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On The Horizon: Staff Q&As address additional implementation issues related to tax reform

RFP
Contents FASB       Staff Q&As address additional implementation issues related to tax reform
    Proposal would require reclassification of certain tax effects from AOCI
    Board discusses comments received on proposed amendments to ASC 825
  
EITF meeting held on January 18 IASB     January 2018 IFRIC update issued   

IFAC releases publication on agreed-upon procedure engagements
FASB Staff Q&As address additional implementation issues related to tax reform The Board recently issued four additional Staff Q&A documents addressing certain financial accounting and reporting issues related to implementing the Tax Cuts and Jobs Act (the ACT). The staff’s views on these issues are summarized in the following Q&As:
  • Topic 740, No. 2: Whether to Discount the Tax Liability on the Deemed Repatriation – The Act subjects unrepatriated foreign earnings to a mandatory one-time transition tax, but permits entities to pay this tax, without interest, over eight years. The staff believes that this liability should not be discounted.
  • Topic 740, No. 3: Whether to Discount Alternative Minimum Tax Credits That Become Refundable – The Act repeals the alternative minimum tax (AMT), effective for tax years beginning after December 31, 2017, but allows an entity to claim portions of any unused AMT credits over the next four years. The staff believes that neither a deferred tax asset nor an income tax receivable for AMT credits that become refundable should be discounted. The staff also believes that the requirement to disclose the amounts of tax credit carryforwards should apply regardless of whether an entity presents the AMT credit carryforward as a deferred tax asset or as an income tax receivable.
  • Topic 740, No. 4: Accounting for the Base Erosion Anti-Abuse Tax – One provision of the Act, referred to as the Base Erosion Anti-Abuse Tax (BEAT), creates a separate tax system that imposes a tax on deductible payments to any “foreign-related party,” as well as a minimum tax on certain domestic corporations’ “modified taxable income.” The Q&A addresses whether an entity should measure deferred tax liabilities and assets at the regular tax rate (21 percent) or at the lower BEAT rate when it expects to qualify under BEAT in future years. The staff believes that an entity should measure deferred tax liabilities and assets using the regular tax rate system, similarly to the existing guidance for AMT, even if it expects to qualify under BEAT in future years.
  • Topic 740, No. 5: Accounting for Global Intangible Low-Taxed Income – The Act imposes a minimum tax on certain foreign income deemed to be in excess of a routine return on tangible asset investment. As a result, U.S. shareholders of certain foreign corporations are subject to current U.S. tax on their global intangible low-taxed income (GILTI) for tax years beginning after 2017. The Q&A addresses whether entities should exclude the effects of the GILTI tax from income tax expense until the future period when this tax arises, or instead include these effects as part of deferred taxes on the related investment in the foreign corporation. The staff believes that the existing accounting guidance related to GILTI is unclear, and that entities should be permitted to make an accounting policy election to either account for these effects in the future period when the tax arises or to recognize them as part of deferred taxes. However, an entity should disclose its accounting policy related to GILTI. The staff will monitor how an entity that pays tax on GILTI is accounting for and disclosing its effects for consideration of further accounting or disclosure improvements.

Proposal would require reclassification of certain tax effects from AOCI The Board issued the proposed ASU, 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 “backward tracing” the income tax effects of tax provisions or benefits originally recorded in OCI. “Backward tracing” means recognizing the effects of changes in deferred tax amounts in the same line item where the deferred tax amounts were originally recognized. The proposal would not amend this guidance, so entities would still be prohibited from backward tracing. The tax effects of items that remain within accumulated other comprehensive income (AOCI) due to the prohibition on backward tracing are referred to as “stranded tax effects.”

The proposal would require entities to reclassify the stranded tax effects resulting from the tax rate change under the Act from AOCI to retained earnings for each period in which the effect of the tax rate change is recorded. The amount of the reclassification would be the difference between (1) the amount initially charged or credited directly to OCI at the previously enacted U.S. federal corporate income tax rate that remains in AOCI, and (2) the amount that would have been charged or credited directly to OCI using the newly enacted 21 percent rate, excluding the effect of any valuation allowance previously charged to income from continuing operations.
Early adoption would be 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 proposed amendments would be effective for all entities for fiscal years beginning after December 15, 2018 and for all interim periods within those fiscal years. Entities would apply the proposed amendments retrospectively to each period (or periods) in which the entity records the effect of the tax rate change under the Act. The reclassification might occur in multiple periods for entities recording provisional amounts under SEC Staff Accounting Bulletin 118 that adjust those provisional amounts as they obtain, prepare, or analyze additional information.

