United States

FASB addresses income tax accounting issues arising from the TCJA

INSIGHT ARTICLE  | 

The Financial Accounting Standards Board (FASB) met on January 10, 2018 to discuss issues that constituents have raised with respect to accounting for the effects of the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017. The decisions related to one of the issues discussed by the FASB will be included in a proposed Accounting Standards Update (ASU) with a 15-day comment period. The decisions related to the remaining issues discussed by the FASB will be captured in a question and answer (Q&A) document that will be published as implementation guidance by the FASB staff on the FASB’s website after they receive feedback from the Emerging Issues Task Force at its meeting on January 18, 2018.

This article includes a summary of the decisions reached by the FASB on January 10, 2018. For additional information about the TCJA and the provisions discussed herein, refer to our Tax Alert, Financial Statement Implications of the TCJA.

Issue to be included in forthcoming proposed ASU

Entities would be required to make a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for the effects of the change in the federal tax rate under the TCJA on deferred tax amounts that were originally recorded in other comprehensive income (OCI). Consider a situation in which an entity has a calendar year end and was in the 35 percent tax bracket prior to the TCJA and the 21 percent tax bracket after the TCJA. During 2016, the entity recognized a deferred tax asset of $35 related to a $100 item that was reflected in OCI, for a net effect on OCI of $65. In 2017, the gross amount of this item ($100) remained in AOCI. As a result of the TCJA, the entity reduces the deferred tax asset and recognizes tax expense from continuing operations of $14 (the difference between the original deferred tax asset of $35 and the reduced deferred tax asset of $21). Without the FASB taking any action, the net amount included in AOCI related to the item would remain at $65, which would create a stranded or dangling debit in AOCI of $14. The FASB’s proposal to require the entity to reclassify $14 between retained earnings and AOCI would eliminate the stranded or dangling debit in AOCI.

The effective date for all entities would be fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption would be permitted in financial statements for fiscal years or interim periods that have not been issued or made available for issuance. Entities that file or issue (or make available for issuance) financial statements prior to the release of the final ASU would not be allowed to make the reclassification in those financial statements. The reclassification would be made in a subsequent period, after the final ASU has been issued and applied in accordance with its effective date provisions. The FASB understands the desire to issue the final ASU as quickly as possible, but with issuance of the proposed ASU, a required 15-day comment period, redeliberations and finalization of the guidance yet to come, it is likely that the final ASU will not be issued before early February.

The transition method would be to apply the new guidance to each period in which all or a portion of the effect of the TCJA is recorded. Certain transition disclosures would be required.

Issues to be included in the forthcoming FASB staff implementation Q&A

Private companies would be able to apply the guidance in Staff Accounting Bulletin (SAB) 118, which provides for a measurement-period mechanism for purposes of accounting for the effects of the TCJA that are provisional, or are not able to be reasonably estimated, at the date the financial statements are issued or released. This position is based on a long-standing practice of private companies being allowed to elect the guidance included in SABs even though it is not technically applicable. Under SAB 118, in cases where the entity can make a reasonable estimate of the accounting effects of applying Topic 740, Income Taxes, of the FASB’s Accounting Standards Codification (ASC) to the TCJA, it should record that estimate and make appropriate disclosures. If a reasonable estimate of those effects cannot be made, the entity should not record anything, but should provide appropriate disclosure. There is a measurement period of no more than a year from the TCJA’s enactment date for entities to finalize the estimates and make any necessary adjustments. Any provisional amounts or adjustments to provisional amounts included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.

Neither of the following would be discounted based on the overall and long-standing guidance to not discount tax assets or liabilities in ASC 740:

  • The tax liability on the deemed repatriation of undistributed and previously untaxed post-1986 foreign earnings and profits (which may be paid over an eight-year period without interest imposed on the unpaid portion)
  • The alternative minimum tax (AMT) credits that will be used or ultimately refunded under the TCJA

Regardless of whether an entity expects to owe amounts under the base erosion anti-abuse tax (BEAT) in future years, it would measure its deferred tax assets and liabilities using the regular tax rate and not the BEAT tax rate. This position is based on an analogy to how AMT has been accounted for under ASC 740.

An entity would be able to choose an accounting policy based on either of the following for purposes of reflecting the effects of the global intangible low-tax income (GILTI) provisions of the TCJA:

  • Recognize deferred tax assets and liabilities for basis differences expected to reverse as GILTI in future years, based on an analogy to how Subpart F income is accounted for under ASC 740
  • Recognize the tax on GILTI in the period in which it is incurred, based on an analogy to how AMT has been accounted for under ASC 740

The entity would be required to disclose the accounting policy chosen.

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