, revenue standards

• Conversion is a one-time change in the accounting principles used in the financial statements from US GAAP to IFRS

• ASU 2015-17- Income Taxes Topic (740): Balance Sheet Classification of Deferred Taxes, represents a change in U.S. which is neither a conversion to IFRS or a result of a convergence project but results in elimination of US GAAP/IFRS Difference

Why a single set of standards?• Use of a single set of high-quality global standards will 1) facilitate

cross-border capital formation and 2) help provide investors with comparable information to make informed decisions

BackgroundConvergence vs. Conversion

IFRS/US GAAP Differences


ASC 740-10-25-3(e)Recognition of tax expense from intra-entity transfers is deferred until the related asset is sold or disposed of and no deferred taxes are recognized for the purchaser’s change in tax basis

IAS 12Tax expense is recognized from intragroup transfers and deferred taxes are recognized at the purchaser’s tax rate for any temporary difference in the tax basis of the asset

Observations

Intragroup profit is eliminated in the group under IFRS; therefore, there is a disconnect between the timing of profit on the sale and the recognition of the related tax expense (this could result in effective tax rate volatility)

Intercompany Transactions

Note: The FASB issued an exposure draft on January 22, 2015 that, if approved, will eliminate the prohibition on recognition of income taxes paid for intra-entity transactions and the related deferred tax asset on intra-entity differences between the tax basis of the assets in a buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements


Example – Current US GAAPIntra-entity Asset Transfers – IP Transfer

Parent transfers self-created IP to Foreign Subsidiary. IP has a 5-year book and tax life in the Foreign Subsidiary’s tax jurisdiction.

Parent30%

FS10%

No DTA recorded pursuant to ASC 740-10-25-3(e)

Consolidated F/SPrepaid taxes $ 45DTA $ 0 Taxes payable $ 45Tax expense $ 0

Selling Price $ 150Tax basis 0Gain $ 150Tax rate 30%Tax paid $ 45

Tax basis $ 150Book basis $ 0Difference $ 150

Tax expense deferred (e.g., recorded as a prepaid)pursuant to ASC 810-10-45-8

IP$150

Post-transfer years 1-5 entries:Seller: DR Tax expense $9

CR Prepaid taxes $9

Post-transfer years 1-5 entries:Buyer: DR Taxes payable $3

CR Tax expense $3

Note: The FASB issued an exposure draft on January 22, 2015 that, if approved, will eliminate the prohibition on recognition of income taxes paid for intra-entity transactions and the related deferred tax asset on intra-entity differences between the tax basis of the assets in a buyer’s tax jurisdiction and their cost as reported in the consolidated financial statements


Example – IFRSIntra-entity Asset Transfers – IP Transfer

Parent transfers self-created IP to Foreign Subsidiary. IP has a 5-year book and tax life in the Foreign Subsidiary’s tax jurisdiction

Selling Price $ 150Tax basis 0Gain $ 150Tax rate 30%Taxes payable/Income tax expense

$ 45

Tax basis $ 150Book basis $ 0Difference $ 150DTA/Deferred tax benefit $ 15

FS10%

IP$150

Parent30%

Post-transfer years 1-5 entries:Seller: N/A

Post-transfer years 1-5 entries:Buyer: DR Current tax payable $3

CR Current tax expense $3DR Deferred tax expense $3

CR DTA $3


ASC 740ASC 718-740-30-1

Deferred tax asset based on cumulative compensation cost recorded for financial reporting purposes

Benefit of excess tax deduction recorded as an increase to additional paid in capital (APIC) when realized (reducing taxes payable)

Unrealized DTA is written-off to equity or income tax expense depending on availability of APIC pool

IAS 12.68A-C

DTA is based on expected future tax deduction under applicable tax law which is estimated each reporting period (using the reporting date fair value) for the portion vested until the award is exercised or expires

Excess tax benefit (which can be on account of a DTA) is recognized in equity

ObservationsCalculations for IFRS may require a significant amount of data each period. Since the DTA moves independent of the book compensation, IFRS accounting could results in volatility in the effective tax rate

Share-based Compensation

Note: On November 23, 2015, the Board affirmed its decision in proposed ASU to improve the accounting for share‐based payment to employees. The Board decided that all excess tax benefits and tax deficiencies should be recognized within the income statement. The Board also decided to remove the requirement to delay recognition of an excess tax benefit until the tax benefit is realized.


