Close
Close

On the Horizon: Impact of tax reform: financial reporting considerations for non-calendar-year entities

RFP
Contents Current reporting issues       Impact of tax reform: financial reporting considerations for non-calendar-year entities

FASB posts highlights from April 11 meeting SEC staff updates Investment Company Reporting Modernization FAQs PCAOB announces forums for broker-dealer auditors CAQ releases tool on cybersecurity risk management for board members Federal Audit Clearinghouse issues proposed revisions to the DCF U.S. Department of Education issues new guidance relating to SFA cluster

Current reporting issues Impact of tax reform: financial reporting considerations for non-calendar-year entities Public business entities that report based on a calendar year have already completed the accounting for income taxes under ASC 740, Income Taxes, in their most recent annual financial statements. In doing so, they have recognized certain tax effects of the Tax Cuts and Jobs Act of 2017 (the Act) during their fourth quarter, or estimated effects in accordance with SEC Staff Accounting Bulletin (SAB) 118. These entities have also considered FASB and SEC staff views on certain accounting and financial reporting issues related to the Act, along with a FASB amendment to existing guidance that provides an option to reclassify stranded tax effects resulting from the Act from accumulated other comprehensive income to retained earnings.

Public business entities with fiscal years ending either before the Act’s enactment date of December 22, 2017 (for example, November 30, 2017) or after December 31, 2017 (for example, June 30, 2018) are also evaluating and accounting for the income tax effects of the Act. For many of these entities, the enactment date did not fall within their fourth fiscal quarter, but they are still required to record the tax effects of the Act in the interim and annual periods that include the new law’s enactment date.

See NDS 2018-03, “Accounting and financial reporting implications of the Tax Cuts and Jobs Act of 2017,” for financial reporting considerations for non-calendar-year entities, including reporting subsequent events, calculating a blended tax rate and an estimated annual effective tax rate, and determining interim disclosure requirements.

See the March 22 On the Horizon and the March 29 On the Horizon for discussions of issues related to accounting for income taxes in interim periods.

The firm has received a number of inquiries related to how non-calendar-year entities should account for certain tax effects of the Act in their interim and annual financial statements. Some of the questions include

  • What tax rate should these entities use to remeasure deferred tax liabilities and assets on the enactment date, and how would this rate compare to both the blended tax rate used when calculating the annual income tax provision and the tax rate used to measure deferred tax liabilities and assets at the end of the annual reporting period?
  • How should these entities evaluate the realizability of deferred tax assets related to net operating losses (NOLs) generated in tax years that (1) ended prior to December 31, 2017, (2) included interim periods before and after December 31, 2017 (such as a tax year ending June 30, 2018), and (3) began after December 31, 2017?
  • How should these entities apply SAB 118 in the period of enactment and through the end of the measurement period?

Entities are required to remeasure deferred tax positions at the enactment date of a tax law or rate change, and to recognize the change in the amount of deferred tax positions resulting from the change as a component of income tax expense (or benefit) in income from continuing operations in the reporting period that includes the enactment date. This requirement applies regardless of which interim reporting period the enactment date falls within. For example, if the enactment date falls in an entity’s second quarter, the entity would record the impact on deferred taxes as a discrete item in the income tax expense (or benefit) for the second quarter and year-to-date interim period.

Under the recognition and measurement guidance in ASC 740-10-30-8, deferred tax liabilities and assets are measured using the enacted tax rate(s) expected to apply to taxable income in the period(s) in which the deferred tax liability or asset is expected to be settled or realized (this period is referred to as the “reversal period”). For entities that report based on a calendar year, determining the enacted tax rate expected to apply to taxable income in the reversal period is not a complex determination because an entity can readily determine that all deferred tax liability and asset balances as of December 31, 2017 (except for any deferred amounts having an indefinite reversal period) will be settled or realized in 2018 or later, and the enacted U.S. federal tax rate effective for years beginning after December 31, 2017 is 21 percent.

