This Tax Alert is a follow-on to yesterday's Breaking Tax News Bulletin, with one correction: the FASB has not yet announced it will issue guidance, but will be reviewing the issues at next week's January 10, 2018 meeting to determine whether or not guidance will be issued.  Please continue reading for the issues the FASB intends to address. 

The Financial Accounting Standards Board (FASB or Board) said that it will discuss issues that have arisen as companies evaluate the accounting for the effects of the Tax Cuts and Jobs Act at its meeting on January 10, 2018.

At that meeting, the Board will decide whether to add a narrow-scope project on the reclassification of certain tax effects stranded in accumulated other comprehensive income (OCI), and the staff will provide the Board with an update on implementation issues related to the Tax Cuts and Jobs Act. Companies should monitor developments because any actions by the FASB or FASB staff could affect their implementation efforts.

Background

The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, ¹ is the most significant change in US tax law in the last 30 years. The FASB has been performing outreach with stakeholders to understand the related accounting issues. While the relief provided by the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin (SAB) 118 ² extends the timeline for completing the accounting for the effects of the Act in the financial statements,³ several issues have arisen in practice.

Key considerations

The FASB will discuss at its January 10, 2018 meeting whether to add a narrow-scope project on the reclassification of certain tax effects stranded in accumulated other comprehensive income.

Under Accounting Standards Codification (ASC) 740-10-45-15, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of tax expense related to continuing operations for the period in which the law is enacted, even if the assets and liabilities related to items of accumulated other comprehensive income. In other words, backward tracing of the income tax effect of items originally recognized through OCI is prohibited. Stakeholders, particularly those with material amounts of unrealized losses on available-for-sale securities, reached out to the FASB with concerns about this accounting treatment. We understand that the narrow-scope project the FASB is considering would address only whether it may be appropriate for entities to reclassify stranded amounts from OCI to retained earnings.

In addition, the staff will provide an overview of certain implementation issues. We’ve described the questions that have arisen in practice related to those issues below.

Whether to discount the tax liability on the deemed repatriation

The Act subjects certain foreign earnings on which US income tax is currently deferred to a one-time transition tax and permits a company to pay that tax over eight years on an interest-free basis. ASC 740-10 prohibits the discounting of deferred taxes but does not address the discounting of long-term income taxes payable.

Questions have arisen about whether the guidance in ASC 835-30, Interest — Imputation of Interest, applies to long-term income taxes payable. If it does, the guidance would require companies to discount the transition tax payable. Further, if discounting were applicable, a question would arise about how to classify the periodic interest expense (e.g., consistent with the classification of interest on tax uncertainties).

Whether to discount AMT credits that become refundable

The Act eliminates the alternative minimum tax (AMT), but any remaining carryforwards can be used to offset future taxable income and/or can be refundable over the next several years. The amount that will offset future taxable income and the amount that will be refundable are based on a percentage of taxable income generated in future years. Questions have arisen as to whether it is appropriate to discount a receivable for amounts refundable and how to classify the related accretion.

Accounting for the base erosion anti-abuse tax

Companies that meet certain thresholds will be required to pay a new minimum base erosion anti-abuse tax (BEAT), which subjects certain payments made by a US company to a related foreign company to additional taxes.

Questions have arisen about whether this tax should be considered as part of the regular US tax system, which would require the effects of the BEAT to be included in income tax in the period the tax arises, or as a separate parallel tax regime. If the tax is determined to be part of a separate parallel tax regime, a question would arise about the appropriate tax rate to be applied in measuring certain US deferred taxes by entities subject to the BEAT regime (i.e., the new US corporate tax rate of 21% or the BEAT rate of 10%).

Accounting for global intangible low-taxed income

The Act subjects a US parent to current tax on its “global intangible low-taxed income” or GILTI. GILTI is aggregated net income for the controlled foreign corporations of a US shareholder. Questions have arisen about whether companies should include the effects of this new tax in income tax in the future period the tax arises or whether it should be reflected as part of deferred taxes on the related investments.

Use of SAB 118 by private companies and not-for-profit entities

The SEC staff issued SAB 118 to provide guidance for companies that have not completed their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment, which is the period that includes December 22, 2017. Questions have arisen as to the applicability of this guidance to nonpublic US GAAP entities.

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ENDNOTES

¹ See Tax Alert 2017-2134.

² SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

³ See Tax Alert 2018-0021.