SEC Staff Provides Accounting Guidance on the Impact of Tax Reform

The staff of the Security and Exchange Commission (“the Staff”) issued guidance on the accounting and disclosure issues created by The Tax Cuts and Jobs Act (“the Act”). The guidance was issued on December 22, 2017, the same day that the President signed the Act into law. The guidance consists of the following two interpretations:

1. Staff Accounting Bulletin (“SAB”) 118 provides a limited extension on accounting for the changes to a public company’s current and deferred income tax amounts caused by the Act.
2. Compliance and Disclosure Interpretation 110.02 provides the Staff’s view that a Form 8-K is not necessary to report a material impairment to a deferred tax asset caused by the enactment of the new tax rates or tax laws.

Pursuant to Financial Accounting Standards Codification (“ASC”) Topic 740, Accounting for Income Taxes, companies generally must account for changes in tax laws or tax rates in the financial reporting period that includes the enactment date. In the U.S., the enactment date is the date that the President signs the law, in this case December 22, 2017.  Thus, for companies with a calendar year-end, this would require recognition of the impact of the tax law changes within their 2017 financial statements.

Item 1 – Staff Accounting Bulletin 118

Staff Accounting Bulletin 118 addresses the timing of reporting the changes to a company’s income tax accounting caused by the Act. Through the use of examples the guidance provides three categories of disclosure:

1. For tax effects that are quantified and complete by the time the company issues its financial statements, the company must adjust the tax accounts as required and provide complete disclosure.
2. For tax effects for which only a reasonable estimate can be quantified, the company must adjust the tax accounts by this reasonable estimate as a provisional amount. In the period that the accounting is complete, the company would have to make the necessary adjustments in the financial statements.  The accounting must be completed within a one-year “measurement period.”
3. For tax effects in which a reasonable estimate cannot be made, the company must account for the item as if there has been no change in the tax law.  In subsequent periods, the company would update the accounting if a reasonable estimate was determined or if the accounting was completed. This would need to be accomplished within the one-year measurement period.

The required disclosures as listed by the Staff are:

1. Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;
2. Disclosures of items reported as provisional amounts;
3. Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
4. The reason why the initial accounting is incomplete;
5. The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;
6. The nature and amount of any measurement period adjustments recognized during the reporting period;
7. The effect of measurement period adjustments on the effective tax rate; and
8. When the accounting for the income tax effects of the Act has been completed.

Item 2 - Compliance & Disclosure Interpretation 110.02

Pursuant to Item 2.06 of Form 8-K, a company must disclose if it concludes that a material charge for impairment to one or more of its assets is required under GAAP. Through the Interpretation, the Staff concluded that disclosure under this provision of Form 8-K would not be required by the revaluation of a deferred tax asset as a result of a tax rate change or other provision of the Act. This guidance references the disclosure requirements of SAB 118, as described above.

In summary, the SEC Staff, having recognized in advance the complexity of the new law and the effort that would be necessary to compute the impact on financial statements, had readied the guidance and provided a year from inception to fully complete the analysis.