Entities that report based on a year-end other than a calendar year may have deferred tax liabilities and assets that are expected to be settled or realized in several tax years. For example, an entity that has a year-end of June 30, 2018 might have deferred tax liabilities and assets on the enactment date that are expected to be settled or realized either during or after the tax year ending June 30, 2018. For amounts expected to be settled or realized during the tax year ending June 30, 2018, the entity should remeasure these amounts on the enactment date based on the blended tax rate (as discussed below) expected to apply to taxable income for the tax year ending June 30, 2018. For amounts expected to be settled or realized in tax year(s) beginning after June 30, 2018, the entity should remeasure these amounts on the enactment date based on the new U.S. federal tax rate of 21 percent. As a result, scheduling the reversal patterns of an entity’s deferred tax liabilities and assets is very important to this determination.

Entities that report based on a year-end other than a calendar year are required by Section 15 of the Internal Revenue Code to calculate a blended tax rate, based on the ratio of days in the tax year that occur before and after the effective date, for the remaining fiscal period. The income tax for the remainder of the fiscal year should be determined by applying the blended tax rate to the taxable income for the period, beginning from the period that includes the enactment date. For entities with year-ends after December 31, 2017, the impact of the Act on the estimated annual effective tax rate effective January 1, 2018 should be factored into interim-period financial statements that include the enactment date. Entities with a year-end other than a calendar year also need to consider the requirements of Section 15 when calculating the annual income tax provision. For example, under Section 15, an entity that has a year-end of June 30, 2018 would apply a blended tax rate of approximately 28 percent, based on the ratio of days described above, when calculating the annual income tax provision.

This entity would then apply the guidance in ASC 740-10-30-8 to measure its deferred tax liabilities and assets as of June 30, 2018 based on the new U.S. federal tax rate of 21 percent, since this is the tax rate expected to apply to taxable income during the reversal period(s). As result, this entity will use different tax rates to calculate its annual income tax provision for the year ending June 30, 2018 and to measure its deferred tax liabilities and assets as of June 30, 2018. Beginning with the tax year ending June 30, 2019, Section 15 will no longer require this entity to apply a blended tax rate because the tax year began after December 31, 2017.

Under the Act, NOL deductions arising in tax years beginning after December 31, 2017 can only offset up to 80 percent of future taxable income. While the Act prohibits NOL carrybacks, it allows an indefinite carryforward for NOLs arising in tax years beginning after December 31, 2017. NOLs arising before January 1, 2018 were not subject to a limit on the amount of taxable income that can be offset using NOLs (except for a 90 percent limit for alternative minimum tax carryforwards), and can be carried back two, and carried forward twenty, years.

When entities that report based on a year-end other than a calendar year evaluate the realizability of any deferred tax assets related to NOL carryforwards, they will need to consider the tax year in which the NOLs arose. For example, if an entity has a year-end of June 30, the following carryback, carryforward, and taxable income limitation attributes apply to NOLs arising in

  • Tax years ending on or before June 30, 2017: 2-year carryback, 20-year carryforward, and not subject to a taxable income limitation
  • Tax year ending June 30, 2018: No carryback, indefinite carryforward, and not subject to a taxable income limitation
  • Tax years beginning after June 30, 2018: No carryback, indefinite carryforward, and subject to a taxable income limitation of 80 percent

See the February 15 On the Horizon for a summary of how entities should consider the carryback, carryforward, and taxable income limitation attributes of NOLs when evaluating the realizability of deferred tax assets.

SAB 118 only applies to accounting for the income tax effects of the Act arising in the period of enactment, regardless of which interim reporting period the enactment date falls in. For public business entities that report based on a calendar year, the period of enactment was the fourth quarter of the year ended December 31, 2017. For most public business entities that report based on a year-end other than a calendar year, the period of enactment was a reporting period other than the fourth quarter. For example, the period of enactment was in the second quarter for entities that have a June 30 year-end. As a result, the guidance in SAB 118 permitting entities to recognize certain tax effects under the Act as provisional amounts, or by continuing to apply ASC 740 based on the tax rates and law in effect prior to the Act, would not apply to accounting for the income tax effects of the Act that arises in the third quarter ended March 31, 2018 (or later) for entities that have a June 30 year-end.

