FASB Staff Clarifies Certain Financial Reporting Considerations Related to Tax Reform

On January 10, 2018, the Financial Accounting Standards Board (FASB) discussed a number of implementation issues related to the application of US generally accepted accounting standards (GAAP) in accounting for the income tax effects of the Tax Cuts and Jobs Act (TCJA).

The following topics were addressed by FASB staff.

Staff Accounting Bulletin 118 and Nonpublic Entities

Background

On December 22, 2017, SEC staff issued Staff Accounting Bulletin (SAB) 118, which allows SEC registrants to apply a measurement period approach. This applies when a registrant doesn’t have the necessary information available, prepared, or analyzed—including computations—in reasonable detail to complete the accounting under ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was enacted.

To the extent a reasonable estimate for all or a portion of the effects of the law can be made, the registrant initially recognizes provisional amounts. TCJA impacts would then be adjusted in subsequent periods when the registrant obtains, prepares, or analyzes the necessary, additional information that, if known, would have affected the provisional amounts initially recorded.

Question

Can private companies and not-for-profit entities apply the guidance in SAB 118?

FASB Staff Position

Yes, private companies and not-for-profit entities may apply the guidance in SAB 118. The FASB staff affirmed this position in a FASB Staff Q&A.

Accumulated Other Comprehensive Income

Background

US GAAP requires the effect of changes in tax rates and laws be recorded in the income tax provision for continuing operations in the period the law is enacted. As the change in tax law flows through continuing operations, any tax effects initially recorded in other comprehensive income (OCI) won’t reflect the appropriate, updated tax rate. This results in what’s known as stranded amounts in accumulated other comprehensive income (AOCI) related to the tax rate differential.

Question

How should entities treat the stranded tax effects in AOCI?

FASB Staff Position

The FASB added a project to their technical agenda and issued an exposure draft on the treatment of stranded AOCI for public comment. The exposure draft proposes that entities make a one-time reclassification from AOCI to retained earnings for the stranded tax effects resulting from the newly enacted tax rate.

The exposure draft proposes the reclassification be solely related to the effects of the TCJA and isn’t applicable to any previously issued or future tax law changes. The reclassification should be calculated as of the date of enactment. However, it could be recorded in multiple periods if the first reporting period contains provisional amounts, as discussed in the SAB 118 section above.

The exposure draft includes a proposed effective date for all companies. Adoption will be required for fiscal years beginning after December 15, 2018, and for interim periods within that fiscal year. Early adoption is permitted.

Deemed Repatriation Transition Tax Liability

Background

The TCJA requires companies pay tax on any undistributed and previously untaxed post-1986 foreign earnings and profit as a deemed repatriation. The deemed repatriation transition tax liability may be paid over a period of eight years, without any interest on the unpaid portion of the liability.

Question

Should the deemed repatriation transition tax liability be discounted based on the expected timing of payment?

FASB Staff Position

No, the tax liability associated with the deemed repatriation transition tax shouldn’t be discounted.

Alternative Minimum Tax Credits

Background

The TCJA repeals the corporate alternative minimum tax (AMT) regime. It allows corporations to use their AMT credit carryovers in their 2018–2020 tax years to offset regular tax liabilities in those years with any remaining credits being refunded in 2021. This results in full realization of any existing AMT credit carryforward irrespective of future taxable income.

Question

Should the AMT credit carryforwards be discounted based on the expected timing of when they’ll be used or ultimately refunded?

FASB Staff Position

No, the AMT tax credit carryover shouldn’t be discounted regardless of the period in which they’re expected to be used or refunded.

Base-Erosion and Anti-Abuse Tax

Background

The base-erosion and anti-abuse tax (BEAT) is essentially an AMT that was designed to prevent companies from reducing taxable earnings by making payments to foreign affiliates. An entity must pay this tax if it’s greater than its regular tax liability.

The BEAT calculation eliminates the deduction of certain base-erosion payments to related foreign corporations. However, the resulting income is taxed at a lower rate.

Question

Should deferred tax assets (DTAs) and deferred tax liabilities (DTLs) be measured using the BEAT rate when an entity expects to be subject to BEAT? Or should BEAT be recorded as a period cost as incurred?

FASB Staff Position

BEAT shouldn’t be factored in the calculation of DTAs and DTLs. They should instead be recorded at the regular statutory tax rate, and any incremental BEAT should be recorded as a period cost.

Global Intangible Low-Taxed Income

Background

The TCJA imposes a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. This income will generally be taxed at an effective rate of 10.5%.

Question

Should DTAs and DTLs be recognized for temporary differences—including outside basis differences—expected to reverse in future years as GILTI? Or should global intangible low-taxed income (GILTI) be recorded as a period cost as incurred?

FASB Staff Position

Both approaches are allowed.

Companies should make a policy election as to which approach they’ll follow. The FASB staff acknowledged there are additional interpretive issues if GILTI is incorporated into the measurement of deferred taxes but didn’t address them.

FASB’s Next Steps

In addition to the exposure draft for the reclassification of tax effects stranded in AOCI, the FASB staff is expected to release a series of FASB Staff Q&A interpretations related to the TCJA.

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