FASB addressed numerous financial reporting implications of P.L. 115-97, known as the Tax Cuts and Jobs Act, on Wednesday in an effort to provide financial statement preparers with timely answers to questions they have posed.
The board considered five implementation issues and agreed to propose a one-time reclassification from accumulated other comprehensive income to retained earnings for certain tax effects resulting from the newly enacted corporate tax rate.
The implementation issues that were decided will be communicated to stakeholders through a Q&A to be posted to a new FASB website dedicated to tax reform. Those issues were decided as follows:
Private companies, not-for-profits, and SAB 118: Private companies and not-for-profit entities may apply SEC Staff Accounting Bulletin No. 118, FASB said, even though the views and interpretations of the SEC staff are not directly applicable to private companies and not-for-profits. In the past, some private companies and not-for-profits have voluntarily applied SEC staff accounting bulletins, and FASB members said voluntary application should be permitted for the bulletin, which was issued to address the new tax law.
The bulletin states that companies having trouble accounting for effects of the new tax law can report reasonable estimates for those effects in their financial statements for the reporting period in which the law was enacted. In addition, the bulletin states that if a reasonable estimate for the tax law’s effects has been determined, it would not be appropriate to exclude that estimate from the financial statements.
Whether to discount the tax liability on the deemed repatriation. The new law taxes companies on undistributed and previously untaxed post-1986 foreign earnings and profits. The deemed repatriation tax may be paid over an eight-year period and does not impose interest on the unpaid portion of the liability.
FASB ruled that the tax liability should not be discounted in company financial reports.
Whether to discount alternate minimum tax (AMT) credits that become refundable. The Tax Cuts and Jobs Act repeals the AMT for corporations, and permits any existing AMT credit carryforwards to be used to reduce the regular tax obligation in 2018, 2019, and 2020.
Any AMT credit carryforwards that do not reduce regular taxes are eligible for a 50% refund in 2018, 2019, and 2020, and a 100% refund in 2021. This results in full realization of an existing AMT credit carryforward irrespective of future taxable income.
FASB ruled that the AMT credits that will be used or ultimately refunded should not be discounted in company financial reports.
Accounting for the base-erosion and anti-abuse tax (BEAT). Under the new law, an entity must pay a BEAT if the BEAT is greater than its regular tax liability. The BEAT calculation eliminates the deduction of certain base-erosion payments made to foreign corporations, but the calculation includes a lower tax rate on the resulting income.
FASB ruled that deferred tax assets (DTAs) and liabilities should be measured for financial reporting purposes at the regular tax rate rather than the lower BEAT rate.
Accounting for global intangible low-taxed income (GILTI). The Tax Cuts and Jobs Act’s GILTI provisions (in new Internal Revenue Code Sec. 250) impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. In general, this income will be effectively taxed at a 10.5% tax rate.
Stakeholders asked FASB if DTAs and liabilities should be recognized for basis differences expected to reverse as a result of the GILTI provisions in future years, or if the tax on GILTI should be included in the period in which it occurred.
FASB voted to permit preparers to elect either approach, based on their specific facts and circumstances.
“My hope is that the policy election disclosure is adhered to,” said FASB member Marc Siegel.
Proposal coming soon
Stakeholders told FASB that as a result of the tax law, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) do not reflect the appropriate tax rates. This is because the adjustment of deferred taxes due to the reduction of the corporate rate to 21% from 35% is required to be included in income from continuing operations.
To address this concern, FASB voted to propose a one-time reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting from the new corporate tax rate. If the proposal is approved, the amount of the reclassification would be the difference between the 35% historical corporate tax rate and the newly enacted 21% rate.
The guidance would be applied to each period in which the effect of the Tax Cuts and Jobs Act (or portion thereof) is recorded, which may be retrospectively to the December 2017 enactment date in some cases. If the proposal is approved, entities would disclose the following in the period in which a reclassification adjustment is made:
- The nature and reason for the change.
- A description of the prior-period information that has been retrospectively adjusted.
- The effect of the change on affected financial statement line items.
After the proposal is issued, stakeholders will have 15 days to comment. FASB will consider the comments and then vote on whether to proceed with a final standard.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a Tax Adviser editorial director.