10 January 2018 FASB discusses accounting issues arising from tax reform The Financial Accounting Standards Board (FASB or Board) on January 10, 2018, added a narrow-scope project to its standard-setting agenda on the reclassification of certain tax effects stranded in accumulated other comprehensive income (OCI) and discussed other issues that have arisen as companies evaluate the accounting for the Tax Cuts and Jobs Act. At the meeting, the FASB staff provided the Board with its preliminary views on various implementation issues. Companies should monitor developments because any actions by the FASB or FASB staff could affect their implementation efforts. 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 stakeholders have raised questions about other implementation issues. The FASB decided to add a narrow-scope project on the reclassification of certain tax effects stranded in accumulated OCI and instructed the FASB staff to draft an exposure draft that would require the amounts to be reclassified to retained earnings. 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 was 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. The narrow-scope project will address only the reclassification from OCI to retained earnings of stranded amounts resulting from the new corporate tax rate. However, the Board will solicit feedback on whether to pursue a separate research project on the broader issue of backward tracing. Recognizing the need for timely issuance and application of guidance in this area, the Board decided that stakeholders will have 15 days to submit comments once it proposes new guidance. The Board also decided that the guidance would be effective for all entities in fiscal years beginning after December 15, 2018 and interim periods within those years, and transition disclosures would be required in the period of adoption. The Board said early adoption would be permitted. 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 about the applicability of this guidance to nonpublic US GAAP entities. The FASB staff said the one-time transition tax liability should not be discounted. ASC 740 prohibits the discounting of deferred taxes, and the staff said that guidance should be applied to this liability. Additionally, the FASB staff said the one-time transition tax is not in the scope of ASC 835.4 The staff explained that this liability did not result from a bargained transaction. Instead, the staff said, it represents an amount imposed on a company by the government, and the amount is subject to estimation and the resolution of uncertain tax positions and therefore is not fixed. Board members said they agreed with this interpretation of ASC 740 and support the staff's recommendation. 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. The FASB staff said AMT credits that become refundable should not be discounted, regardless of whether the credits are classified as receivables or deferred tax assets. The FASB staff explained that these credits represent unique amounts that will be used and should be accounted for under ASC 740, which prohibits the discounting of deferred taxes. The FASB staff said that, similar to the one-time transition tax liability, these credits are not in the scope of ASC 835. Additionally, AMT credits may be recognized on the financial statements but not on the tax return due to the uncertainty of the tax position and these amounts would not be discounted. The FASB staff said its recommendation is that it is inappropriate to discount the related receivable or deferred tax asset. Board members said they agreed with this interpretation of ASC 740 and support the staff's recommendation. 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%). The FASB staff discussed the questions raised by some stakeholders about whether deferred tax assets and liabilities should be measured at the regular tax rate or the lower BEAT rate if the taxpayer expects to owe BEAT in future years. ASC 740 currently provides guidance on what rate to use to measure deferred tax assets and liabilities when an entity owes an AMT. The Board agreed that the framework for accounting for AMT is an appropriate analogy for the new BEAT system, because both represent an incremental tax. The staff recommended that a company should analogize to the AMT guidance and use the regular tax rate (i.e., the new 21% rate) to measure its temporary differences. Board members said they agreed with this interpretation of ASC 740 and support the staff's recommendation. 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. The FASB staff presented these alternatives to the Board, noting that both received support from different stakeholders. The FASB staff and the Board acknowledged that it is not clear how current guidance under ASC 740 applies to GILTI, leading to reasonable arguments to support both interpretations. Board members said they agreed with the staff's recommendation that companies should make a policy election to account for the effects of GILTI either as a component of income tax expense in the future period the tax arises or as a component of deferred taxes on the related investments, and include appropriate disclosures in their financial statements. The Board also asked the FASB staff to evaluate this accounting as practice develops so it can consider whether future standard setting is necessary.
1 See our Technical Line, A closer look at the accounting for the effects of the Tax Cuts and Jobs Act. 3 See our Technical Line, SEC staff provides guidance on accounting for the effects of US tax reform. Document ID: 2018-0064 | |||||||||||||||||||||||||||||||||
