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On The Horizon: Impact of tax reform – evaluating the realizability of certain deferred tax assets

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Contents Current reporting issue       Impact of tax reform: evaluating the realizability of certain deferred tax assets

FASB discusses feedback on proposal to reclassify stranded tax effects       Reclassification of certain tax effects from AOCI
      Ratification of an EITF consensus-for-exposure
      Disclosure framework: disclosure review – fair value measurement
      Targeted improvements to collaborative arrangements
      Segment reporting

IASB       Narrow-scope amendments issued to pension accounting
      TRG for IFRS 17 meets

International Federation of Accountants       IPSASB seeks comments on five-year strategy and work plan

Comment letters issued


Current reporting issue Impact of tax reform: evaluating the realizability of certain deferred tax assets ASC 740, Income Taxes, requires an entity to establish a valuation allowance when it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. As a result, entities are required to determine in each reporting period whether a valuation allowance is needed to reduce the carrying amount of any deferred tax assets that are not expected to be realized and, if needed, the amount of the valuation allowance.

As discussed in ASC 740-10-30-18, sources of taxable income of the appropriate character (for example, ordinary income or capital gains) in either the carryback or carryforward period may be available under the tax law in a particular jurisdiction to realize a tax benefit for deferred tax assets that are either

  • Related to deductible temporary differences, such as expenses recognized in the current year for financial reporting purposes that will not be deductible under the tax law until future periods
  • Related to carryforwards, such as net operating loss (NOL) deductions

The future reversal of deferred tax liabilities related to taxable temporary differences, such as expenses that are deductible under a tax law in the current period that will not be recognized for financial reporting purposes until future periods, is one of the more objective sources of future taxable income that an entity should consider as available under the tax law to realize a tax benefit for deferred tax assets.

Many entities have recognized deferred tax liabilities related to land with a taxable temporary basis difference or indefinite-lived assets (such as goodwill and nonamortizable intangible assets) that are not being amortized for financial reporting purposes, but are deductible under a tax law. However, the reversal of deferred tax liabilities for taxable temporary differences related to indefinite-lived assets held for use should not be considered a source of future taxable income. These temporary differences (referred to as “naked credits”) would only reverse when the related assets are impaired or disposed of, and ASC 740 does not allow an entity to anticipate events such as impairments or disposals when predicting the reversal of the related deferred tax liabilities.

Because an entity cannot assert that a deferred tax liability related to an indefinite-lived asset will be realized prior to the expiration of the existing deferred tax asset, the naked credit generally cannot be considered a source of taxable income when evaluating the realizability of a definite-lived deferred tax asset.

Under the tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the Act), NOL carryforwards arising in tax years beginning after December 31, 2017 can only offset up to 80 percent of future taxable income, and NOL carryforwards arising in tax years ending after December 31, 2017 have an indefinite carryforward period rather than the 20-year carryforward period applicable to pre-Act NOLs.

In the reporting period that includes the new tax law’s enactment date (December 22, 2017), entities need to determine whether the reversal of a naked credit may be a source of future taxable income when evaluating whether a valuation allowance is needed for deferred tax assets related to any deductible temporary differences (other than NOLs) that will reverse in future periods and become NOL carryforwards with an indefinite carryforward period. Entities should not assume that all NOLs arising in tax years ending after December 31, 2017, or all deductible temporary differences that will reverse and become NOLs in those tax years, are realizable and do not require a valuation allowance. Because the analysis is specific to the entity’s facts and circumstances, scheduling the pattern of reversal for these deferred tax assets and liabilities is generally necessary in order to determine the realizable portion of the deferred tax asset.

Further, it generally remains inappropriate for an entity to consider deferred tax liabilities related to naked credits as a source of taxable income when evaluating the realizability of deferred tax assets related to NOL deductions arising in tax years before January 1, 2018 because these NOLs remain subject to a 20-year carryforward period.

When an entity determines the amount of future taxable income available under the tax law to realize a benefit for deferred tax assets, it needs to consider that NOLs arising in tax years beginning after December 31, 2017 can be used to offset only 80 percent of the taxable income from the future reversal of all deferred tax liabilities, including any amounts related to naked credits.

