This may be a separate note, in addition to the note under Significant Accounting Policies, to more fully disclose the accounting for income taxes. This note may further explain how deferred tax assets and liabilities are recognized, and there may be a breakdown of income taxes that correspond to income from continuing operations and extraordinary items.
A public enterprise must disclose a reconciliation using percentages of dollar amounts of (a) the reported amount of income tax expense attributable to continuing operations for the year to (b) the amount of income tax expense that would result from applying domestic federal statutory rates to pretax income from continuing operations. Tax loss carryforwards, if any, would also be reported
There could be an analysis of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, and an assessment of the how deferred tax assets will be realized, and how deferred tax liabilities will be reversed, and the projected future taxable income, and tax planning strategies used in making this assessment.
Contingencies and Commitments
This note may contain a listing and the amounts of any guaranties granted (mortgages, securities, endorsements, etc.), and details of any commitments for investments in assets and their financing.
There may be a phrase such as, “Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated”. Another phrase commonly used is, “The company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the company’s consolidated financial position, results of operations or liquidity”. In this case, there probably are not any significant amounts to be disclosed. But if the company is involved in legal proceedings that could have a material effect on its results, there should be full disclosure of the pending lawsuits, the amounts involved, and management’s opinion as to the expected outcome, based on the best information available as of the reporting date.
If applicable, the notes should contain an explanation of environmental remediation costs. This may be included among contingencies or may be reported separately.