Entities that report based on a year-end other than a calendar year may not be able to measure the tax effects of certain provisions of the Act until the end of their most recent tax year. For example, entities with a June 30 year-end that are subject to the one-time transition tax on unrepatriated foreign earnings would not be able to make a final measurement of this tax until June 30, 2018. These entities were permitted to apply the guidance in SAB 118 to the measurement of the one-time transition tax during their second quarter ended December 31, 2017 because the accounting for the tax effects of the one-time transition tax arose in the period of enactment. Entities that were not able to complete the accounting for the tax effects of the one-time transition tax in the period of enactment either recognized provisional amounts (if a reasonable estimate could be made) or continued to apply ASC 740 based on the tax rates and laws in effect prior to the Act (if a reasonable estimate could not be made). These entities will continue to apply SAB 118 during the “measurement period” until they complete the accounting for the tax effects of the Act under ASC 740.

Entities are reminded that under SAB 118, the measurement period begins at the enactment date and ends when an entity has obtained, prepared, and analyzed the information required to complete the accounting requirements under ASC 740, regardless of which reporting period the enactment date falls within. The measurement period cannot extend beyond one year from the enactment date.



FASB posts highlights from April 11 meeting All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on April 11 to discuss two proposed ASUs, which include technical amendments and improvements to certain Codification topics. The Board’s actions are summarized below.

After discussing the proposed ASU, Technical Corrections and Improvements to Topic 942, Financial Services – Depository and Lending: Elimination of Certain Guidance for Bad Debt Reserves of Savings and Loans, the Board tentatively decided to retain the guidance related to the reserve method of accounting for bad debts for income tax purposes, which would have been eliminated under the proposal.

The Board affirmed other provisions of this proposal to remove the guidance in ASC 942-740-45-1 related to Comptroller of the Currency’s Banking Circular 202, and directed the staff to draft an ASU for vote by written ballot.

The Board also made the following tentative decisions related to issues in the proposed ASU, Technical Corrections:

  • Issue 22 – Amendments to ASC 940-405, Financial Services – Brokers and Dealers: Liabilities: To retain the proposed amendment related to offsetting securities borrowed and loan transactions in a final ASU and to clarify the Basis for Conclusions related to this issue.
  • Issue 27 – Amendments to ASC 958-325, Not-for-Profit Entities: Investments – Other: To remove the proposed amendment addressing the measurement and carrying value for other investments from a final ASU. The Board directed the staff to perform additional analysis on identifying and measuring impairment for not-for-profit entities.
  • Issue 30 – Amendments to ASC 962-325, Plan Accounting – Defined Contribution Pension Plans: Investments – Other: To retain the proposal to remove the stable common collective trust fund from the implementation guidance in a final ASU, to remove all the key assumptions from the implementation guidance in ASC 962-325-55-17, and to clarify the Basis for Conclusions related to this issue.

The Board also tentatively decided to remove Issues 5, 10, and 21 from a final ASU, and affirmed all of the other amendments in the proposed ASU.

The Board made the following tentative decisions related to the effective date and transition guidance upon issuance of an ASU:

  • Certain proposed amendments would be effective upon issuance.
  • Other amendments would be effective for public business entities for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years. For all other entities, these amendments would be effective for fiscal years beginning after December 15, 2019 and for interim periods in fiscal years beginning after December 15, 2020.
  • The transition guidance and effective dates for certain amendments made to recently issued guidance that is not yet effective will be the same as those for the recently issued guidance.

The Board directed the staff to draft an ASU for vote by written ballot.



SEC staff updates Investment Company Reporting Modernization FAQs Responses to FAQs were prepared by and represent the views of the SEC staff. They are not rules, regulations, or statements of the Commission. The Commission has neither approved nor disapproved these FAQs or the interpretive answers to these FAQs.

