WRITING PROJECT 1

Writing Project P2

By Michelle Aguirre

ACG4111

Professor Kuhn

August 12, 2024

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Overview of Proposed Changes

The Exposure Draft issued by the Financial Accounting Standards Board provides an

extensive revamping in reporting and disclosures of liabilities and shareholders' investment. The

proposed changes put more emphasis on transparency, comparability, and general usefulness of

financial statements. More specifically, it addresses the proposed changes to the classification of

liabilities, detailed disclosures about long-term debt and operating lease liabilities, and the

reporting of shareholders' equity components.

Improved Classification of Liabilities

One of the most prominent changes that FASB is proposing is further refining liability

classification into current and noncurrent. The new standards define current liabilities as

liabilities whose settlement is expected either within one year or the operating cycle of the entity,

whichever is longer, while noncurrent liabilities are those whose settlement is expected after the

specified periods as noted by FASB in 2024 . Users will have a better view of the short- and

long-term obligations of firms. For example, current liabilities of the group are presented as

$18,598 in 2024, $20,125 in 2023, and $14,412 in 2022. On the other hand, the noncurrent

liabilities have long-term debt, other borrowings, noncurrent operating lease liabilities, and

deferred income taxes, which are depicted as $16,914 in 2024, $16,683 in 2023, and $19,225 in

2022 (Edgar, 2021) . This kind of information is supplied so that stakeholders might have an

understanding of the group's financial liabilities on both a short-term and long-term basis.

Detailed Disclosures of Long-Term Debt

Long-term debt has even more detailed disclosure requirements, such as certain

disclosures relating to maturity dates, interest rates, and repayment schedules (FASB, 2024).

This is supposed to increase transparency about ways in which businesses manage their long-
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term obligations. For example, the long-term debt of the group and other borrowings have been

presented as $11,509 in 2024, $11,536 in 2023, and $14,073 in 2022 (Edgar, 2021). Explanatory

disclosures of these items will enhance the understanding of the company, based on which

stakeholders can understand the cash flow requirements in the future and also the refinancing

risks associated.

Operating Lease Liabilities

As business practices continue to evolve, the FASB proposes improved disclosures

related to operating lease liabilities. Companies will have to give more information on the timing

and amounts of future lease payments in the financial statement as opposed to the previous case

where companies were not disclosing such vital information about future commitments. As an

example, on its disclosure for non-current operating lease liabilities it indicates that the company

has $2,337 in 2024, $2,218 in 2023, and $2,249 in 2022 (Edgar, 2021). The increased disclosures

are meant to portray a clearer view of long-term commitments in terms of a lease and their

impact on the financial health of the investment.

Changes in Shareholders' Investment Reporting

This proposal brings new reporting requirements for shareholders' investment, mainly on

Accumulated Other Comprehensive Loss, AOCL. The companies are now under obligation to

disclose the components of AOCL and their impacts on the shareholders' equity. Based on the

results, AOCL is presented as $(725) in 2024, $(756) in 2023, and $(854) in 2022 (Edgar, 2021).

The added disclosure will present a better view of exactly how different components affect

comprehensive income and shareholders' equity.

Impact on Financial Statements and Disclosures

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Notably, the proposed changes are expected to make some notable impacts on financial

statements and disclosures. Firstly, there will be increased transparency, providing stakeholders

with an even fuller view of the financial position of a company. For example, liabilities will be

more clearly classified, and long-term debt will be disclosed in much greater detail, thereby

facilitating an investor's analysis of liquidity and financial stability (FASB, 2024). Another

important addition brought by the new standards is comparability across companies and

industries, promoting consistent evaluations of financial performance.

The change may, however increase the reporting cost for the companies as the companies

might have to update their accounting systems and processes for such changes to take effect as

per the requirements by FASB, 2024. In addition, changes could affect key financial ratios such

as liquidity and leverage ratios since the disclosures would give more detailed information about

the financial obligations and equity components. In summary, the proposal of the FASB tries to

change the nature of financial reporting standards so that they would enhance comparability and

relevance for the stakeholders by providing detailed and transparent financial information to

them.

