Previously we had discussed action by the Securities and Exchange Commission to deal with the changes to deferred taxes required by the law known as the Tax Cuts and Jobs Act (see SEC Issues Interpretative Bulletin on Applying ASC 740 in Light of TCJA). The SEC issued Staff Accounting Bulletin No. 118 that provided guidance to public companies on how to deal with issues arising from the difficulties in computing the proper deferred tax adjustments in time to report for December 31, 2017 financial statements.

The Financial Accounting Standards Board met on January 10, 2018 to discuss other implications of TCJA on reporting and measurement for deferred taxes under ASC 740. Ken Tysiac of the Journal of Accountancy posted a report of that meeting on the Journal’s website (“FASB Addresses Financial Reporting Impacts of New Tax Law”, January 10, 2018 [1]).

The board addressed five implementation issues and decided to issue a proposal to address another issue. The Journal of Accountancy reported that FASB will formally communicate the implementation issues via a set of FAQs on its website.

The Board first decided to allow private companies and not-for profits to apply SEC Staff Accounting Bulletin No. 118 to their financial statements. The board will permit this despite the that SEC bulletins are generally no applicable to private companies or not-for-profit organizations. An organization applying the bulletin will also need to comply with the disclosures required under the bulletin.

The board decided that any tax to be due over up to eight years for deemed repatriation should not be discounted, nor should there be discounting of any minimum tax credit refund that a corporation will receive over several years.

The board ruled that, despite the fact that a lower base-erosion and anti-abuse tax (BEAT) might eventually apply to an entity’s income, deferred tax assets and liabilities should be measured at the regular tax rate and not at the potentially lower BEAT rate.

TCJA also imposed a special tax on global intangible low-taxed income (GILTI) in IRC §250. The tax is imposed on foreign income in excess of a deemed rate of return on intangible assets of the foreign corporation.

A question arose about whether deferred tax assets and liabilities should be recognized for basis differences that will eventually reverse related to GILTI income, or if the effects of GILTI should be recognized only the period the tax is actually imposed.

In this case, FASB decided to allow entities to select either method of accounting for this item.

Finally FASB is going to issue an exposure draft with a 15 day comment period to address “stranded tax effects” that exist in accumulated other comprehensive income. The American Bankers Association, among others, had raised concerns about the current treatment, which would cause the changes to flow through net income, would have impacts on both income and regulatory capital.

As was noted in a January 4, 2018 article posted on the ABA Banking Journal website:

In the letter, ABA pointed out that, under current tax accounting, the reduction of deferred tax assets and liabilities are recorded entirely within net income, including those applying to items in accumulated other comprehensive income such as unrealized gains and losses on available for sale securities. As a result, not only are net income and regulatory capital distorted, but this treatment also creates onerous operational burdens to track the related amounts in the future. Since ABA first expressed its concerns to FASB, other trade groups representing insurers have expressed support for the association’s letter.

FASB is proposing to allow a one-time reclassification from accumulated other comprehensive income to retained earnings solely for the difference between the historical 35% federal rate and the new 21% state rate. Any other changes would continue to be treated under current guidance.

The Journal of Accountancy describes the proposed guidance as follows:

The guidance would be applied to each period in which the effect of the Tax Cuts and Jobs Act (or portion thereof) is recorded, which may be retrospectively to the December 2017 enactment date in some cases. If the proposal is approved, entities would disclose the following in the period in which a reclassification adjustment is made:

The nature and reason for the change.
A description of the prior-period information that has been retrospectively adjusted.
The effect of the change on affected financial statement line items.

As this exists at the moment as only a proposed standard, it is subject to change based on the comments and must be finally adopted by the Board before it may be used.

[1] https://www.journalofaccountancy.com/news/2018/jan/fasb-addresses-tax-reform-implications-201818180.html

[2] “FASB to Meet on Tax Reform Accounting Issue Raised by ABA,” ABA Banking Journal Website, https://bankingjournal.aba.com/2018/01/fasb-to-meet-on-tax-reform-accounting-issue-raised-by-aba/, January 4, 2018

[3] Ken Tysiac, “FASB Addresses Financial Reporting Impacts of New Tax Law”, Journal of Accountancy website, https://www.journalofaccountancy.com/news/2018/jan/fasb-addresses-tax-reform-implications-201818180.html, January 10, 2018