Tax Disclosure

Words have weight in the accounting world.   We don’t necessarily associate financial verbiage with taxes so what does you income tax disclosure say to your company’s shareholders, equity and rating agency analysts?

The MD&A is meant to expand, clarify and enhance the accounting figures so obviously it should not be generic, obtuse or difficult to read. More over research by Feng Li (University of Michigan) suggests that there is increased complexity in the language when performance is poor and Kristina Rennekamp (Cornell University) found a positive correlation between readable language and investor confidence in whether the information provided was truthful.  These support my belief in trying to provide tax information in plainer language.

What would make your tax position clearer for the reader– below are just a few good suggestions.

  • International 
    • add disclosure about any granted tax holidays or other incentives provided by government agencies,
    • identify significant terms of transfer pricing arrangements and advance pricing agreements,
    • discuss any activity that would changes the mix of the company’s foreign operations.
  • Cash flow
    • disclose any significant cash in-flows from tax windfalls, and
    • lay out the timing of future cash tax payments required for deferred taxes based on the known reversal of temporary differences.
  • Deferred taxes
    • discuss the evidence which supports your tax benefit or changes in the benefit’s amount.  This dovetails with the requirement to provide a discussion on significant management estimates.
  • Effective tax rate
    • explain material items in the reconciliation beyond the generic captions everyone uses, and
    • point out new or unusual reconciling items.
ico Did you know?
In 1650 Louis XIV levied a 50% export tax on beaver pelts, and 10% on moose hides on the residents of New France.

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