The short answer is no. When the SEC staff issued Staff Accounting Bulletin (SAB) 118, they did not create an exception permitting companies to hold off on accounting for the tax reform law introduced as the Tax Cuts and Jobs Act (TCJA) for up to one year. Rather, SAB 118 acknowledges that there are situations that an entity acting in good faith might not be able to gather, prepare, and analyze the information necessary to complete the accounting for the TCJA by the time of its first filings after its Dec. 22, 2017 enactment.
SAB 118 introduces the concept of a measurement period for the accounting for the TCJA. The measurement period would work in a similar manner to the measurement period for a business combination. When there are items for which the income tax accounting is incomplete related to the TCJA, a company can have up to one year to complete the accounting with any adjustments being run through the current period. As is the case with a measurement period for a business combination, disclosure about the incomplete accounting is required.
Under ASC Topic 740, Income Taxes, the impact of the TCJA is reflected in financial statements ending on or after Dec. 22, 2017. Due to the short time table to prepare and issue financial statements for Dec. 31, 2017, an entity may not be able to complete all of the information gathering, preparation, or computation to determine the accounting impact of the TCJA. The inability to gather and calculate the financial statement effects may be a particular issue when assessing the transition tax on retained foreign earnings and when assessing the need for a valuation allowance on deferred tax assets.
The SEC staff identified two potential circumstances where measurement may not be complete at the time of a filing:
- Measurement is incomplete, but a reasonable estimate can be made – A provisional amount for all or some of the effects of the TCJA may be available even though all of the information or calculations necessary to complete the measurement are not done. In these circumstances, the registrant should prepare the financial statements using the provisional amounts and make appropriate disclosures.
- Measurement is incomplete and cannot be reasonably estimated – The accounting, or a portion of the accounting, for the TCJA is presented under tax law in effect prior to the TCJA and appropriate disclosure is made because a reasonable estimate cannot be made.
In either of these situations as measurement of the impact of the TCJA is completed the provisional amounts are updated with changes run through the current period income tax expense or benefit.When the accounting for all or a portion of the income tax effect of the TCJA is incomplete, the SEC staff identified the following eight disclosures that should be made:
- Qualitative disclosures of the income tax effects of the TCJA for which the accounting is incomplete;
- Disclosures of items reported as provisional amounts;
- Disclosures of existing current or deferred tax amounts for which the income tax effects of the TCJA have not been completed;
- The reason why the initial accounting is incomplete;
- The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;
- The nature and amount of any measurement period adjustments recognized during the reporting period;
- The effect of measurement period adjustments on the effective tax rate; and
- When the accounting for the income tax effects of the TCJA has been completed.
Companies are expected to act in good faith in gathering the information necessary to account for the TCJA, making computations and, when necessary, reasonable estimates. In many instances, measurement of all of income tax effects of the TCJA will be completed for the first filing after the issuance of the TCJA. When the measurement of the impact of the accounting for all or portion of the income tax effect of the TCJA is complete, that information must be included in the financial statements. If after measurement is completed there is a subsequent discovery that the measurement was incorrect, the new information would be assessed to determine if there are changes in estimates or if the changes were related to the correction of an error.
It's also important for registrants to note that updates were made to the Compliance & Disclosure Interpretation stating that the effect of the remeasurement of the deferred tax assets does not trigger a requirement under 2.06 to file a Form 8-K.
For additional information, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at firstname.lastname@example.org or 816.945.5614.
Published on January 09, 2018 Print