The following fact pattern illustrates how an entity with both taxable temporary differences related to naked credits and deductible temporary differences (other than NOLs) reversing in future periods that become NOL carryforwards (with an indefinite carryforward period, subject to the 80 percent limit discussed above, and with carryback prohibited) might consider the effects of the Act on the realizability of its deferred tax assets as of December 31, 2017:

  • Deferred tax liabilities related to either the naked credits or to any other taxable temporary differences are $600.
  • Deferred tax assets are also $600, and $300 is expected to reverse and become NOL carryforwards in each of 2018 and 2019, resulting in an NOL carryforward of $600 at the end of 2019.
  • Temporary differences are all of the same nature (ordinary income) and relate to the same tax jurisdiction.
  • The entity expects that it will have breakeven results in 2018 and 2019, prior to the reversal of any temporary differences.

This entity must determine whether the reversal of the naked credits should be a source of future taxable income in 2018 and 2019 and should consider this fact, among others, in determining whether a valuation allowance is needed.

If the entity determines that all or a portion of its deferred tax liabilities, including the naked credits, are sources of future taxable income, it then needs to consider the 80 percent limit on the amount of the NOL carryforwards that can be used to offset future taxable income. In this example, the entity would only be able to offset 80 percent of taxable income in any future tax year and, as a result, would need to recognize a valuation allowance against this deferred tax asset for up to 20 percent of future taxable income in each period.

For example, if the entity determines that reversal of deferred tax liabilities will result in future taxable income of $600 for 2020, it could offset only 80 percent ($480) with its NOL carryforward deduction of $600, and a valuation allowance of 20 percent ($120) would be required. However, if the deferred tax liability was substantially higher than $600 so that future taxable income for 2020 was expected to be $1,000, the 80 percent limit would not apply, and a valuation allowance would not be required because the deferred tax asset related to these NOL carryforwards of $600 is less than 80 percent of $1,000.

The existence of deferred tax liabilities related to naked credits is one of several factors that an entity should consider when it determines whether a valuation allowance is needed to reduce the carrying amount of deferred tax assets to those amounts it expects to realize in each relevant tax jurisdiction. For example, under ASC 740-10-30-18, projections of taxable income and the available tax-planning strategies are other possible sources of taxable income that may be available under a tax law.

These determinations are complex and require an entity to (1) have a deep understanding of its worldwide tax structure, (2) understand the tax law in each relevant tax jurisdiction, and (3) exercise significant judgment when applying all of the existing accounting guidance related to valuation allowances.

Entities may also need to determine the expected periods of reversal for their temporary differences because the reversal patterns of an entity’s existing temporary differences may have a significant effect on whether a valuation allowance is required and, if required, the amount.

Entities should also consider that the existing guidance requires an entity to remeasure its deferred tax positions and the related valuation allowances 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.

A public business entity (including private companies and not-for-profit entities that elect to apply the guidance) may apply the guidance in Staff Accounting Bulletin (SAB) 118 if a reasonable effort has been made and the accounting for the income tax effects of the Act (such as the remeasurement of deferred tax positions) are provisional or incomplete at the time it issues the financial statements for a reporting period. During the “measurement period” discussed in SAB 118, these entities may record adjustments to provisional amounts upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date.



FASB discusses feedback on proposal to reclassify stranded tax effects All decisions reached at Board meetings are tentative and may be changed at future meetings.

The Board met on February 7 to discuss the following matters:

  • Reclassification of certain tax effects from accumulated other comprehensive income (AOCI)
  • Ratification of a consensus-for-exposure issued by the Emerging Issues Task Force (EITF)
  • Changes in disclosure requirements for fair value measurements
  • Targeted improvements to collaborative arrangements
  • Segment reporting

These discussions are summarized below.

Reclassification of certain tax effects from AOCI The Board discussed comments received from stakeholders on the proposed ASU, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, and tentatively decided to

  • Clarify that entities should reclassify from AOCI to retained earnings both the effect of the change in the federal corporate tax rate, as well as other stranded tax amounts under the new tax law that they elect to reclassify. Entities would be required to disclose these other stranded tax amounts if they elect to reclassify them.
  • Permit entities to elect, rather than requiring them, to reclassify these stranded tax amounts. Entities would be required to disclose the election that they make.
  • Require entities with stranded tax effects to disclose their accounting policy for releasing these amounts.
  • Allow entities to elect to record the reclassifications either retrospectively for each period in which the effect of the change in the tax rate is recognized, or at the beginning of the annual or interim period in which the amendments are adopted.
  • Permit early adoption for public business entities if financial statements have not been issued, and for all other entities if financial statements have not been made available for issuance

The Board also tentatively decided to affirm the proposed transition disclosures and the effective date, which is for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, for all entities.

