Frequently asked questions about tax reform
Financial Reporting Alert 18-1
This alert contains responses to frequently asked questions (FAQs) about how an entity should account for the tax effects of the new tax reform legislation in accordance with ASC 740. Since its initial release on January 3, 2018, this publication has been updated twice to reflect (1) A number of additional FAQs (e.g., a new section on interim considerations), (2) Activities of the FASB and its staff, and (3) Guidance that previously appeared separately in FRAs 18-3 and 18-4. While the answers to the FAQs reflect our views at this time, those views are subject to change on the basis of additional guidance, input received, or further developments in practice. We plan to frequently update the Financial Reporting Alert to reflect developments as they occur and as additional questions surface.
On December 22, 2017, President Trump signed into law the tax legislation commonly known as the Tax Cuts and Jobs Act (the “Act”). Under ASC 740, the effects of new legislation are recognized upon enactment, which (for federal legislation) is the date the president signs a bill into law. Accordingly, recognition of the tax effects of the Act is required in the interim and annual periods that include December 22, 2017.
Shortly after enactment, the SEC staff issued SAB 118, which provides guidance on accounting for the Act’s impact. Under SAB 118, an entity would use something similar to the measurement period in a business combination. That is, an entity would recognize those matters for which the accounting can be completed (“Bucket 1”), as might be the case for the effect of rate changes on deferred tax assets (DTAs) and deferred tax liabilities (DTLs). For matters that have not been completed, the entity would either (1) recognize provisional amounts to the extent that they are reasonably estimable and adjust them over time as more information becomes available (“Bucket 2”) or (2) for any specific income tax effects of the Act for which a reasonable estimate cannot be determined, continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the Act was signed into law — that is, the entity would not adjust current or deferred taxes for those tax effects of the Act until a reasonable estimate can be determined (“Bucket 3”).
i. How do SAB 118 and the need to record “reasonable estimates” interact with the guidance in ASC 740 regarding uncertain tax positions (i.e., FIN 48) with respect to the Act? [Added March 20, 2018]
SAB 118 addresses certain practical problems created by the enactment of a vast amount of new and complex legislation only nine days before December 31, 2017 — the end of a reporting period for most entities. The Act was developed over a very condensed timeframe, and preparers and practitioners had little time to analyze its preliminary or final versions. As a consequence, there may be tax technical matters with respect to the Act for which it is not feasible to prepare a complete “more-likely-than-not” assessment during the enactment period or potentially even in subsequent quarters within the measurement period.
Accordingly, we believe that uncertainties about how the Act should be interpreted may be accounted for provisionally under SAB 118. More specifically, during the one-year measurement period, an entity may account for an uncertain tax technical matter with respect to the Act on the basis of a reasonable estimate of how the Act will ultimately be interpreted. As new information becomes available, an entity would then adjust its provisional estimate until it can complete its more-likely-than-not assessment. It would need to complete that assessment, along with appropriate measurement of the resulting positions, by the end of the measurement period. In a manner consistent with SAB 118, an entity should make a good faith effort to develop reasonable estimates until it prepares a complete more-likely-than-not assessment.
Determining whether a tax technical matter is within the scope of SAB 118 during the one-year measurement period will, of course, depend on the specific facts and circumstances of each individual entity and will require considerable judgment.
FASB ASU and Q&As (updated March 20, 2018)
Since the Act was signed into law, the FASB has issued the following new guidance on accounting for certain aspects of it:
- Staff Q&A (January 2018) stating that entities that are not SEC registrants may apply SAB 118 to financial statements.
- Four staff Q&As (January 2018) outlining the FASB staff’s interpretations of ASC 740 and U.S. GAAP with respect to (1) discounting of the deemed repatriation transition tax and refundable alternative minimum tax (AMT) credit carryforwards, (2) global intangible low-taxed income (GILTI), and (3) the base erosion anti-abuse tax (BEAT). See additional discussion in FAQs 3.2, 7.3, 4.1, and 6.1.
- ASU 2018-02 (February 2018), which addresses industry concerns about applying ASC 740 to certain provisions of the Act. Specifically, some constituents in the banking and insurance industries expressed concerns about the requirement in ASC 740 that the effect of a change in tax laws or rates on DTAs and DTLs be included in income from continuing operations in the reporting period that contains the enactment date of the change. That guidance applies even when the tax effects were initially recognized directly in other comprehensive income (OCI) at the previous rate, resulting in “stranded” amounts in accumulated other comprehensive income (AOCI) related to the income tax rate differential. See additional discussion in FAQ 1.2.
This Financial Reporting Alert (FRA) contains responses to frequently asked questions (FAQs) about how an entity should account for the tax effects of the Act in accordance with ASC 740. While the answers to the FAQs reflect our current views, these views are subject to change on the basis of additional input received or further developments in practice. We plan to continue to update this document to reflect developments as they occur and as additional questions surface. The following is a high-level summary of the updates to this FRA thus far:
- Originally issued on January 3, 2018.
- Updated on January 19, 2018, to address a number of additional FAQs and to reflect the activities of the FASB and its staff.
- Updated on March 20, 2018, to cover a number of additional FAQs (e.g., a new section on interim considerations has been added) and to incorporate guidance that previously appeared separately in FRAs 18-3 and 18-4.
Amended and added FAQs are marked as such in the question line.
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