The staff of the SEC’s Division of Investment Management recently updated its Investment Company Reporting Modernization Frequently Asked Questions to address, among other things, certain compliance dates associated with the following rules issued by the Commission:

  • 2016 Final Rule, Investment Company Liquidity Risk Management Programs
  • 2017 Temporary Final Rule, Investment Company Reporting Modernization (See On the Horizon dated December 14, 2017 for further information.)
  • 2018 Interim Final Rule, Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs (See On the Horizon dated March 1, 2018 for further information.)



PCAOB announces forums for broker-dealer auditors The PCAOB announced dates for the 2018 Forums for Auditors of Broker-Dealers. The 2018 dates and locations are as follows:

  • July 10 – Denver, Colorado
  • September 19 – Fairfax, Virginia (also available via live stream)
  • November 2 – Jersey City, New Jersey

Discussion topics will include inspection observations, an update on standard setting, recent changes to the auditor’s report, and enforcement matters. Additionally, PCAOB staff will present case studies covering areas related to inspection observations, such as auditing revenue, auditing net capital supplemental information, and review procedures of broker-dealer exemption reports. The forums also will include presentations from the staff of the Financial Industry Regulatory Authority and the SEC.

Forums are live meetings and are open to members of PCAOB-registered firms that audit public companies or broker-dealers. There is no fee to attend, but preregistration is required and space may be limited.
Attendees are encouraged to submit questions in advance via email or the online registration form.



CAQ releases tool on cybersecurity risk management for board members The Center for Audit Quality (CAQ) released a new tool designed to help board members enhance their oversight of enterprise-wide cybersecurity risk management. The tool, “Cybersecurity Risk Management Oversight: A Tool for Board Members,” provides questions board members can use to discuss cybersecurity risks and disclosures with management and CPA firms. The resulting dialogue can help board members better understand how the company is managing its cybersecurity risks, as well as help clarify the external auditor’s responsibility for cybersecurity risk considerations within the context of the financial statement audit and, if applicable, the audit of internal control over financial reporting (ICFR).

In addition to key questions, the tool compiles cybersecurity-related resources from the CAQ, the AICPA, the National Association of Corporate Directors, and others.

The CAQ also released a press release regarding the new tool.



Federal Audit Clearinghouse issues proposed revisions to the DCF The U.S. Department of Commerce Federal Audit Clearinghouse (FAC) proposed revisions to the Data Collection Form (DCF) in a Federal Register notice titled Proposed Information Collection: Comment Request: Data Collection Form for Reporting on Audits of States, Local Governments, Indian Tribes, Institutions of Higher Education, and Non-Profit Organizations. The proposal will have no effect on 2018 single audits, but once finalized would be effective for fiscal periods ending in 2019, 2020, and 2021.

The four main changes being proposed to the DCF are as follows:

  • The audit finding information currently required to be included in the DCF by auditors would be expanded to include the actual text of the audit finding.
  • Auditors would be asked to indicate whether there was written communication to the auditee relating to any issues that were not an audit finding but warranted the attention of those charged with governance.
  • Auditees would be required to include the text of their corrective action plans.
  • Auditees would also be required to include the text of the notes to the schedule of expenditures of federal awards.

The notice also includes an estimate of the number of hours it will take nonfederal entities and their auditors to complete the DCF, which is also subject to comment.

The proposed DCF will be posted in the near term on the FAC website for review. Written comments must be submitted on or before June 4.



U.S. Department of Education issues new guidance relating to SFA cluster The U.S. Department of Education issued a Federal Student Aid (FSA) memorandum relating to the Student Financial Aid (SFA) cluster, applicable to Single Audit filers for fiscal years ending in 2018.The FSA memorandum states that institutions participating in Title IV programs that submit a Single Audit that does not include the SFA cluster as a major program will no longer be required to notify their respective School Participation Division of the low-risk assessment. If identified as low-risk, the SFA cluster is not required to be audited as a major program, unless necessary to comply with the percentage of coverage rule.



© 2018 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.