Share-based Compensation - ExampleCompany A grants a nonqualified stock option− $25 fair value, fully vested at grant date on January 1, 20X1 − Strike price equals market price on date of grant = $40− 40% tax rate− $70 share price on December 31, 20X1− $80 share price upon exercise in 20X2

Company A would recognize the following income tax expense/(benefits) and APIC/Equity impact under US GAAP and IFRS:

US GAAP IFRSGrant: DTA $10 -

Income Tax Expense/(Benefit) ($ 10) -

12/31/20X1: DTA - $12Income Tax Expense/(Benefit) - ($10)Equity - ($2)

Exercise: Current Tax Payable $16 $16DTA ($10) ($12)APIC/Equity ($6) ($4)


ASC 740-10-45-20ASC740-20-45-3

No backwards tracing - for example, the tax effect of a change in the beginning-of-the year valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related DTA in future years ordinary shall be included in income from continuing operations" (this from FAS109 par 26)

IAS 12.61A

Backwards tracing required - current tax and deferred tax shall be recognized outside profit or loss if the tax relates to items that are recognized, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognized, in the same or a different period: in other comprehensive income, shall be recognized in other comprehensive income; directly in equity, shall be recognized directly in equity

Considerations Determining which DTA to recognize/derecognize when there is a change in recoverability may be complex.

Intraperiod Tax AllocationBackwards Tracing


Intraperiod Allocation - ExampleExample

Assumptions• Company Z had the following DTAs as of 12/31X1 and determines that it is

MLTN/probable that it will realize the benefit of all DTAs

• During 20X2, Z determines it is no longer MLTN/probable that it will realize the benefit of the DTAs and records the following entries:

Description Amount

NOL carryforward $10,000 Cont Ops

Accrued expenses $ 3,000 Cont Ops

Unrealized losses $ 2,000 OCI

US GAAP IFRSIncome Tax Expense/(Benefit) $15,000 $13,000OCI - $2,000Valuation Allowance/DTA ($15,000) ($15,000)


Tax Effects of Outside Basis Differences (Book > Tax)Investments in subsidiaries, branches, associates and joint arrangements

ASC 740-30-25-5ASC 740-30-25-7ASC 740-30-25-3

ASC 740-10-25-3(a)ASC 740-30-25-17

No DTL is recorded on the excess of book over tax basis of the company’s investment in its foreign subsidiary (or foreign corporate joint venture that is essentially permanent in duration) unless it becomes apparent that the temporary difference will reverse in the foreseeable future. There is a presumption that earnings will be repatriated and the related temporary difference will reverse, which can be rebutted by plans for reinvesting such earnings. No DTL is required for domestic subsidiaries if the company can recover the temporary difference in a tax-free manner and the company expects to use such means.

IAS 12.39

No DTL is recorded on excess book over tax basis if the company can control the reversal and it is probable that the difference will not reverse in the foreseeable future. This provision applies to all investments, including associates and branches. Foreseeable future is generally believed to be more than one year by analogy to IAS 1, Presentation of Financial Statements.

Observations

If a company meets the US GAAP standard of indefinitely reinvested, it generally also meets the IFRS standard of foreseeable future. Differences in the types of entities covered may yield an IFRS vs. US GAAP difference. No domestic/foreign distinction under IFRS.


Tax Effects of Outside Basis Differences (Tax > Book) Investments in subsidiaries, branches, associates and joint arrangements

ASC 740-30-25-9

A DTA shall be recognized for an excess of the tax basis over the amount for financial reporting of an investment in a subsidiary (or corporate joint venture that is essentially permanent in duration) only if it is apparent that the temporary difference will reverse in the foreseeable future

There is no specific requirement regarding the recording of DTAs on investments in entities that are not subsidiaries (or corporate joint ventures that are essentially permanent in duration)

IAS 12.44

A DTA is recorded only to the extent it is probable that the temporary difference will reverse in the foreseeable future and there will be taxable profit against which the temporary difference can be utilized

