Armanino Blog

Will FASB Provide Relief From Reporting Taxes?

by Scott Borgia
February 16, 2018

How will the Tax Cuts and Jobs Act (TCJA) affect your company’s financial statements? That’s a hot topic among CFOs, audit boards and CPAs. The Securities and Exchange Commission (SEC) issued guidance in late December that will help public companies report the effects of the changes. A couple of weeks later, the Financial Accounting Standards Board (FASB) unanimously agreed to follow suit. Here’s what we know so far.

Major tax law change passes 

Under current U.S. Generally Accepted Accounting Principles (GAAP), companies must adjust deferred tax assets and liabilities for the effect of a change in tax laws or tax rates. On the income statement side, the adjustment is included in income from continuing operations. The guidance applies even in situations in which deferred tax liabilities and assets are related to items presented in other comprehensive income (OCI), such as pension adjustments, gains or losses on cash flow hedges, and foreign currency translation adjustments.

Tax law changes happen frequently, but they usually aren’t as significant as those enacted by the TCJA, which is considered the biggest change to the tax code in 30 years. The law was signed by President Trump on December 22, 2017. Because the new law was enacted before year end, calendar-year businesses must incorporate the effects of the changes into their 2017 financials—even though most provisions don’t go into effect until tax years beginning after December 31, 2017. The effects may be difficult to estimate, especially for companies with global operations and those with significant deferred tax assets and liabilities on their balance sheets. 

FASB steps in

The FASB met several times in January to discuss concerns related to income tax reporting. Three major decisions were made:

  1. Private companies and not-for-profit organizations can analogize to the SEC’s Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. This guidance allows companies to use “reasonable estimates” and “provisional amounts” for some line items for taxes when preparing their fourth-quarter and year-end 2017 financial statements. It also explains the types of disclosures that need to be made in the financial statement footnotes.
  2. Taxes paid because of the new “deemed repatriation” tax, which calls for a one-time tax on overseas earnings, don’t have to be discounted.
  3. Alternative minimum tax (AMT) credits that become refundable don’t have to be discounted for amounts refundable.

An FASB Staff Q&A, Whether Private Companies and Not-for-Profit Entities Can Apply SAB 118, clarifies that, even though SEC SABs apply directly to only public companies, a private company or a not-for-profit entity voluntarily applying SAB No. 118 would be deemed in compliance with U.S. GAAP, provided that 1) all relevant aspects of SAB No. 118 are applied in their entirety, including the required disclosures, and 2) a statement that SAB No. 118 has been applied is disclosed as an accounting policy.

Banks and insurers request special assistance 

On January 18, the FASB also issued a proposal to relax a provision in Topic 740, Income Taxes, so the effect of the new corporate income tax rate on future tax payments and credits on items a business records in OCI won’t affect the net income reported on an income statement. Banks and insurance companies that hold large volumes of available-for-sale securities that get recorded in OCI were especially concerned about implementing this provision. They raised alarms to the FASB that using net income to record the effects of the new corporate income tax rate on deferred tax assets and liabilities could have a significant—and misleading—effect on their finances.

Proposed Accounting Standards Update (ASU) No. 2018-210, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income, would require a reclassification from accumulated OCI to retained earnings for the so-called “stranded tax effects” resulting from the reduction in the corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate.

More questions

In addition to the issue raised by bankers and insurers, the FASB has addressed several other questions that it has received about the new tax law and recording its impact in company financial statements. Two particular areas of concern include:

Base erosion antiabuse tax (BEAT). Under the new law, companies must pay the newly enacted BEAT if it’s greater than their expected tax liability. The BEAT is similar to the now-defunct AMT and is designed to be an incremental tax ensuring that a business can never pay less than the statutory rate.

Some groups asked the FASB whether deferred tax assets and liabilities should be measured at the regular tax rate or the lower BEAT tax rate if the business expects to owe the BEAT in future years. The FASB said that, similar to how Topic 740 treats the AMT, no business can predict whether it will always be subject to the BEAT, so the effects of the tax should be recorded in the year it is incurred.

Global intangible low-taxed income (GILTI). The TCJA includes a GILTI provision, which imposes a tax on foreign income in excess of deemed returns on tangible assets of foreign corporations. In general, this income will be effectively taxed at a 10.5% tax rate less foreign tax credits.

Some groups asked the FASB 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 the period in which it is incurred. The FASB concluded that there’s no universal answer. It’s open to different interpretations, depending on a company’s circumstances
These issues aren’t expected to result in standard-setting action from the FASB. Instead, the FASB has posted an informal question-and-answer document on its website.

Coming soon

The FASB plans to act quickly to resolve concerns about how the TCJA will affect financial reporting. It opened Proposed ASU No. 2018-210 for public comment for an unusually short 15-day period, which is the shortest time the FASB’s due process rules allow. FASB staff is also working on additional question-and-answer publications to be published on its website as companies work through the effects of the TCJA throughout 2018.

February 16, 2018

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