FASB, SEC and NAIC release additional guidance for insurance organizations on accounting for impacts of tax reform

Authored by Carrie Small

To aid insurance organizations in understanding the implementation of certain affects from tax reform, regulatory bodies have begun to release guidance and clarifications. The Financial Accounting Standards Board (FASB) released a proposed Accounting Standards Update (ASU) related to reclassification of other comprehensive income (OCI), the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) 118 related to accounting and disclosures, and the National Association of Insurance Commissioners (NAIC) released several pieces of guidance applicable to insurance organizations.

FASB exposure draft: Regarding stranded tax effects within other comprehensive income (OCI)

On Jan. 18, 2018, the FASB released an exposure draft, Proposed Accounting Standards Update, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, related to the reclassification of certain tax effects from accumulated other comprehensive income (AOCI). The exposure draft is in response to unsolicited comment letters from the banking and insurance industries about a narrow-scope financial reporting issue arising from the adoption of tax reform. The FASB issued the exposure draft to solicit public comment on proposed changes to Topic 220 of the FASB Accounting Standards Codification (ASC) with the comment period ending Feb. 2, 2018.

Deferred tax assets (DTAs) and deferred tax liabilities (DTLs)

On Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA or the Act) reduced the corporate federal income tax rate to 21 percent. Currently, generally accepted accounting principles (GAAP) requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates in the reporting period that includes the enactment date. The tax effect of the rate change is included in income from continuing operations even when the deferred taxes were originally recorded in OCI. Thus, AOCI includes the deferred taxes recorded at the historical tax rate and does not reflect the adjustments made to the deferred tax assets or liabilities for the newly enacted tax rate of 21 percent. The exposure draft refers to this difference as stranded tax effects.

Reclassification

The proposed ASU would require a reclassification from AOCI to retained earnings to eliminate the stranded tax effects from the adoption of the newly enacted federal corporate tax rate as a result of the TCJA. The amount of the reclassification is calculated as the difference between the amount initially charged to OCI at the time of the previously enacted tax rate that remains in AOCI and the amount that would have been charged using the newly enacted tax rate, excluding any valuation allowance previously charged to income. It is important to note that the proposed ASU only applies to the stranded tax effects resulting from the enactment of the TCJA and it does not address the current prohibition in GAAP on backwards tracing which resulted in prior stranded tax effects.

The proposed ASU would be effective for fiscal years beginning after Dec. 15, 2018 and interim periods within those fiscal years, with early adoption permitted.

SEC Staff Accounting Bulletin (SAB) 118: Accounting and disclosures for impact of tax reform

Significant concerns were raised by companies regarding the enactment date of the TCJA and the limited timeframe available to accurately determine the impact of the tax changes within their annual and quarterly reports filed with the SEC. To help companies address the challenges arising out of the magnitude of the changes in the TCJA, the staff from the Office of the Chief Accountant and Corp Fin released SAB 118 on Dec. 22, 2017 to provide guidance on accounting and disclosures for the impact of TCJA.

Incomplete tax effects

Under SAB 118, for those tax effects that are incomplete (i.e., the company did not have adequate time to prepare or analyze the tax effects in reasonable detail), the company would report a provisional amount based upon a reasonable estimate. The provisional amount would be subject to adjustment during the measurement period, not to exceed one year. The provisional amount, estimate, should be recorded in the first reporting period in which one is determined. The staff believes it would be inappropriate to exclude a reasonable estimate if one is determined.

If the company does not have the information available, prepared or analyzed that is necessary to make a reasonable estimate, the staff does not expect the company to include a provisional amount, and, in that case, the company “should continue to apply ASC Topic 740 (e.g., when recognizing and measuring current and deferred taxes) based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. That is, the staff does not believe an entity should adjust its current or deferred taxes for those tax effects of the Act until a reasonable estimate can be determined.”

Disclosures

SAB 118 also describes the supplemental disclosures that should be included in the financial statements where the accounting under ASC Topic 740 is incomplete, such as the reasons why the accounting is incomplete and the additional information needed. More specifically, the supplemental disclosures should describe the following:

  • Qualitative disclosures of the income tax effects of the TCJA for which the accounting is incomplete;
  • Disclosures of items reported as provisional amounts;
  • Disclosures of existing current or deferred tax amounts for which the income tax effects of the TCJA have not been completed;
  • The reason why the initial accounting is incomplete;
  • The additional information that is needed to be obtained, prepared or analyzed in order to complete the accounting requirements under ASC Topic 740;
  • The nature and amount of any measurement period adjustments recognized during the reporting period;
  • The effect of measurement period adjustments on the effective tax rate; and
  • When the accounting for the income tax effects of the TCJA has been completed.

SAB 118 only applies to the accounting and disclosures of the TCJA.

Private companies and not-for-profit organizations

Can private companies apply SAB 118? Earlier this month, the FASB released a Q&A confirming SAB 118 may be used by private companies and not-for-profit entities. The Q&A explains that based upon the longstanding practice of private companies electing to apply SABs, the FASB staff would not object to private companies and not-for-profit entities applying SAB 118. If a private company or not-for-profit entity applies SAB 118, they would be in compliance with GAAP.