Observations

While there is no difference in the recognition criteria of DTAs, there can be a difference where there is an excess tax over book basis with regard to branches or associates that may be precluded from recognition under IFRS but would potentially be recognized under US GAAP


Interim Reporting and Tax Rate

ASC 740

The forecasted tax rate is computed on the basis of the forecasted pre-tax income and tax expense for the entire reporting group, computed at an entity level

Year-to-date tax expense is calculated by multiplying the group’s year-to-date pre-tax income by the group’s forecasted effective tax rate

IAS 12

Each jurisdiction computes its projected rate, and those rates must be applied jurisdiction by jurisdiction to the respective actual year-to-date income

The interim period tax charge is calculated by taking the sum of each individual entity’s interim tax charge. If such sum is not practicable, a weighted average of all group rates may be used if it is a reasonable approximation of the effect of using more specific rates

ObservationsASC 740 could result in YTD tax expense that does not closely correlate to YTD pre-tax income when considering the mix of income between jurisdictions


Interim Reporting – Example

Assumptions• Company A operates in the US (40% tax rate) and a foreign jurisdiction (10% tax

rate) and can reliably project income and projects the following income and AETR

• Company A has the following ordinary income/(loss) and tax each quarter under US GAAP and IFRS:

Jurisdiction Pretax Inc/(Loss) Tax Rate Tax Exp/(Ben) AETRUS $3,000 40% $1,200Foreign 2,000 15% 300Consolidated $5,000 $1,500 30%

Jurisdiction Q1 Q2 Q3 Q4US $1,000 $1,000 $500 $500 Foreign 0 0 1,000 1,000Consolidated $1,000 $1,000 $1,500 $1,500Tax Expense – US GAAP $300 $300 $450 $450Tax Expense - IFRS $400 $400 $350 $350


ASC 740-10-25 ASC 740-10-30

Requires a two-step recognition and measurement approach to determine the amount of tax benefit to recognize in the financial statements

If more-likely-than-not (MLTN) recognition criteria is met, the tax position is measured at the largest amount of benefit that is greater than 50% likely to be realized upon settlement

IAS 12 IAS 37

IAS 12 does not specifically address accounting for income tax uncertainties

The recognition and measurement provisions of IAS 37 are often used by analogy because an uncertain tax position (UTP) may give rise to a liability of uncertain timing and amount

Recognition is based on whether it is probable that an outflow of economic resources will occur (probable is defined as MLTN)

Measurement is based on the entity’s best estimate of the amount of the tax liability (e.g., it may be based on weighted-average probability of a range of possible outcomes or most likely outcome)

Uncertain Tax Positions

Standards Update

IFRS Interpretation Committee Draft Interpretation: Uncertainty over Income Tax Treatments

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

21

IFRS Interpretations Committee Draft InterpretationUncertainty over Income Tax Treatments

The Interpretations Committee published tentative decisions related to accounting for uncertainties in income taxes in its Draft Interpretation issued on October 21, 2015

– Scope

Applies to the determination of taxable profit, tax bases, unused tax losses, unused tax credits and tax rates, in circumstances in which there is uncertainty over income tax treatments that affects the application of IAS 12

– Unit(s) of measurement

An entity should identify the unit provides better predictions of the resolution of the uncertainty

Considered separately or considered together as a group

– Examination by taxation authorities

An entity should assume that a taxation authority with the right to examine amounts reported to it will examine those amounts and have full knowledge of all relevant information when making those examinations


22

IFRS Interpretations Committee Draft InterpretationUncertainty over Income Tax Treatments (continued)

– Recognition

If an entity concludes that it is probable that the taxation authority will accept an uncertain tax treatment, or group of uncertain tax treatments, it shall determine the taxable profit, tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings

If an entity concludes that it is not probable that the taxation authority will accept an uncertain tax treatment, or group of uncertain tax treatments, it shall reflect the effect of uncertainty in determining the related taxable profit, tax bases,unused tax losses, unused tax credits or tax rates

– Measurement

An entity should measure a tax liability or asset using the expected value or the most likely amount, depending on which method it expects to better predict the amount that it will pay or recover

