The FASB met Wednesday, Jan. 10, 2018, and discussed how companies should account for the effects of the new tax law, introduced as H.R. 1 (Tax Cuts and Jobs Act). The discussion addressed six different financial reporting issues related to the new tax law and has already resulted in the issuance of a FASB Staff Q&A.

Backwards Tracing

U.S. Generally Accepted Accounting Principles (GAAP) requires that the impact of a change in tax law be recognized as a discrete item in the period of enactment. So, for instance, when the president signs a law decreasing the federal tax rate companies recognize the impact of the rate change on their deferred taxes in the reporting period that the law is signed through current period income tax expense (benefit).

This method of recognition results in a "stranded tax effect" in accumulated other comprehensive income (AOCI). The stranded tax effect is the difference between the amount of income tax previously recognized in other comprehensive income (OCI), which would have been at a 35 percent rate, and the amount of the change in the deferred tax asset (DTA) or liability (DTL) associated with that item in AOCI recognized in current period earnings, i.e. the reduction of the DTA/DTL down to a 21 percent rate for C corporations. Absent action from the Board, the stranded tax effect is only released when the underlying item is disposed, liquidated or terminated, thus triggering recognition in current income.

Stakeholders raised concerns that the stranded tax effect is confusing for financial statement users and could have a negative effect on capital requirements. The Board responded to these concerns by deciding to propose an accounting standards update that would require backwards tracing for items in AOCI for the recognition of the tax rate change in the new tax law. Citing the need for quick action, the Board will include in its proposal that the update would allow for early adoption for financial statements not yet issued or available for issuance upon completion of the final standard, permit early adoption in an interim period, and will include only a 15-day comment period once the exposure draft is issued (the shortest allowed). The proposal is also expected to require retrospective application.

Important to note is that the tentative decisions of the Board will not permit backwards tracing for stranded tax effects related to previous or future changes in tax law. Companies with previous stranded tax effects, which may have occurred from changes in State income tax rates, would continue to carryforward those amounts in AOCI pending the results of a broader research project to be conducted by the Board.

Staff Accounting Bulletin (SAB) 118

The SEC staff issued SAB 118, which describes an interpretation of US GAAP that permits a measurement period of up to one year for recognizing the effects of the changes in the new tax law similar to the measurement period for business combinations. The use of the measurement period is intended for those Companies that after a good faith effort find that it is not possible to obtain the necessary information, prepare, or analyze the effects of the new tax law in reasonable detail to complete the measurement as required by US GAAP.

The FASB discussed whether private companies and not-for-profit entities could adopt a policy to follow SAB 118 and concluded that consistent with the longstanding practice of private companies electing to apply SABs a non-registrant can adopt SAB 118 and still be in compliance with GAAP. In the resulting Staff Q&A the FASB staff emphasized that a private company or not-for-profit electing to apply SAB 118 should adopt all provisions in SAB 118, including the incremental disclosure requirements. We believe many private companies will find the provisions of SAB 118 helpful when preparing financial statements for periods ended Dec. 31, 2017.

Alternative Minimum Tax (AMT) Credit Carryforwards

Corporate AMT is eliminated under the new tax law and existing AMT credits become refundable in future years. Many have asked whether the expected long-term portion of the refundable credits should be discounted for the effect of interest. The FASB discussion indicated general agreement that the noncurrent portion of AMT credits should not be discounted.

Tax on the Deemed Repatriation of Foreign Earnings

In order to transition the US to a territorial tax system the new tax law creates a one-time tax on unrepatriated foreign earnings of controlled foreign corporations (CFC) and foreign corporations with a 10 percent or greater US corporate ownership. The tax is measured based on 2017 unrepatriated foreign earnings, but is payable over eight years. As with AMT credits, the FASB discussion indicated that long-term payables related to the deemed repatriation tax should not be discounted for the effect of interest.

Base Erosion Anti-Abuse Tax (BEAT)

BEAT functions similar to AMT, except it is computed based on deductions associated with the transfer of earnings to foreign jurisdictions. It can be viewed as an attempt to prevent multi-national corporations from manipulating where earnings are taxed. Questions arose as to whether it should be accounted for similar to AMT, where it is accounted for when incurred, or if expectations about paying BEAT should be included in the computation of the tax rate used to compute deferred taxes. The FASB discussion concluded that even though the paying of BEAT does not create credit carryforwards, it was most akin to an alternative tax and should be accounted for in the same manner as AMT. As a result, entities that may be subject to BEAT should not consider BEAT when determining the tax rate to apply when computing deferred taxes.

Global Intangible Low-Taxed Income (GILTI)

The new tax law created GILTI, which can be thought of as an anti-abuse provision that is designed to tax excessive returns earned in foreign jurisdiction. The computation of GILTI for tax compliance will itself be a complex and difficult exercise, but questions were also raised about how GILTI should be accounted for in financial reporting. When the Board discussed the topic, it indicated that GILTI functions similar to how the tax for Subpart F income functions and should be thought of in similar terms. This results in companies needing to apply judgement to assess whether it is appropriate to include the effects of GILTI when computing deferred taxes or whether GILTI should be excluded from deferred taxes and accounted for only when incurred. The Board intends to continue to research and observe practice related to GILTI and may re-discuss the accounting for GILTI in the future.

There are numerous changes contained in the new tax law that must be assessed when preparing calculations for income tax for financial reporting purposes, stay tuned for additional information and discussion of these topics and more.

For more information, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at mwiniarski@cbiz.com.

Published on January 16, 2018 Print