Summary: ASC 740 requires that companies record certain impacts of tax reform (The Tax Cuts and Jobs Act) in the period in which the reform has been enacted. Certain technical implementation questions have repeatedly arisen since the December 22, 2017 enactment date for those elements of the Act that will require inclusion in soon-to-be-released financial statements. The FASB met on January 10, 2018 to discuss some of those topics and preliminary recommendations.
Reclassification of Stranded Amounts in Other Comprehensive Income (“OCI”)
Currently, ASC 740-10-45-15 requires the effects of tax law changes (including statutory rate changes) to be reported as a component of tax expense in income from continuing operations. This provision also specifically applies to deferred taxes that are initially recorded as a component of OCI. Current ASC 740 guidance prohibits backwards tracing of the effects of items originally recorded to OCI, which, coupled with the requirement to report tax law and rate changes through tax expense, will cause amounts of deferred taxes previously valued at legacy federal tax rates to be stranded in OCI.
Responding to solicited and unsolicited comments from constituents and stakeholders, (including financial institutions and insurance companies), the FASB voted to add a narrow scope project to their agenda to address the accounting for these stranded amounts. Based on conversations during the FASB meeting, anticipate the FASB will issue an exposure draft that will require reclassification from OCI to retained earnings the stranded tax effects solely created from the accounting for the Tax Cuts and Jobs Act (meaning, historical and future tax effects that may have or will create stranded amounts will not be reclassified). Once the exposure draft is issued, anticipate a 15-day comment window. The FASB has also indicated that they plan to include a proposed effective date of December 15, 2018, with an option for early adoption for those financials statements that have not yet been issued.
NOTE: This does not change the guidance that the tax effects of the Tax Cuts and Jobs Act, even for items impacting OCI, must be recorded as a component of tax expense in income from continuing operations.
FDIC will allow banks to reclassify the “stranded AOCI” from retained earnings to AOCI as of December 31, 2017 for call report purposes:
On January 18, 2018, the federal banking regulators issued interagency guidance allowing banks to reclassify the “stranded AOCI” from retained earnings to AOCI as of December 31, 2017 for call report purposes, even though the official FASB pronouncement allowing this has not yet been finalized.
Application of SAB 118 to Private Companies and Not-for-Profit Entities
SEC SAB 118 was issued as guidance for public companies, permitting an election for a company to create a measurement period (akin to ASC 805) to account for the tax effects of the Tax Cuts and Jobs Act. The bulletin provides guidance for how to report the impact of taxes under the Act, when a registrant does not have all the available information in order to properly account for all elements of the Act. The bulletin also offers disclosure guidelines for companies that elect to take advantage of the measurement period.
The question arose as to whether private companies and not-for-profit entities could also follow the elective guidance under SAB 118. The FASB Staff proposed that private companies and not-for-profit entities could adopt the guidance offered under SAB 118, but to do so, a company will need to adopt all relevant provisions and include the appropriate disclosures in its financial statements. Since that meeting, the FASB has published a Staff Q&A document on its website, supporting this position.
Discounting of the Deemed Repatriation Tax
One of the hallmark mechanisms to transition the US taxation system to a territorial system is through the deemed repatriation tax. The tax will be computed based off of amounts from specified dates in 2017, and is payable in eight installments (if an installment period is elected). Taxes payable will then be bifurcated between current and noncurrent liabilities, depending on the installation payment date.
The question arose as to whether it would be appropriate to discount the long-term tax liabilities created by the deemed repatriation tax, pursuant to ASC 835-30. The FASB Staff indicated that they do not believe it is appropriate to discount any deemed repatriation taxes payable, based on existing ASC 740 guidance that prohibits the discounting of deferred taxes (which the FASB Staff indicated should also be applied to this unique tax). Additionally, the Staff indicated that there is likely to be some uncertainty as to the amount payable, since certain underlying elements of the tax are subject to revision and audit. Because the liability is not necessarily a fixed amount, discounting of the long-term tax payable would not be appropriate. The board members agreed with this preliminary position, and additional guidance is anticipated after January 18 on this topic.
Discounting Alternative Minimum Tax (“AMT”) Receivables
With the repeal of corporate AMT, coupled with new refundable nature of AMT credits, many companies will reclassify their AMT credits from deferred tax assets to current or noncurrent taxes receivable, based on anticipated refund timing.
The question arose as to whether it would be appropriate to discount any receivables recorded. The FASB Staff indicated that AMT receivables should not be discounted based on existing ASC 740 guidance that prohibits discounting of deferred taxes. The board members agreed with this preliminary position, and additional guidance is anticipated after January 18 on this topic.
Accounting for the Base Erosion Anti-Abuse Tax (“BEAT”)
The BEAT is a minimum tax that applies to companies meeting certain revenue thresholds and making payments to foreign related companies.
Questions have arisen as to whether the BEAT should be accounted for as a separate, parallel US tax system (since there is no interplay between regular tax and BEAT), or if it should be accounted for as a component of the regular tax system. The FASB Staff indicated that the BEAT should be accounted for as a component of the regular US tax system. Their position is that the BEAT is analogous to AMT, and that accordingly, the tax accounting for BEAT should be based on the framework outlined for accounting for AMT. Accordingly, the Staff believes it is appropriate to account for the BEAT as an income tax expense in the period in which a company is actually subject to it, and that it would not be appropriate for companies to record deferred taxes at the BEAT rates. Board members agreed with this preliminary position, and additional guidance is anticipated after January 18 on this topic.
Accounting for Global Intangible Low-Taxed Income (“GILTI”)
The GILTI provisions operate comparably to existing Subpart F rules, meaning that a US parent entity can be taxed on its share of a subsidiary’s GILTI.
Questions have arisen as to how to appropriately account for GILTI under ASC 740. The FASB Staff described two common alternatives that have been presented by constituents:
- Account for GILTI as a component of tax expense in the period in which a company is subject to it (comparable to BEAT/AMT), or
- Account for the effects of GILTI on deferred taxes, including basis differences, that are expected to reverse as GILTI.
The FASB Staff indicated that they do not believe any existing ASC 740 literature addresses the accounting for GILTI. Accordingly, their position is that either methodology is both reasonable and acceptable at this time. The board agreed with the preliminary position, but also noted that companies should disclose the policy they select to account for GILTI. The board indicated they would monitor the accounting for GILTI as financial statements are published, to evaluate whether future standard setting or guidance will be needed.
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Please contact your Elliott Davis advisor if you have any questions about the takeaways from the January 10 FASB meeting. We will continue to provide timely updates about the Tax Cuts and Jobs Act on ASC 740 as additional guidance from the FASB is released.