– Consideration of Changes in Facts and Circumstances

If facts and circumstances change, an entity shall reassess the judgments and estimates required


23

IFRS Interpretations Committee Draft InterpretationUncertainty over Income Tax Treatments (continued)

– Disclosure

IAS 1: An entity shall determine whether it should disclose judgments made in the process of applying its accounting policy

IAS 1: An entity shall determine whether it should disclose information about the assumptions it makes and other estimates used

IAS 37: An entity shall determine whether the potential impact shall be disclosed as tax-related contingencies for positions that are probable of being accepted by the taxation authority

– Transition

Prospective application with recognition of the cumulative effect in opening retained earnings or other appropriate components of equity

Retrospective application to each prior reporting period presented

Disclose method of transition

The effective date is not yet known

– The comment period concluded on January 19, 2016


24

IFRS Interpretations Committee Draft InterpretationUncertainty over Income Tax Treatments: Example 1

When one tax treatment is considered independently and when the most likely amount is used to reflect the effect of uncertainty

– Entity A has an unresolved dispute over whether a specific item of 100 should be deductible in determining the taxable profit for a specific period

– A tax investigator did not accept the tax treatment but the entity appealed to court which makes a final decision on the acceptability under the tax law

– Entity A noted that this uncertain tax treatment affects neither accounting for deferred tax nor tax rates and it concluded that it is probable that the taxation authority will accept the other tax treatments used in its tax filing

– Entity A has no similar disputes and it therefore decides that this tax treatment should be considered independently

– At the end of the reporting period, Entity A determines that it is not probable that the taxation authority will accept the tax treatment on the basis of an evaluation of all available evidence and that the most likely amount will provide the better prediction of the resolution of the uncertainty

– Entity A recognizes and measures a current tax liability in accordance with IAS 12 based on a taxable profit that includes 100 in addition to the reported amount in its tax filing


25

IFRS Interpretations Committee Draft InterpretationUncertainty over Income Tax Treatments: Example 2

When multiple tax treatments are considered collectively and when the expected value is used to reflect the effect of uncertainty

– Entity B’s tax filing included a number of deductions related to transfer pricing

– Entity B notes that the taxation authority’s decision on one transfer pricing matter would affect, or be affected by, the other transfer pricing matters

– Entity B determines that the tax treatments should be considered collectively as it will provide the best prediction of the resolution of the uncertainty

– At the end of the reporting period, Entity B concludes that it is not probable the taxation authority will accept all of the taxtreatments

– Entity B notes that this group of uncertain tax treatments affect neither accounting for deferred tax nor tax rates and it concludes that it is probable the taxation authority will accept the other tax treatments used in its tax filing


26

IFRS Interpretations Committee Draft InterpretationUncertainty over Income Tax Treatments: Example 2 (continued)

– The probability of additions to taxable profit are as follows

– Entity B noted the most likely amount of 800 does not provide the better prediction of the resolution of the uncertainty and concludes that the expected value of 650 provides a better prediction of the resolution of the uncertainty

– Entity B recognizes and measures a current tax liability in accordance with IAS 12, based on the taxable profit, which includes 650 in addition to the amount of taxable profit in its tax filing

Estimated Outcome

Individual Probability

Estimate of Expected Value

Outcome 1 - 5% -

Outcome 2 200 5% 10

Outcome 3 400 20% 80

Outcome 4 600 20% 120

Outcome 5 800 30% 240

Outcome 6 1,000 20% 200

100% 650

Current Developments


2015 AICPA Conference on Current SEC and PCAOB DevelopmentsInternational financial reporting standardsPotential fourth alternative revisited at 2015 conference• This alternative, introduced during the 2014 conference, which would allow U.S.-based filers to

voluntarily provide supplemental IFRS-based information without reconciliation to U.S. GAAP, was revisited again

• Mr. Schnurr indicated that the OCA is likely to recommend that the SEC consider and commence rulemaking that is consistent with this fourth alternative

SEC Chair Mary Jo White and Mr. Schnurr reemphasized the importance of continued FASB and IASB collaboration on standard-setting projects in an effort to improve the quality of financial reporting

Comments were echoed by IASB Chairman Hans Hoogervorst who, in a call for a renewed commitment to ongoing collaboration and convergence, asked participants to “stay engaged [with the IASB] and help us in continuing to build our Standards in the future”


