As everyone knows by now, the U.S. tax system was widely altered on December 22, 2017 by enactment of the Tax Cuts and Jobs Act (the Act). The date of enactment is highlighted here because that is the date that triggers financial statement implications. Oh…so close to year-end for most companies. This timing situation is complicated because:
- The full implications of the Act are not yet clear because of the vastness and complex nature of the legislation and its condensed period of consideration, along with little time elapsed since enactment to develop regulatory interpretations.
- Accounting rules require the effects of newly-enacted tax legislation to be recorded in current earnings in the “period of enactment.”
This means that calendar year companies must assess and record the tax implications of legislation that was signed into law only a week before year-end before they issue their 2017 financial statements. Happy New Year!
Of course, by necessity, the SEC was first to weigh in for public company guidance in the issuance of SAB (Staff Accounting Bulletin) 118, given the tight timeframe of public company reporting deadlines. The FASB, in January 2018, quickly issued a Staff Q&A stating that private companies can adopt SAB 118 and would be in compliance with US GAAP in doing so. FASB also added that if any provisions of SAB 118 are adopted, then all should be adopted, including the disclosure requirements. In addition, a company should also disclose its accounting policy of adopting SAB 118 for income taxes. FASB Staff have also issued, in January 2018, four additional Q&As outlining the FASB Staff’s interpretations of existing US GAAP for income taxes with respect to certain specific provisions of the Act. We expect to see additional Staff Q&As as time goes on.
Three Bucket Approach
SAB 118 adopts a “three-bucket” approach to evaluating and accounting for implications of the Act.
- Bucket 1 would be used for items for which the accounting could be completed before the financial statements are issued. This would apply to matters with little to no interpretive uncertainties. Restating deferred tax assets and liabilities at the 21% new maximum corporate tax rate from the former 35% carrying rate would be an example of this type of adjustment.
For tax accounting matters that have not been completed at the financial reporting date, the Company would either use:
- Bucket 2 for matters where reasonable estimates could be made at the reporting date, and record those estimates and adjust them over time as more information becomes available, treating such changes as a change in estimate, or
- Bucket 3 for matters where no reasonable estimate can be made of the effects of the Act at the reporting date, and continue to account for these matters under the existing tax laws until such time as a reasonable estimate can be made of the treatment under the Act.
Buckets 2 and 3 require a “measurement period” during which time the Company assesses and reassesses estimates of how the Act will ultimately be interpreted, and would update its provisional recorded estimates until it reaches the more-likely-than-not assessment threshold. This measurement period, similar to business combination guidance, is one year. Companies are required to make good faith estimates of amounts recorded provisionally throughout the measurement period until the accounting for changes required by the Act is completed.
As expected with tax legislation this complicated and widespread in its impact, time will be needed to assess the tax effects in specific company applications, and this condition complicates the accounting for income taxes, as well.
We expect to post updates for commonly applicable situations as the implementation period evolves and the effects become known. In the meantime, if you’re wondering what this means for your financial reporting of income taxes, please contact us.