The FASB staff believes, however, that if a private company or a not-for-profit entity applies SAB 118, it should apply all relevant aspects of the SAB in its entirety. This would include the disclosures. The FASB staff also believes a private company or a not-for-profit entity that applies SAB 118 should disclose its accounting policy of applying SAB 118.

SAB 118 application for Statutory Accounting (NAIC interpretation)

On Jan. 8, 2018, the Chair of the Statutory Accounting Principles Working Group released a memo to the Chief Financial Regulators recognizing that insurers may not be able to complete their analysis and calculation of the TCJA within the 2017 statutory filings. The memo concludes, consistent with the SAB, and general guidance for estimates under statutory accounting, insurers should report reasonable estimates where determinable. If a reasonable estimate cannot be determined, an insurer should continue to apply existing accounting guidance until an estimate may be calculated.

NAIC Form A: Key impacts of tax reform

On Jan. 10, 2018, the Statutory Accounting Principles (E) Working Group (SAPWG) exposed Form A, agenda item 2018-01, to consider the impact of tax reform on Statement of Statutory Accounting Principles No. 101 – Income Taxes (SSAP No. 101). The agenda item identified the following key items that may be impacted by the TCJA:

  • Reduction of the corporate federal income tax rate from 35 percent to 21 percent, which will reduce future current federal income taxes and reduce gross DTAs and DTLs as of the enactment date.
  • Elimination of the net operating loss carryback provisions for life entities only; non-life entities are still able to carry net operating losses back two years. The ability for both life and non-life entities to carry back capital losses three years still remains.
  • Modification of the carryforward provisions for life entities from 20 succeeding taxable years to an indefinite period, limited to 80 percent of taxable income. The net operating loss carryforward period for non-life entities remains at 20 succeeding taxable years with no limitation.
  • Repeal of the corporate alternative minimum tax (AMT), with transitional provisions for recovery of any AMT credit carryforwards available as of Dec. 31, 2017.

Analysis of 2016 deferred tax data

The NAIC staff conducted an analysis of the deferred tax asset reported in Note 9 of the 2016 statutory financial statements amid concerns the life industry would be negatively impacted under paragraph 11.a. of the admissibility calculation with the elimination of net operating loss carryback provisions under the TCJA. It was found that the total adjusted gross deferred tax assets admitted from carrybacks and carryforwards in 2016 was less than or equal to 15 percent of capital and surplus for 97 percent of entities which reported an amount in the DTA footnote. As such, the NAIC staff presumes the changes to the carryback guidance under paragraph 11.a. for net operating losses “will have no impact on the amount of DTAs permitted to be admitted.” The NAIC Staff Summary Conclusion was that the change in the federal income tax code is not expected to have a significant impact on the admittance of DTAs, therefore they do not recommend revisions to the SSAP No. 101 admissibility concepts. Similarly, they do not recommend any revisions to extend the realization period or percentage of adjusted capital and surplus for admitting DTAs.

Recording the impact of tax rate changes

The agenda item discusses current guidance within SSAP No. 101 and SSAP No. 72 (Surplus and Quasi-Reorganizations) on how changes in DTAs and DTLs, including changes attributable to tax rates, should be recognized. The guidance is identical in both SSAPs and indicates these changes should be recognized as a separate component of gains and losses in unassigned funds (surplus). The agenda item states further clarification is provided through guidance in the annual statement instructions which identifies the change in net deferred income tax, excluding changes in nonadmission, is reported on line 26 for property and casualty entities, and line 40 for life entities in the Summary of Operations.

NAIC staff recommendations

The proposed revisions to the guidance under SSAP No. 101, as well as the SSAP No. 101 Exhibit A Implementation Questions and Answers (Q&A), are included within Form A. The proposals also include new footnotes within SSAP No. 101 to further explain the tax provisions of the TCJA. NAIC staff recommends a detailed review of the Q&A separate from this agenda item to ensure the examples are still relevant and beneficial in applying the guidance under SSAP No. 101. The current proposals for the Q&A are limited to updating references to IRS tax carryback provisions and to update the tax rate from 35 percent to 21 percent as applicable.

The NAIC staff also recommended that the SAPWG move this agenda item to the active listing, classified as nonsubstantive, and expose nonsubstantive revisions to SSAP No. 101 to update the guidance for the effects of the TCJA. They further recommended the SAPWG send a referral to the Capital Adequacy (E) Task Force to provide notice of the exposure and a summary of the tax changes. The Task Force will consider whether the change in the federal tax rate should be reflected in the tax factors for Life Risk-Based Capital calculations. The comment period for agenda item 2018-01 ends on Feb. 23, 2018. The exposure draft is available on the SAPWG website.

Continued guidance likely

As issues and questions arise, additional guidance from regulatory bodies is highly likely. We recommend you consult with your Baker Tilly tax and accounting advisors to understand all of the implications for your organization.

For more information on the accounting implications of tax reform on 2017 financial reporting and beyond, or to learn how Baker Tilly professionals 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.