18 January 2018 FASB staff to publish its views on tax reform accounting issues, FASB proposes guidance on related issue The Financial Accounting Standards Board (FASB or Board) and the Emerging Issues Task Force (EITF), on January 18, 2018, discussed the FASB staff's views on four issues that have arisen as companies evaluate the accounting for the Tax Cuts and Jobs Act. At the meeting, EITF members thanked the staff for acting quickly to add clarity. The FASB staff said it will post the staff's question and answer (Q&A) documents on the Implementation Portal on the FASB website shortly. As expected, the FASB also issued a proposal that would require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the new federal corporate income tax rate. Under the proposal, entities would be able to early adopt the guidance in the first interim or annual period for which financial statements have not been issued and apply it retrospectively to each period in which the effect of the change in federal income tax rate in the Act is recognized. Comments are due by February 2, 2018. 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) 1182 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 staff provided an overview of four implementation issues and its recommendations on how to address them using the framework of current US GAAP. Members of the Board and the EITF were supportive of the staff's recommendations. 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. Accounting Standards Codification (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. The FASB staff said in its draft Q&A that the one-time transition tax liability should not be discounted. ASC 740 prohibits the discounting of deferred taxes, and the staff believes that guidance should be applied to this liability, due to the unique nature of the transition tax. Additionally, the FASB staff said the one-time transition tax is not in the scope of ASC 8354 because this liability did not result from a bargained transaction. Instead, 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. The staff said the scope exception in ASC 835-30-15-3(e) for transactions where interest rates are affected by tax attributes or legal restrictions would apply. 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 about whether it is appropriate to discount a receivable for amounts refundable. The FASB staff said in its draft Q&A that 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 said 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 these credits, like the one-time transition tax liability, 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. Further, the staff said companies should disclose the amounts and expiration dates for AMT credit carryforwards, regardless of whether they are presented as a deferred tax asset that would need to be disclosed under current US GAAP5 or as a receivable, because these disclosures would provide information that would help investors evaluate the amounts to be used or refunded. 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%). ASC 7406 currently provides guidance on what rate to use to measure deferred tax assets and liabilities when an entity owes an AMT. The staff said in its draft Q&A that the framework for accounting for AMT is an appropriate analogy for the new BEAT system because both represent an incremental tax. The staff said 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. Using the lower BEAT rate to measure temporary differences would not reflect the amount an entity would ultimately pay because the BEAT would exceed the regular tax. Further, in order to consider BEAT in the calculation of deferred taxes, a company would have to anticipate being subject to BEAT in future years. While a company may expect to be subject to BEAT for the foreseeable future, the FASB staff said companies could not predict whether they will always be subject to BEAT, just like they couldn't predict whether they would always be subject to the AMT. The staff also said an entity would not need to evaluate the effect of potentially paying the BEAT in future years on the realization of deferred tax assets under the regular tax system. 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 the new tax should be reflected as part of deferred taxes on the related investments. The FASB staff said in its draft Q&A that ASC 740 does not provide clear guidance about how to account for GILTI and that reasonable arguments can be made to support both interpretations. Supporters of treating GILTI as a period cost argue that the GILTI calculation is contingent upon future events, which could not be anticipated in the current period, and GILTI therefore shouldn't be included in deferred taxes. Most notably, GILTI is aggregated across all foreign corporations, so it is difficult to know how basis differences will ultimately offset. Supporters of reflecting GILTI as part of deferred taxes analogize to the guidance on Subpart F income. They say that, like Subpart F income, GILTI is included in US taxable income upon the reversal of basis differences. Thus, supporters believe companies should recognize deferred tax assets and liabilities for those existing basis differences. The staff believes companies should make an accounting 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 FASB staff will evaluate accounting related to GILTI as practice develops so it can consider whether future standard setting is necessary and provide an update to the Board later this year. — For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting 3 See Tax Alert 2018-0021 Document ID: 2018-0129 |
