Authored by Carrie Small
On Dec. 22, 2017, the president signed into law the Tax Cuts and Jobs Act (TCJA), providing for the most significant overhaul of the U.S. tax code in more than 30 years. With the enactment of tax reform occurring in 2017, companies should expect to see an impact from the new legislation within their financial statements for the calendar year ending Dec. 31, 2017.
All companies will be required to remeasure their existing deferred tax assets (DTAs) or deferred tax liabilities (DTLs) for the impact of the lower, 21 percent, enacted corporate tax rate. There are several other provisions within the tax bill that may need to be considered or even quantified with the filing of 2017 financial statements.
ASC 740, Income Taxes
Accounting Standards Codification 740, Income Taxes, (ASC 740) requires a company to account for the impact of a change in tax law or tax rate in the period of enactment. This is recorded as a discrete item through continuing operations, even if the related deferred item being remeasured was originally established through a financial statement component other than continuing operations (i.e., OCI). This can result in a ‘disproportionate effect’ and can lead to complexities with the tracking of the related tax effects, as well as inconsistencies between the current tax effect and underlying deferred nature of the item.
The Securities and Exchange Commission (SEC) provided guidance on the income tax accounting implications of the TCJA through Staff Accounting Bulletin No. 118 (SAB 118) on the day of enactment. The guidance provides some relief for public companies that may not have the necessary information available to fully comply with the sweeping changes in the tax bill by the issuance of the 2017 financial statements. Generally, a company would be required to record the impact of matters for which the accounting can be completed, such as the remeasurement of existing DTAs / DTLs. For matters for which the underlying information needed to complete the accounting is not fully available or not at all available, a company would record either a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined) or nothing at all. Provisional amounts would then be subject to adjustment during a “measurement period” until the accounting under ASC 740 is complete. Supplemental disclosures should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis that is needed, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in a timely manner.
It is expected that the Financial Accounting Standards Board (FASB) will provide similar guidance after their Jan. 10, 2018 board meeting. The financial reporting effects of the TCJA is on the set agenda, including discussion of the disproportionate tax effects in OCI as a result of the tax law change, the use of SAB 118 by private companies and not-for-profit entities, and the accounting for certain other tax reform related items that could use some clarity.
It is also anticipated that the National Association of Insurance Commissioners (NAIC) will likely follow the guidance of the SEC and FASB, although the timeframe is still unclear.
What to do now
We recommend insurance companies have timely discussions with their tax advisors and audit firms to ensure all aspects of accounting for the TCJA are being considered.
For more information on how tax reform impacts financial reporting, or to learn how Baker Tilly insurance specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.