The tax reform signed into law by President Trump on Dec. 22 (the Tax Act) presents public companies with several accounting and disclosure challenges. Although companies are still evaluating how they will be affected by the Tax Act, the Securities and Exchange Commission has released guidance to help navigate the disclosure issues.
Most of the SEC’s guidance is contained in a staff accounting bulletin (No. 118, available here). In the bulletin, the SEC acknowledges that the Tax Act was signed into law shortly before many companies’ fiscal year and quarter end, and that many companies will be unable to fully account for all effects of the Tax Act in their next financial statements. To the extent that a company can reasonably estimate the income tax effect of the Tax Act on its financial statements, the financial statements should reflect that estimate as a “provisional amount.” If a company cannot make such a reasonable estimate, it should continue to apply the provisions of the tax laws that were in effect before the Tax Act was enacted.
The SEC added that disclosure about material financial impacts of the Tax Act should be supplemented with the following types of information:
- Qualitative disclosures of the income tax effects of the Tax Act for which the accounting is incomplete
- Disclosures of items reported as provisional amounts
- Disclosures of existing current or deferred tax amounts for which the income tax effects of the Tax Act have not been completed
- The reason why the initial accounting is incomplete
- The additional information that needs to be obtained, prepared or analyzed in order to complete the accounting requirements under Accounting Standards Codification Topic 740, which deals with accounting and disclosure of income taxes under U.S. Generally Accepted Accounting Principles
- The nature and amount of any adjustments recognized during the reporting period
- The effect of adjustments on the effective tax rate
The bulletin adds that provisional amounts may only be provided during an interim period that should “in no circumstances … extend beyond one year from the enactment date.” Additionally, the bulletin provides that companies should disclose when they have completed accounting for the income tax effects of the Tax Act.
The rest of the SEC’s guidance is contained in a Compliance and Disclosure Interpretation (110.02, available here), which confirms that the accounting implications under the Tax Act do not trigger independent mandatory reporting obligations on Form 8-K.
In short, it appears that the SEC intends to grant reporting companies some measure of relief from accounting and disclosure obligations while they continue to assess the effects of the Tax Act. As stated by the SEC’s Chief Accountant Wes Bricker, “Allowing entities to take a reasonable period to measure and recognize the effects of the Tax Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors.