On December 22, 2017, the SEC’s Office of the Chief Accountant and the Division of Corporation Finance provided critical regulatory guidance for the accounting impacts of the recently enacted tax reform bill (commonly known as the Tax Cuts and Jobs Act or the "Act"). Specifically, the Staff issued two pieces of guidance:
- Staff Accounting Bulletin (SAB) No. 118 - views of the Staff regarding the application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act.
- Compliance and Disclosure Interpretation 110.02 - views of the Staff regarding the applicability of Item 2.06 (Material Impairments) of Form 8-K with respect to the impact of a change in the tax rate or tax laws pursuant to the Act on the re-measurement of a deferred tax asset.
SAB 118. A number of registrants have raised questions with the SEC about the application of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("ASC Topic 740"), which provides accounting and disclosure guidance on accounting for income taxes under U.S. GAAP, where the registrant does not have the necessary information available, prepared or analyzed in reasonable detail to fully comply with ASC Topic 740 for the period in which the Act was enacted. In response, the SEC issued SAB 118 to give guidance in this situation. In essence, the guidance breaks down the reporting into three categories:
- First, if a registrant has completed the accounting under ASC Topic 740 for certain income tax effects of the Act, it should reflect such income tax effects in its financial statements for the period that includes the December 22, 2017 enactment date.
- Second, if a registrant has not completed the accounting under ASC Topic 740 but can determine a reasonable estimate for certain income tax effects of the Act, it should include that estimate as a provisional amount in its financial statements until it has obtained, prepared and analyzed the information necessary to complete the accounting requirements (such period, the "measurement period"). The SEC indicated that the measurement period should be completed no later than one year after December 22, 2017, the date on which the Act was enacted.
- Third, if a registrant cannot make a reasonable estimate of the tax effects of the Act, it should continue to apply ASC Topic 740 in recognizing and measuring current and deferred taxes as under prior law. The registrant would later report provisional amounts in the first reporting period in which a reasonable estimate can be determined.
As further guidance, the SEC stated that a registrant using the measurement period approach should include the financial statement disclosures to provide information about the material financial reporting impacts of the Act for which the accounting under ASC Topic 740 is incomplete, including:
- Qualitative disclosures of the income tax effects of the 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 Act have not been completed;
- The reason why the initial accounting is incomplete;
- The additional information that is needed to be obtained, prepared, or analyzed in order to complete the account requirements under ASC Topic 740;
- The nature and amount of any measurement period adjustments recognized during the reporting period;
- The effect of measurement period adjustments on the effective tax rate; and
- When the accounting for the income tax effects of the Act has been completed.
Furthermore, registrants should consider other effects of taking advantage of the measurement period, such as disclosure in a securities offering, earnings release, investor presentation and one-on-one meetings with investors; effect on calculations of non-GAAP measures; and compliance with covenants in debt agreements.
C&DI 110.02. The SEC states that the re-measurement of a deferred tax asset to incorporate the effects of newly enacted tax rates and other provisions of the Act does not trigger an obligation to file under Item 2.06 of Form 8-K (which relates to the disclosure of material impairments other than "in connection with the preparation, review or audit of financial statements required to be included in the next periodic report due to be filed under the Exchange Act"). Consistent with the approach taken in SAB 118, a registrant may use the "measurement period" approach of complying with ASC Topic 740, including disclosing "the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report."
Director of the Division of Corporation Finance Bill Hinman stated, "This guidance recognizes that investors demand and deserve high-quality information, while also recognizing that entities may face challenges in accounting for one of the most comprehensive changes to the U.S. federal tax code since 1986."
Chief Accountant Wes Bricker added, "Allowing entities to take a reasonable period to measure and recognize the effects of the 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."