Accounting Standard Setting

2015 AICPA Conference on Current SEC and PCAOB Developments

Perspectives from IASB Chairman Hans Hoogervorst• Observed that the quality of IFRSs continues to improve, as evidenced by the

IASB’s work on its revenue recognition and lease accounting standards• Characterized the convergence achieved with the revenue recognition project as

a huge success story• Encouraged by the increased interest in IFRSs expressed by stakeholders in the

economies of Japan, India, and China• Believes that the accounting world has moved to being virtually bilingual with its

use of IFRSs and U.S. GAAP, which, although imperfect, represents significant progress from 10 years ago

• Of the view that a strong commitment to IFRSs is in the self-interest of the United States because there are substantive U.S. interests at stake


SEC: No Authoritative Use of International Standards in U.S.

February 20, 2016 at the Practising Law Institute's “SEC Speaks” conference, SEC Chief Accountant James Schnurr:

• SEC expects to issue guidance that U.S. companies will not be permitted to file their “primary financial statements” under IFRS for “the foreseeable future”.

• Ruled out the possibility of the SEC approving IFRS as an accepted alternative to U.S. GAAP for domestic U.S. companies

• As reported at the 2015 AICPA conference, the SEC staff is developing a proposal to allow U.S.-based filers to voluntarily provide supplemental IFRS-based information without reconciliation to U.S. GAAP

• Eliminate current requirements that the voluntarily provided, IFRS-based information must be “reconciled” to U.S. GAAP

SEC Comments onIncome Taxes: IFRS


32

SEC Comments on Income TaxesIFRS: Recognition of Deferred Tax Assets

There are examples of the Staff asking for additional detail or comments on entities that file under IFRS

An example comment received from the SEC Staff includes (emphasis added):

We note from page F-XX that your forecast for Entity A shows you will have taxable profits over the long-term and will therefore utilize the deferred tax assets associated with net operating loss carryforwards. Given your recent history of losses, please provide us with your analysis as to why you believe recognition of such deferred tax assets continues to be appropriate under IAS 12, paragraphs 35 through 37. Your response should clearly explain your net operating loss carryforwards for each entity (Entity A, Entity B, and Entity C) and your analysis of the realization for each. We may have further comment upon receipt of your response.


33

SEC Comments on Income TaxesIFRS: Effective Tax Rate Reconciliation



We note your effective tax rate decreased from 16.2% to 11.1% from 2012 to 2014. We also note that during 2013 you completed the combination of X entity which had a nominal tax rate of 30%. Please provide to us expanded information per IAS 12 paragraph 81(d) on the following:

– The components of the reconciliation adjustment labeled “non-taxable financial and other income” of $X million excluding the gain on the initial investment held in X entity of $X million

– The components of the line item labeled tax savings from tax credits and special tax status and

– Clarification of the effect on your current and deferred income taxes arising from the X entity business combination

To the extent these line items are comprised of individually significant items, please provide draft disclosure to be included in future filings that quantifies and clarifies the effects of tax credits and special tax status. Please discuss whether you have significantly low tax rates in particular jurisdictions and if these are one-time events or recurring items and expiry dates, if any, of these items.


34

SEC Comments on Income TaxesIFRS: Error versus Estimate



We have read your response to comment XX of our letter dated May 16, 20X3. Please explain to us why the overprovision related to the 20X1 overstatement of non-deductible expenses was recorded in fiscal 20X2. In this regard, explain to us in detail whether this adjustment represents the correction of an error. Refer to paragraph 41 of IAS 8. If this adjustment is a correction of an error, please further explain to us why you did not restate your fiscal 20X1 income tax expense pursuant to paragraph 42(a) of IAS 8.

State Aid Considerations


36

State Aid ConsiderationsBackground

The European Commission has initiated formal investigations into tax rulings granted to several high profile multinationals

State aid investigations are generally focused on certain tax structures with legal entities in Ireland, Luxembourg, the Netherlands and Belgium

A state measure is considered to be incompatible with the EU state aid rules when certain conditions are present

– The measure confers an economic advantage to the company or group of companies to which it is directed

– The measure is imputable to the state and financed through state (public) resources

Enacted by the state itself or an agency

– The advantage is selective

Only available to that specific company or group of companies to which it is directed

– The measure distorts or threatens to distort competition and has a negative effect on trade between EU member states

Tax rulings can amount to incompatible state aid under the EU State Aid rules if they grant a selective advantage to a company


37

State Aid ConsiderationsInvestigation Process

Provisional Findings

– After an initial investigation with the member state concerned, the Commission decides whether the tax ruling raises doubts on its compatibility with the rules and issues a letter with its preliminary view

– Published in the Official Journal of the EU and the web-site of the Commission

– 30 day window of opportunity once published to submit comments and provide other information before the Commission makes final conclusions

Commission's Final Decision

– If the Commission concludes that the measure is not compatible, it will issue and adverse decision

– The pertinent member state will be directed to recover the aid granted over the last ten years, including interest from the time the aid was at the disposal of the beneficiary until the date of recovery

– The Commission can force the member state to sue the taxpayer through the member state’s national courts if payment is not voluntarily made


38

State Aid ConsiderationsInvestigation Process (continued)

EU Appeals Process

– Following an adverse decision, the taxpayer may appeal to the EU General Court

– The member state can also initiate a separate application or intervene in favor of the beneficiary (taxpayer) in its appeal

– The Court of Justice may give the final judgment in the case or refer the case back to the General Court

– During the appeal process, the effects of the Commission’s final decision are not suspended

Taxpayer can request a national court to authorize a delay of the recovery of the state aid pending the EU Court Decision

– If the taxpayer remits the liability but is successful in its appeal, any payments are remitted back to the taxpayer

Fines for Recalcitrant Member States

– If a member state refuses to enforce the Commission’s order, the Commission (or another member state) can ultimately go to the Court of Justice

May impose a daily penalty on the recalcitrant member state

– The fine may be collected through an adjustment of any EU subsidies to the respective member state


39

State Aid ConsiderationsAccounting for Income Taxes

Analysis of the tax position under the recognition and measurement criteria of ASC 740 (U.S. GAAP) or in line with guidance currently existing in IAS 12 (IFRS)

– Consider different subsequent events guidance for U.S. GAAP and IFRS

Historically, a tax benefit associated with a tax ruling issued by an EU member state was almost always found to meet the more likely than not standard

Possible negative factors to consider

– Not sufficient evidence or information submitted with the ruling to form a basis for such ruling

– The ruling was issued so quickly that there could not have been sufficient time for a proper review of all pertinent facts

– The ruling was based on a negotiation with the tax authority instead of an application of transfer pricing principles

– Economic Analysis in the ruling did not comply with OECD standards

Other changes in facts or tax law


40

State Aid ConsiderationsAccounting for Income Taxes (continued)

Disclosure

– Consider when the reasonably possible standard has been met under U.S. GAAP

Reasonably possible that significant increases or decreases to the unrecognized tax benefits will occur within the following twelve months

– U.S. parent multinational companies that have been named in state aid investigations have generally disclosed that the matter is being investigated by the Commission and there is risk that the Commission may find that the company should repay the illegal state aid

Disclosure of the matter may include the following:

– Description of the issue

– Description of the amount of the tax at risk

Disclosure may be included in the following:

– MD&A

– Risk Factors

– Critical accounting estimates

– Income Taxes footnote

– Other


41

State Aid ConsiderationsExample Disclosures

Risk Factors Disclosure Example

Future changes in domestic or international tax laws and regulations could adversely affect our income tax liabilities. Recent developments, including the European Commission’s investigations of the tax authorities in certain European countries regarding whether decisions made by these tax authorities comply with European Union rules on state aid, as well as the Organisation for Economic Co-operation and Development’s project on Base Erosion and Profit Shifting, may result in changes to long-standing tax principles. Any such changes could adversely affect our effective tax rate or result in higher cash tax liabilities.

MD&A Disclosure Example

In addition, in October 2014, the European Commission opened a formal investigation to examine whether decisions by the tax authorities in Luxembourg with regard to the corporate income tax paid by certain of our subsidiaries comply with European Union rules on state aid. If this matter is adversely resolved, Luxembourg may be required to assess, and we may be required to pay, additional amounts with respect to current and prior periods and our taxes in the future could increase. Although we believe our tax estimates are reasonable, the final outcome of tax audits, investigations, and any related litigation could be materially different from our historical income tax provisions and accruals.


42

State Aid ConsiderationsExample Disclosures (continued)

Income Taxes Disclosure Example

Company A was granted a ruling which lowered the effective income tax rate on taxable earnings for years 20X1 through 20X5 under Belgium’s excess profit tax regime. This lower rate, when compared with the country’s statutory rate, resulted in an income tax reduction of $X million ($0.0X per diluted share) in 2014 and $X million ($0.0X per diluted share) in 2013. In February 2015, the European Union Commission (“EU”) opened a state aid investigation into Belgium’s rulings. On January 11, 2016, the EU announced its decision that these rulings were illegal and ordered that tax benefits granted under these rulings should be collected from the affected companies, including Company A. If this matter is adversely resolved, the Belgian government may be required to assess, and Company A may be required to pay, past taxes reflective of the disallowed alleged state aid that Company A received in years 20X1 through 20X5. Company A is currently assessing its legal options and the impact that an adverse outcome would have on the Company’s financial statements in future periods, but does not expect the impact to be material.


Patrice is a Washington National Tax partner within Deloitte Tax LLP leading the WNT Accounting for Income Taxes group and a member of Deloitte’s Financial Reporting Competency leadership team. She consults with companies on the application of accounting standards such as ASC 740 (FAS109 and FIN 48) and IAS 12 and assists companies with financial reporting of tax implications of complex transactions and life events such as acquisitions, divestitures, public offerings, spin-offs, and bankruptcy. Patrice serves as the National Leader of Internal Training for the Financial Reporting for Taxes competency group of Deloitte Tax LLP.

Patrice has been a guest lecturer for various organizations including Tax Executives Institute, American Institute of Certified Public Accountants, American Bar Association, Bureau of National Affairs, Practicing Law Institute, and Council on State Taxation. Prior to joining Deloitte in 2002, Patrice worked for Arthur Andersen LLP as a member of the International Tax Group in San Francisco, California and with Grant Thornton LLP in Utah. Throughout her career, Patrice has provided tax services to clients in a variety of industries including financial services, technology, real estate, manufacturing, retail, hospitality, and private equity.

Patrice received Bachelor of Science and Master of Accounting degrees from Brigham Young University. She is a licensed Certified Public Accountant in California and Utah and is a member of the American Institute of Certified Public Accountants.

[email protected]

Patrice Mano

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Jenna L Summer

BackgroundJenna Summer is a senior manager in the Accounting for Income Taxes group in KPMG’sWashington National Tax Practice. Jenna has been with KPMG for eleven years and specializes inaccounting for income taxes under both US GAAP and IFRS.

Professional and Industry Experience

Jenna provides services to public and non-public domestic and multinational clients in a variety ofindustries, including, but not limited to, the following activities:

Income Tax Provision Preparation, Review and Audit under both US GAAP and IFRS including accounting for uncertainty in income taxes, accounting for investments in subsidiaries and tax accounting considerations of share-based compensation

Accounting for Income Taxes on Carve-out Financial Statements

Accounting for Income Taxes on IFRS Conversions

Jenna also supports accounting for income tax matters for local office engagement teams, knowledgesharing of emerging issues and assists with the development and delivery of firm training and externalpresentations.

Technical Skills ASC 740

IAS 12

Publications and Speaking Engagements Tax Executives Institute

AICPA

Bloomberg BNA

JENNA L SUMMERTax Senior Manager

KPMG LLPSuite 120001801 K Street NWWashington, D.C. 20036

Tel 202-533-3614Fax 313-447-2287Cell [email protected]

Function and SpecializationJenna is a member of the Accounting for Income Taxes Group in KPMG’s Washington National Tax Practice.

Education, Licenses & Certifications BS in BA in Accounting, Central Michigan

University

Masters of Science in Taxation, Grand Valley State University

Certified Public Accountant, Michigan & Washington, D.C.


Placeholder for Jenna’s and Eric’s bios


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