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Emerging Issues Task Force

Issue No. 13-C, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists." The settlement of a liability for an unrecognized tax benefit may be reduced by a net operating loss (NOL) carryforward or a tax credit carryforward as required by U.S. tax law. The IRS does not require a disallowed uncertain tax position to be settled in cash if sufficient NOL carryforwards are available to eliminate the additional taxable income, but a taxpayer is required to use NOL carryforwards in the first year taxable income arises.

Topic 740, Income Taxes, does not include explicit guidance on whether and when an entity should present an unrecognized tax benefit as a liability or as a reduction of NOL carryforwards or other related tax credits. In practice, the presentation of the liability for an unrecognized tax benefit depends on the relationship with the NOL carryforwards. If the liability for an unrecognized tax benefit is directly associated with a tax position taken in a tax year that results in or that resulted in the recognition of an NOL carryforward for that year (and the NOL carryforward has not yet been utilized), the unrecognized tax benefit should be presented as a reduction to the NOL; otherwise, it should be presented as a liability.

The issue is how an entity should present a liability for an unrecognized tax benefit in the statement of financial position when nonrecognition of the tax benefit would otherwise reduce a deferred tax asset related to an NOL or tax credit carryforward under the provisions of the tax law.

Required:
1. Evaluate the key areas being addressed by the EITF
2. Assess how a company's accounting and financial reporting is likely to be impacted by the work being done by the EITF on this issue.

Solution Preview

1)

The key areas being addressed by the EITF are the presentation of unrecognized tax benefit when there is Net Operating Loss Carry-forward or Tax Credit Carry-forward. The areas being addressed are the presentation of unrecognized tax benefit in the financial statements. The main area being addressed is how unrecognized tax benefit should be presented. Should it ...

Solution Summary

This solution explains Issue No. 13-C and Topic 750. The sources used are also included in the solution.

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