Interpretive guidance from the Securities and Exchange Commission (SEC) temporarily lets public companies use good faith estimates to adjust for the income tax effects of the Tax Cuts and Jobs Act (TCJA). The Financial Accounting Standards Board (FASB) followed the SEC’s lead and also is allowing private companies to use good faith estimates. But the grace period expires in December. The SEC is advising companies that, once the grace period is over, they should be prepared to comply with the income tax reporting requirements in U.S. Generally Accepted Accounting Principles (GAAP).
Now that the grace period is ending, companies that follow GAAP (whether public or private) may find themselves unprepared if they haven’t yet invested adequate time and resources to understand how the TCJA will affect them.
Tax reporting under GAAP
Under GAAP, companies must adjust deferred tax assets and liabilities for the effect of a change in tax laws or tax rates. On the income statement side, the adjustment is included in income from continuing operations. The guidance applies even in situations in which deferred tax liabilities and assets are related to items presented in other comprehensive income (OCI), such as pension adjustments, gains or losses on cash flow hedges, and foreign currency translation adjustments.
Tax law changes happen frequently, but they usually aren’t as significant as those enacted by the TCJA, which is considered the biggest change to the tax code in 30 years. The effects may be difficult to estimate, especially for companies with global operations and those with significant deferred tax assets and liabilities on their balance sheets.
Customarily, companies that follow GAAP must report the effects of tax law changes when the changes are enacted. The TCJA was signed into law on December 22, 2017, in an atmosphere of unprecedented uncertainty and urgency. Given the scope of the changes, many companies were caught off guard.
SEC and FASB reactions
On the same day that the TCJA was enacted, the SEC issued Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. This guidance has allowed companies to use “reasonable estimates” and “provisional amounts” for some line items for taxes when preparing their fourth-quarter and year-end 2017 financial statements.
Even though SABs apply directly to only public companies, in early 2018 a FASB Staff Q&A, Whether Private Companies and Not-for-Profit Entities Can Apply SAB 118, clarified that a private company or a not-for-profit entity voluntarily applying SAB No. 118 would be deemed in compliance with GAAP, provided that 1) all relevant aspects of SAB No. 118 are applied in their entirety, including the required disclosures, and 2) a statement that SAB No. 118 has been applied is disclosed as an accounting policy.
The SEC and FASB guidance gave public and private businesses a little extra time to digest the tax law changes that would impact them under the TCJA.
The grace period instituted in SAB No. 118 ends on the first anniversary of the TCJA’s enactment. In September, SEC Deputy Chief Accountant Sagar Teotia told the Financial Accounting Standards Advisory Council that the SEC isn’t planning to extend the deferral longer than what was outlined in the original SAB. He explained that, over time, as the IRS has issued additional guidance on specific TCJA provisions, public companies have generally supplied more details about the effects of the TCJA.
However, Teotia isn’t focused on private businesses or not-for-profits with limited financial resources and expertise. Many of these entities may not fully understand the effects of the TCJA and, therefore, may need additional help complying with the accounting rules for income taxes in the coming months.
Contact your B&V representative for more information on how the TCJA will affect your company’s financial statements in 2018 and beyond, at 713-667-9147 or firstname.lastname@example.org.