SEC Provides Clarity and Assistance on Income Tax Reform

12/28/2017

On Dec. 22, 2017, the Tax Cuts and Jobs Act (the act) was signed into law by President Donald Trump. In conjunction, the SEC’s Office of the Chief Accountant and Division of Corporation Finance staff issued interpretive guidance for public companies, auditors, and other stakeholders. The guidance clarifies the accounting for certain tax effects associated with the act when, upon the issuance of an entity’s financial statements, the accounting for changes in tax laws is incomplete. Additionally, the SEC provided clarifications on various disclosure requirements.

The interpretive guidance includes a new Staff Accounting Bulletin (SAB) and a new Compliance and Disclosure Interpretation (C&DI).

  • SAB No. 118 (codified in SAB Topic 5.EE) provides the following measurement model and disclosure considerations:
    • In scenarios where an entity’s measurement of accounting for changes in tax laws is:
      • Complete (in whole or in part): the effects should be recorded in the reporting period.
      • Incomplete, but can be reasonably estimated: the provisional effects (or changes in the provisional effects) should be recorded in the reporting period.
      • Incomplete and cannot be reasonably estimated: the entity should not record provisional amounts based on the act and should continue to record the effects based on the tax laws that were in effect immediately prior to the act being enacted. For those income tax effects for which an entity is not able to determine a reasonable estimate, the entity should record the effects in the first reporting period in which a reasonable estimate can be determined.
    • The provisional amount is subject to adjustment during a measurement period until the accounting under ASC 740 is complete. The measurement period should not extend beyond one year from the tax reform law’s enactment date.
    • Supplemental disclosures should be provided about the material financial reporting effects of the act for which the accounting is incomplete, including:
      • Qualitative disclosure of the areas for which the accounting is incomplete
      • Items recorded as provisional amounts
      • Current or deferred tax amounts for which the income tax effects have not been completed
      • Reasons for the incomplete accounting
      • Additional information or analysis that still needs to occur, and other information relevant to why the registrant was not able to complete the accounting
      • Nature and amount of measurement period adjustments recognized in the reporting period
      • Effect of measurement period adjustments on the effective tax rate
      • When the accounting for the income tax effects of the act is completed
    • The SEC has indicated that the interpretive guidance in SAB No. 118 is expected to be applied to domestic and foreign private issuers.
  • Question 110.02 was added to the C&DIs for Item 2.06 (“Material Impairments”) on Form 8-K, “Current Report,” and clarifies that remeasurement of a deferred tax asset (DTA) to incorporate the effects of the act does not trigger an obligation to file a Form 8-K as the remeasurement is not an impairment under ASC 740. Regardless, the act can have implications on the entity’s financial statements, including whether it is more likely than not that a DTA will be realized. Entities using the “measurement period” approach from SAB No. 118 and that conclude an impairment (or provisional amount with respect to that possible impairment) has occurred should disclose that in their next periodic report.