Armanino Blog

Reporting the Effects of Tax Reform

by Nick Gibbons
January 22, 2019

The Financial Accounting Standards Board (FASB) continues to monitor how companies and their auditors are tackling the financial reporting ramifications of the major new provisions of the Tax Cuts and Jobs Act (TCJA). For now, no new guidance is in the works, though some uncertainty remains regarding the global intangible low-taxed income (GILTI) regime, the base erosion and antiabuse tax (BEAT) and realization of deferred tax assets.

New tax rules

Signed into law on December 22, 2017, the TCJA ushered in some of the biggest changes to federal tax law in decades. Provisions that are expected to have major effects on businesses include:

  • Replacement of graduated corporate income tax rates ranging from 15% to 35% with a flat 21% rate,
  • Repeal of the corporate alternative minimum tax (AMT),
  • A new 20% deduction for qualified business income for so-called “pass-through” entities,
  • Expansion of bonus depreciation and the first-year Section 179 expense deduction,
  • Increased annual gross-receipts thresholds for eligibility to use certain simplified tax accounting methods,
  • Elimination of the Section 199 deduction,
  • Repeal of the earnings stripping rules,
  • New limits on interest expense deductions, with several exceptions, and
  • New limits on net operating loss (NOL) deductions.

The TCJA also introduced the GILTI regime, which imposes a tax on foreign income in excess of the deemed returns on the tangible assets of foreign corporations. In addition, it created the BEAT, which companies must pay if it is greater than their expected tax liability.

FASB response

In January 2018, the FASB scrambled to address some of the most pressing questions about the new tax law. The FASB’s website featured a Q&A document that covered queries about the BEAT and GILTI. The document clarified that companies shouldn’t discount the liability on the deemed repatriation of earnings or AMT credits that become refundable.

For the most part, FASB research staff have found that companies and accountants have figured out the financial reporting implications of the tax law change. But many are awaiting guidance or updates from the IRS. In addition, questions about accounting for GILTI persist.

For GILTI, the FASB received inquiries on whether deferred tax assets and liabilities should be recognized for basis differences expected to reverse as GILTI in future years, or if the tax on GILTI should be included in tax expense in the period in which it’s incurred. The FASB’s Q&A document indicates that FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes, could allow either interpretation, depending on the facts and circumstances.

Lingering questions

Many businesses are also unsure when to realize deferred tax assets from NOLs. Under one view, a business would follow the tax law ordering rules to determine whether existing deferred tax assets are expected to be realized.

Under a second interpretation, a business would apply what the FASB calls a “with-and-without approach” to determine whether the deferred tax asset would be realized. This means the business would compare what it expects its tax expense to be after using the NOL with what it expects its tax expense to be without using the NOL.

“The staff concluded [ASC Topic 740] is not clear and nothing would preclude them from applying either approach,” FASB fellow Jason Bond said.

Stakeholders also asked about a method, or framework, for how to recognize deferred tax assets and liabilities for the basis differences expected to affect the amount of GILTI inclusion upon reversal.

“The FASB concluded the framework is not inconsistent with the guidance,” a FASB research staff member said. “The framework could be one acceptable approach for recognizing deferred taxes on GILTI.”

Staying the course

The FASB will continue to monitor income tax reporting under the TCJA. The door remains open to take action in the future, if necessary, particularly on accounting for and disclosing the effects of the foreign tax provisions.

Tax disclosures 2.0

In November 2018, nearly a year after the TCJA was passed, the Financial Accounting Standards Board (FASB) reviewed with fresh eyes Proposed Accounting Standards Update (ASU) No. 2016-270, Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes.

Released in July 2016, ASU No. 2016-270 was intended to address investor and analyst complaints that the disclosures in Accounting Standards Codification (ASC) Topic 740, Income Taxes, leave investors with scant information about what could be significant liabilities.

The proposal also attempted to add new disclosures about tax obligations for money made overseas. Under the proposal, businesses would have been required to:

  • Separate foreign and domestic taxes,
  • Describe enacted changes in tax law,
  • Explain circumstances that cause a change in the assertion about the indefinite reinvestment of undistributed foreign earnings, and
  • Disclose the aggregate of cash, cash equivalents and marketable securities held by foreign subsidiaries.

Publicly traded businesses would have had to provide extra information, including the total amount of unrecognized tax benefits that offset the deferred tax assets for carryforwards. They also would have had to disclose the line items in the financial statement in which the unrecognized tax benefits are presented and the related amounts of these benefits.

The project was put on hold as Congress deliberated on major changes to the tax code. Now the FASB has found that some points in the proposal are no longer relevant. So, the FASB has agreed to draw up and issue a new proposal in the coming months.

Meanwhile, members of the Investor Advisory Committee (IAC) recently told the FASB that detailed tax information was critical for their analyses of companies’ financial health. They especially want to know more about what companies pay to domestic vs. foreign tax authorities — not just what their effective tax rates are.

“From the preparer side, the actual cost to provide this additional information is not necessarily material, but the value that it provides to investors when reviewing financials can be hugely material,” IAC member Matt Schecter said. “This data can help to determine, effectively, the cash taxes and effective tax cash rate that we can use to model cash flows going forward.”

January 22, 2019

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