Part 2
Understanding Deferred Income Taxes

Deferred income taxes are important accounting concepts that come about due to

differences between financial and tax accounting. Such differences generate two major accounts

interrelated to each other: deferred tax assets and deferred tax liabilities. A company incurs a

deferred tax asset when it has already made a tax payment on the income, which is yet to be

reported in its statement at some future date. This generally occurs due to the temporary

differences between the treatments of expenses or losses in financial accounting and under tax.
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For instance, a company recognizing an expense currently but is unable to deduct it for tax

purposes in the future will result in a deferred tax asset.

On the other hand, taxable temporary differences give rise to deferred tax liabilities. This

occurs when a firm reports income on its financial statements before reporting it to the taxing

authority. For example, if a company defers income for tax purposes, a deferred liability will

arise, which is actually the amount of future tax that will be paid when the income is finally

taxed. These amounts are therefore of great importance in fairly disclosing the taxes paid and the

general financial position of a company and also ensure correct matching of the tax expenses

with the periods earning the related revenues or incurring the related expenses.

Changes In Deferred Income Taxes 2020 – 2021

May 2, 2020, through May 1, 2021

The case, therefore, of the deferred income taxes account, from May 2, 2020, when its

value was $1,122 million, and dropped to May 1, 2021, standing at $1,169 million, signifies a

rise of $47 million about 4.2%. The movement here denotes changes in the different deferred tax

positions the firm had during this period. Several reasons could have caused this increase, one of

which is the differences in timings of the income and expense recognition. If additional revenues

or income through some other avenue have been booked and are not yet subject to taxation, the

firm would increase its deferred liabilities for taxation.

In addition, changes in accounting estimates may also affect deferred tax balances. For example,

the revision of the estimation by a company of its future tax benefit or liability, upon becoming

available with new information or from a change in the tax laws, could affect the carrying value

of the related deferred tax. Changes in tax laws or rates could impact the calculation of DTs as
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well. If tax legislations have been changed affecting the company's deferred tax positions, that

may be a reason for the increase.

January 30, 2021 - May 1, 2021

The increase in the deferred income taxes from $990 million on January 30, 2021, to

$1,169 million on May 1, 2021, is huge—increase of $179 million, about 18.1% (Edgar, 2021)..

This steep rise therefore indicates more profound changes in the tax position of the company

within this very short period (Edgar, 2021).. This could be due to the following reasons:. This

could be the first instance of increased earnings or other changes in financial performance that

impact timing-related tax payments. For example, if a company were to increase revenues or

capture income earlier for book purposes than for tax purposes, then this would generate more

deferred tax liabilities.

The increase may be a function of changes in the company's tax strategy or changes in

adjustments made in its tax positions. Companies regularly review and update their tax strategies

based on their financial performance and changes in regulations. Such changes can impact

deferred tax balances. Timing differences also arise when income or expense is not recognized

on the financial statements in the same period that the related income or expense is recognized

for tax purposes. If timing differences were large this period, this could be explaining a large

increase in deferred tax balances.

Overall Implications

The changes in deferred income taxes during all of these periods reflect some important

changes in the financial and tax situations of this company. An increase in deferred tax liabilities

would mean that the firm expects to pay more taxes in the future because of the recognized

income that is not yet taxed. Stakeholders need to understand these changes, which provide
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insights into the tax planning and financial health of the company. These deferred tax balances

undoubtedly impact the financial statements of the company and, hence, the reported earnings

and financial ratios. Thus, investors, analysts, and stakeholders have to take such adjustments

into consideration while trying to gauge future tax liabilities of the company and its overall

strategy related to finance. Understanding the reasons for such variations helps in assessing the

financial stability of the company and its tax management practices.

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Exhibit
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References

Financial Accounting Standards Board (FASB). (2024). Proposed Update: Presentation and

Disclosure of Liabilities and Shareholders' Investment. https://fasb.org/page/ShowPdf?

path=Proposed%20ASU%20Presentation%20of%20Financial%20Statements%20(Topic

%20205)%20Disclosure%20of%20Uncertainties%20about%20an%20Entity%27s

%20Going%20Concern.pdf&title=Proposed%20Accounting%20Standards%20Update

%E2%80%94Presentation%20of%20Financial%20Statements%20(Topic%20205):

%20Disclosure%20of

“TARGET CORPORATION .” Edgar, Edgar, 28 May 2021,

www.sec.gov/ix?doc=/Archives/edgar/data/0000027419/000002741921000017/tgt-

20210501.htm. Accessed 5 Aug. 2024.