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

See the January 25, 2018 On the Horizon for a summary of this proposal.

Ratification of an EITF consensus-for-exposure The Board ratified the consensus-for-exposure reached by the EITF at the January 18 meeting on Issue 17-A, “Customer’s Accounting for Implementation, Setup, and Other Upfront Costs (Implementation Costs) Incurred in a Cloud Computing Arrangement That Is Considered a Service Agreement.” The Board also directed to staff to draft a proposed ASU on this issue, with a comment period of 60 days.

See the January 25 On the Horizon for a summary of Issue 17-A.

Disclosure framework: disclosure review – fair value measurement The Board discussed the amendments in the proposed ASU, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. It confirmed certain amendments in the proposal, including previous tentative decisions, and made tentative decisions in other areas.

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

Targeted improvements to collaborative arrangements The Board discussed the scope of the project on potential improvements to ASC 808, Collaborative Arrangements, and tentatively decided to retain the current scope of the project, which includes certain transactions between the participants of a collaborative arrangement, but excludes transactions directly related to sales to third parties. The current scope also clarifies when certain transactions are within the scope of the revenue guidance in ASC 606, Revenue from Contracts with Customers, but excludes the development of a model for nonrevenue transactions.

The Board also tentatively decided that entities would be required to apply any amendments resulting from a final ASU when issued retrospectively as of the date when they adopt ASU 606, but could also apply certain practical expedients within the transition guidance in ASC 606.

The staff was directed to draft a proposed ASU on these improvements, with a comment period of 45 days.

Segment reporting The Board discussed its project on segment reporting for the purpose of establishing the parameters of the extended outreach on this topic in the future. No decisions were made.



IASB Narrow-scope amendments issued to pension accounting The IASB has issued Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) to assist entities in determining pension expenses when a defined benefit pension plan is changed.

The existing guidance in IAS 19, Employee Benefits, requires an entity to remeasure its net defined benefit liability or asset when a plan is changed (for instance, by an amendment, a curtailment, or a settlement), but does not specify how an entity should determine current service cost and net interest for the period after the change.

The amendments require an entity to use the updated assumptions from this remeasurement to determine current service cost and net interest for the remainder of the reporting period after the change is made to the plan.

The amendments are effective on or after January 1, 2019.

TRG for IFRS 17 meets The Transition Resource Group (TRG) for IFRS 17, Insurance Contracts, met to consider implementation questions submitted by stakeholders. The IASB technical staff considered these submissions and requested further information on four of them.

The objective of the TRG is to provide a public forum for stakeholders to share implementation questions with the IASB and to follow a discussion of those questions. The TRG does not issue any authoritative guidance, but the IFRS Foundation publishes summaries and recordings from these meetings on its website.

A link to the TRG's webpage is included on the IFRS Foundation’s website.

The next meeting of the TRG for IFRS 17 will be held on May 2.



International Federation of Accountants IPSASB seeks comments on five-year strategy and work plan The International Federation of Accountants’ International Public Sector Accounting Standards Board released a Consultation Document, “Proposed Strategy and Work Plan 2019-2023,” which provides constituents with an opportunity to comment on the Board’s strategic objective, supporting themes, and work plan priorities for 2019 through 2023.

The proposal emphasizes the importance of International Public Sector Accounting Standards (IPSAS) to public financial management reforms and proposes a strategic objective of strengthening public financial management globally by increasing the adoption of accrual-based IPSAS.

Comments on the Consultation Document are due by June 15.



Comment letters issued On February 1, Grant Thornton LLP issued a comment letter in response to the FASB’s proposed ASU, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

The firm also issued a comment letter on February 5 in response to the FASB’s ASU, Leases (Topic 842): Targeted Improvements.



© 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.