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On the Horizon: ASU gives option to reclassify certain tax effects from AOCI to retained earnings

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FASB       ASU gives option to reclassify certain tax effects from AOCI to retained earnings
      Highlights from February 14 meeting posted
            Hedging guidance implementation
            Revenue recognition of grants and contracts by NFPs
            Disclosure requirements for defined benefit plans



FASB ASU gives option to reclassify certain tax effects from AOCI to retained earnings The Board issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address issues raised by stakeholders related to how tax rate changes affect deferred taxes originally recorded in other comprehensive income (OCI).

Under the existing guidance in ASC 740, Income Taxes, adjustments to deferred tax liabilities and assets resulting from a change in tax laws or tax rates are included in income from continuing operations, regardless of where the related tax provision or benefit was originally recorded. As a result, an entity is prohibited from “backwards tracing” the income tax effects of tax provisions or benefits originally recorded in OCI. “Backwards tracing” means recognizing the effects of changes in deferred tax amounts in the same line item where the deferred tax amounts were originally recognized in prior years. ASU 2018-02 does not amend this guidance, so entities are still prohibited from backwards tracing. The tax effects of items that remain within accumulated OCI (AOCI) due to this prohibition are referred to as “stranded tax effects.”

What ASU 2018-02 does is to give entities an option to reclassify the stranded tax effects resulting from the tax law and tax rate changes under the Tax Cuts and Jobs Act of 2017 (the Act) from AOCI to retained earnings. The option to reclassify stranded tax effects under ASU 2018-02 only applies to the income tax effects of tax law and tax rate changes under the Act, and does not apply to other stranded tax effects, such as those resulting from prior changes in tax laws.

If the entity elects to reclassify the income tax effects of the Act, the amount of the reclassification should include (1) the effect of the change in the federal corporate income tax rate on gross deferred tax amounts and related valuation allowances, if any, for items remaining in AOCI as of the date when the tax reform was enacted, and (2) other income tax effects of the Act on items remaining in AOCI that an entity elects to reclassify. The amount of the reclassification should exclude the effect of the change in the tax rate on gross valuation allowances that were originally charged to income from continuing operations.

All entities are required to disclose their accounting policy for releasing stranded income tax effects from AOCI. The new guidance adds this disclosure because there is diversity in practice on how entities release the income tax effects from AOCI. Some entities release the income tax effects from AOCI as each individual unit of account is derecognized (for example, when an individual available-for-sale security is sold), whereas others release the income tax effects from AOCI when the entire portfolio, consisting of all of the individual units of account, is derecognized (for example, when an entire portfolio of available-for-sale securities is sold).

In addition, entities are required to disclose in the period of adoption whether they have elected to reclassify the stranded tax effects related to the Act. Entities that elect to reclassify stranded tax effects related to income tax effects under the Act, other than those arising from the change in the federal corporate income tax rate, are also required to describe these effects in the period of adoption.

The amendments are effective for all entities for fiscal years beginning after December 15, 2018 and for all interim periods within those fiscal years. Entities should apply the amendments either retrospectively to each period (or periods) in which the entity records the effect of the tax rate changes under the Act, or at the beginning of the annual or interim period in which the amendments are adopted. The reclassification might occur in multiple periods for entities recording provisional amounts under SEC Staff Accounting Bulletin 118 if they adjust those provisional amounts as they obtain, prepare, or analyze additional information.

Early adoption is permitted for public business entities that have not issued financial statements and for all other entities that have not made the financial statements available for issuance.

The following transition disclosures are required in the first interim or annual period of adoption for all entities, except as indicated below:
  • The nature of, and reason for, the change in accounting principle
  • A description of the prior-period information that has been retrospectively adjusted (this disclosure only applies to entities electing to apply the amendments retrospectively)
  • The effect of the change on affected financial statement line items

Highlights from February 14 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on February 14 to discuss the following matters:
  • Implementation activities related to the new hedging guidance
  • Proposed guidance for contributions received and contributions made by not-for-profit (NFP) entities
  • Proposed guidance related to disclosures for defined benefit plans

These discussions are summarized below.

Hedging guidance implementation

The Board discussed implementation activities related to the new hedging guidance in ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, and discussed the staff’s responses to technical inquiries related to the following matters:
  • Prepayable financial instruments – The FASB staff presented its interpretation of which financial instruments meet the definition of prepayable, as defined in the ASC Master Glossary, and stated that instruments prepayable with time- and event-based contingencies, along with callable and noncallable convertible instruments, meet this definition, in addition to instruments that are currently exercisable and prepayable. The staff also stated that instruments for which contractual maturity can be accelerated due to credit do not meet this definition. The staff will post further information on this issue to the hedge accounting implementation webpage.
  • Net investment hedges under the spot method – The staff presented its interpretation of how an entity should amortize excluded components when the hedging instrument is a cross-currency interest-rate swap that is “off-market” (meaning it does not have a fair value of zero) at hedge inception. The staff stated that any systematic and rational approach that results in the off-market nature of the swap equaling zero at the end of the hedging relationship is acceptable. The staff also noted that structuring cross-currency interest-rate swaps designated in net investment hedges to achieve a specific accounting result is not considered rational when an entity evaluates whether an approach is systematic and rational.

The Board directed the staff to research a potential technical correction to the shortcut method guidance related to the use of the term prepayable.

See NDS 2017-08, Targeted improvements to hedge accounting: ASU 2017-12 simplifies accounting for hedging activities, for more information.

Revenue recognition of grants and contracts by NFPs

The Board discussed the amendments in the proposed ASU, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, and tentatively decided to clarify and refine the indicators to consider when determining whether a contribution is conditional because an agreement contains a barrier. It also tentatively decided to remove the phrase the extent to which a stipulation requires an additional action or actions from the indicators included in the proposal.

In addition, an entity can elect to apply the “simultaneous release” accounting option to restricted contributions for conditional restricted contributions separately from unconditional restricted contributions. In other words, if an entity elects to apply this option, it need not apply it for all donor-restricted transactions.

The Board also affirmed the following aspects of the proposal:
  • The proposed guidance for distinguishing between conditional contributions and unconditional contributions should be similar for both a recipient and a resource provider.
  • Entities should apply the modified retrospective transition approach following the effective date to agreements that are either (1) incomplete as of the effective date, or (2) entered into after the effective date.
  • For recipients, the effective date would be the same as that for the new revenue guidance; however, the Board tentatively decided that for resource providers, the effective date would be delayed by one year.
  • Early adoption would be permitted.

See the August 10, 2017 On the Horizon for a summary of the proposal.

Disclosure requirements for defined benefit plans

The Board discussed the amendments in the proposed ASU, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, and made several tentative decisions related to removing, retaining, or modifying existing disclosure requirements and to adding new disclosure requirements.

The Board will continue to discuss the proposal at a future meeting.



© 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.