Authored by: Mary Miske
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. Fiscal year-end institutions should consider the impact of blended tax rates and the timing of the reversal of temporary differences when remeasuring their DTAs/DTLs for their first fiscal year ending after Dec. 31, 2017. Institutions should also consider whether changes to their assessment as to the realizability of their DTA or whether a valuation allowance is required as a result of the tax law changes. Particular attention should be paid to the timing of the reversal of temporary differences and any limits as to the utilization of net operating losses allowed to offset reversing taxable temporary differences.
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., the tax effects of unrealized gains and losses that generally are recorded through other comprehensive income (OCI)). This can result in a ‘disproportionate effect’ that is stranded in OCI 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.
On Jan. 10, 2018, the Financial Accounting Standards Board (FASB) voted to proceed with issuing an exposure draft that would require a one-time reclassification for the stranded tax effects in OCI as a result of adjustments to DTAs/DTLs for the newly enacted corporate tax rate. The exposure draft will:
“…require a one-time reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted corporate tax rate. The amount of the reclassification would be the difference between the 35 percent historical corporate tax rate and the newly enacted 21 percent corporate tax rate.”
The proposed effective date would be for fiscal years beginning after Dec. 15, 2018 and for interim periods within that fiscal year. The exposure draft will also propose to allow early adoption for unissued financial statements if the final standard update is available before the financial statement issuance. This would allow filers to potentially apply the interpretation to their Dec. 31, 2017 financial statements, if they are not issued before the finalization of the interpretation. Alternatively, early adoption of the interpretation for the first quarter financial statements (with retrospective application) may still provide relief from tracking stranded amounts subsequent to Dec. 31, 2017.
It is anticipated that the board may issue the exposure draft the week of Jan. 15, 2018 and must allow a minimum 15-day comment period. Therefore, the potential board vote is not anticipated until at least the first week of February.
It is important to note that the anticipated exposure draft relates solely to the stranded tax effects in OCI as a result of the newly enacted corporate rate and does not address other backwards tracing issues at this time.
The board also determined that guidance will be provided allowing private companies to elect to apply the guidance under SEC Staff Accounting Bulletin (SAB) 118 (see discussion below).
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.
What to do now
We recommend financial institutions 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 this topic, or to learn how Baker Tilly financial institutions 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.