UPDATE: FASB releases additional guidance on accounting for impacts of tax reform

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) and the FASB staff has issued several Staff Q&As that address various financial accounting and reporting impacts from the Tax Cuts and Jobs Act (TCJA). Companies should review this information and discuss the specific impacts on their organizations with their tax and accounting advisors.

UPDATE: ASU 2018-02, Accumulated Other Comprehensive Income

Accounting Standards Update, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), gives companies the option to reclassify from accumulated other comprehensive income to retained earnings the stranded tax effects resulting from the TCJA. The ASU, finalized on Feb. 14, 2018, included a few significant changes from the previously issued exposure draft. The main provisions include the following:

• Allows for optional reclassification of stranded tax effects related to the TCJA
• When elected, requires all stranded tax effects related to the TCJA to be reclassified (i.e., including other income tax effects not specifically related to the change in rates)
• Entities electing to reclassify stranded tax effects related to the TCJA are required to disclose that the election was made, including a description of the other income tax effects, if any, related to the TCJA that were reclassified
• Entities not electing to reclassify stranded tax effects related to the TCJA are required to disclose, in the period of adoption, that the election was not made
• In addition, all entities are required to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income (i.e., including those income tax effects not related to the TCJA)
• Requires certain additional transitional disclosures
• Allows application at the beginning of the period of adoption (annual or interim) or retrospectively
• Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018
• All entities, including public entities, that have not yet issued their financial statements may early adopt the standard

Staff Q&A: Whether Private Companies and Not-for-Profit Entities Can Apply SAB 118

Due to the timing of the enactment of the TCJA, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 118 on Dec. 22, 2017 to provide guidance to SEC registrants that do not have the necessary information available, prepared, or analyzed in reasonable detail to complete their accounting for certain tax effects of the TCJA.

Under the guidance in SAB 118, companies that do not have the necessary information available, prepared or analyzed to complete their accounting for the effects of the TCJA should record reasonable estimates, if possible, and identify them as provisional. If reasonable estimates cannot be made, no provisional amount should be recorded and the guidance in Accounting Standards Codification (ASC) Topic 740 (740) should continue to be applied using the tax laws that were in effect immediately prior to the TCJA’s enactment.

Any adjustments to provisional amounts or to amounts where provisional amounts could not be determined during the measurement period should be reported as measurement period adjustments and included in income from continuing operations in the reporting period that those amounts are determined. The measurement period ends on the earlier of when the necessary information has been obtained, prepared, and analyzed or one year from the enactment date.

SAB 118 requires certain supplemental disclosures about the material financial reporting impacts of the TCJA for which the accounting under ASC 740 is incomplete; including, the reason why the accounting could not be completed and the additional information necessary to complete the accounting.

On Jan. 11, 2018, the FASB staff issued Staff Q&A Topic 740 No. 1, which indicated the FASB staff would not object to private companies and not-for-profit entities applying the guidance in SAB 118. Additionally, private companies and not-for-profit entities applying SAB 118 would be in compliance with accounting principles generally accepted in the United States of America (U.S. GAAP). The FASB staff believes private companies and not-for-profit entities applying SAB 118 should apply all relevant aspects of SAB 118 in its entirety, including all relevant disclosures. The FASB staff also believes entities applying SAB 118 should disclose their accounting policy of applying SAB 118 in accordance with ASC paragraphs 235-10-50-1 through 50-3.

Staff Q&A: Whether to Discount the Tax Liability on the Deemed Repatriation

The TCJA includes a one-time transition tax on undistributed and previously untaxed post-1986 foreign earnings and profits. The transition tax is calculated using the greater of post-1986 foreign earnings and profits as of Nov. 2, 2017 and Dec. 31, 2017. Companies may elect to pay the resulting tax liability over eight years.

In FASB Staff Q&A Topic 740 No. 2, the FASB staff indicated that the deemed repatriation tax liability should not be discounted. The FASB staff based their conclusion on the fact that ASC 740 prohibits the discounting of deferred tax amounts and the fact that the FASB staff does not believe that ASC 835-30 on the imputation of interest applies in this situation.

Staff Q&A: Whether to Discount Alternative Minimum Tax Credits That Become Refundable

The TCJA repealed the corporate alternative minimum tax (AMT) system. Existing AMT credit carryforwards not used to offset regular tax obligations in years 2018 through 2020 will become partially refundable in 2018 and fully refundable starting in 2021. Due to these tax law changes, any unused AMT credit carryforwards remaining at Dec. 31, 2017 will likely be fully realizable.

In response to these tax law changes, the FASB staff issued FASB Staff Q&A Topic 740 No. 3, which indicates that any AMT credit carryforwards, whether presented as deferred tax assets or as receivables, should not be discounted. As was the case with FASB Staff Q&A Topic 740 No. 2, the FASB staff based their conclusion on the fact that ASC 740 prohibits the discounting of deferred tax amounts and the fact that the FASB staff does not believe that ASC 835-30 on the imputation of interest applies in this situation.

Staff Q&A: Accounting for the Base Erosion Anti-Abuse Tax

Companies must pay the base erosion anti-abuse tax (BEAT) included in the TCJA to the extent regarded domestic corporations that are part of a group with at least $500 million of annual gross receipts and who have a base erosion percentage of 3 percent or higher make certain deductible payments. The operation of the BEAT tax is similar to the now repealed corporate AMT tax as it partially disallows certain deductions, in this case certain payments made to foreign affiliates, and applies a lower rate to the resulting taxable BEAT income.

Analogizing to the AMT guidance in ASC 740, the FASB staff concluded companies subject to BEAT should measure their deferred tax assets and liabilities using the applicable statutory tax rate under the regular tax system and not the BEAT rate. Any incremental BEAT tax should be recognized in the period incurred.

Staff Q&A: Accounting for Global Intangible Low-Taxed Income

The TCJA includes a tax on the excess of a United States shareholder’s total net foreign income over a deemed return on tangible assets. This excess is referred to as global intangible low-tax income (GILTI).

In FASB Staff Q&A No. 5, the FASB staff indicated they do not believe ASC 740 is clear as to the accounting for GILTI, because of this, companies may make a policy election and either account for GILTI as a period cost when incurred, or recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal. When making this policy election, companies must disclose their accounting policy related to GILTI inclusions in accordance with ASC paragraphs 235-10-50-1 through 50-3.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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