At their January 10th Board meeting, the FASB discussed the accounting implications regarding certain topics arising from the enactment of H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “Tax Cuts and Jobs Act”). Among the issues addressed during the meeting, the FASB discussed:
- Reclassification of certain “stranded” amounts reported in other comprehensive income;
- If non-publicly accountable entities, i.e. private companies and not-for-profits (“NFPs”), can apply SEC Staff Accounting Bulletin (SAB) 118;
- Whether to discount the tax liability on the deemed repatriation; and
- Whether to discount alternative minimum tax credits that become refundable.
With respect to those issues, the FASB decided:
Stranded Amounts in OCI – In ASC 740, Income Taxes, the FASB requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the period in which the new tax laws are enacted. That guidance is applicable even in situations in which deferred tax liabilities and assets are related to items presented in OCI. Therefore, companies would report the effects of the Tax Cut and Reform Act’s enacted tax rate reduction (from 35% to 21%) as an adjustment to deferred tax assets and liabilities and to income tax expense in their income statement, even where some portion of those tax effects were initially recognized directly in other comprehensive income.
The FASB decided to add to their project agenda a narrow-scope project on the reclassification of certain tax effects stranded in accumulated OCI. The FASB also instructed their staff to draft an exposure draft that would require the amounts reported in OCI to be reclassified to retained earnings.
Allowing Private Entities and NFPs to apply SAB 118 – SAB 118; which applies to publicly accountable entities only, addresses the application of ASC 740 to situations “in which the accounting for certain income tax effects of the [Tax Cut and Reform Act] will be incomplete by the time financial statements are issued for the reporting period that includes the enactment date of December 22, 2017. Questions have arisen regarding different approaches to the application of the accounting and disclosure guidance in ASC Topic 740 to such a situation. [SAB 118, Topic 5]”
With respect to allowing private entities and NFPs to apply SAB 118, the FASB asked its staff to issue a response in a Q and A document, which can be downloaded from the FASB website. In the Q&A, the FASB staff recommended, “that if a private company or a not-for-profit entity applies SAB 118, it should apply all relevant aspects of the SAB in its entirety. This would include the disclosures listed in SAB 118. The FASB staff also believes that a private company or a not-for-profit entity that applies SAB 118 should disclose its accounting policy of applying SAB 118 in accordance with paragraphs 235-10-50-1 through 50-3 of the Accounting Standards Codification.”
Allowing discounting of tax liability or discounting of refundable alternative minimum tax credits – With respect to (a) tax liability on the expected repatriation of undistributed foreign income and (b) unused alternative minimum tax amounts that are subject to carryforward into future years, some questioned whether companies should discount the related future tax liability or tax receivable in determining those amounts.
Not unexpectedly, the FASB staff pointed out that ASC 740 does not support applying discounting when determining the related tax liabilities or tax receivables discussed. The FASB agreed with the staff’s observation and directed the staff to include their recommendation in its Q&A discussion for posting on the FASB website in the near future.
The FASB directed the staff to provide recommendations on the accounting for two additional narrower scope topics – accounting for the base erosion anti-abuse tax and accounting for global intangible low-taxed income. The staff recommendations regarding the implementation issues associated with those topics will be included in their final Q&A.