The following transition disclosures would be required in the first interim or annual period of adoption:
  • The nature of, and reason for, the change in accounting principle
  • A description of the prior-period information that has been retrospectively adjusted
  • The effect of the change on affected financial statement line items

Comments on the proposed ASU are due February 2.

Board discusses comments received on proposed amendments to ASC 825 All decisions reached at Board meetings are tentative and may be changed at future meetings.

On January 18, the Board met to discuss comments received from stakeholders on Part I of the proposed ASU, Technical Corrections and Improvements to Recently Issued Standards: Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

As a result of these discussions, the Board tentatively decided to:

  • Require insurance companies subject to the guidance in ASC 944, Financial Services – Insurance, to apply the prospective method chosen for transition to all equity securities measured using the measurement alternative in ASC 321, Investments – Equity Securities
  • Remove the phrase "all equities of the same type" from the subsequent measurement guidance in ASC 321 included in the proposal and replace it with "all identical or similar investments of the same issuer"
  • Make an entity’s election to measure an equity security and all identical or similar investments of the same issuer at fair value under the proposal both irrevocable and applicable to all future purchases of identical or similar investments of the same issuer
  • Clarify the guidance in ASC 815-15-25-4, Derivatives and Hedging: Embedded Derivatives, to state that when an entity elects the fair value option for a financial liability that is also a hybrid financial instrument, some changes in fair value should be presented separately in other comprehensive income under ASC 825-10-45-5, Financial Instruments

The proposed amendments upon issuance of a final ASU would be effective for public business entities for fiscal years beginning after December 15, 2017 and in interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018 would not be required to adopt the amendments until the interim period beginning after June 15, 2018.

For all other entities, the effective date and transition requirements would be the same as the requirements in ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Early adoption is permitted for all entities that have already adopted ASU 2016-01.

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

See the October 5, 2017 On the Horizon for a summary of this proposal.



EITF meeting held on January 18 Because a consensus-for-exposure is subject to ratification by the FASB and some of the details of conclusions reached at an EITF meeting are determined during the process of developing the minutes of the meeting, the following descriptions are preliminary.

On January 18, the FASB’s Emerging Issues Task Force (EITF) reached a consensus-for-exposure 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 Contract.” The staff will seek Board ratification of the consensus-for-exposure within the upcoming weeks.

The consensus-for-exposure proposes that implementation costs associated with a cloud computing arrangement that is considered a service contract would be accounted for the same way as implementation costs associated with a software license, as prescribed in ASC 350 40, Intangibles – Goodwill and Other: Internal-Use Software. Therefore, implementation costs incurred in the preliminary and post-implementation phases of a project would be expensed, along with data conversion and training costs. Implementation costs incurred in the application development phase, such as costs for the cloud computing arrangement’s integration with on-premise software, coding, and configuration or customization, would be capitalized.

Entities would amortize the capitalized implementation costs over the noncancellable term of the cloud computing arrangement plus any renewal periods, to the extent that it is reasonably certain the renewal will be exercised. The amortization of capitalized implementation costs would be reflected in the same line item within the income statement as the periodic payments for the hosting service.

The proposal would require entities to provide additional disclosures about the terms of the cloud computing arrangement, significant judgments and assumptions made, and qualitative and/or quantitative information about the costs expensed and capitalized as well as the period in which the costs are amortized. These disclosures would also be required for internal-use software arrangements that are currently accounted for under ASC 350-40.

Entities may elect to apply the proposed amendments upon issuance of a final ASU on a prospective basis to arrangements entered into, renewed, or materially modified after the adoption of the final guidance or on a retrospective basis to all arrangements.



IASB January 2018 IFRIC update issued The IASB’s IFRS Interpretations Committee (IFRIC) has issued the January 2018 Update summarizing the decisions reached by the Committee during its January 16 public meeting.

Decisions on an IFRIC Interpretation become final only after the Committee has formally voted on the Interpretation, which is then sent to the IASB for ratification.



IFAC releases publication on agreed-upon procedure engagements The International Federation of Accountants (IFAC) issued a publication, “Agreed-Upon Procedures (AUP) Engagements: A Growth and Value Opportunity,” in connection with the International Accounting and Assurance Standards Board’s work on a standard-setting project proposal to revise the International Standard on Related Services (ISRS) 4400, Engagements to Perform Agreed-Upon Procedures Regarding Financial Information.

The publication discusses:
  • What an AUP engagement is
  • The benefits of offering such services
  • Examples of financial- and nonfinancial-information AUP engagements, including case studies with examples of procedures that might be applied
  • An illustration of an AUP engagement report from ISRS 4400

The AICPA is also currently working on a project to revise AT-C Section 215, Agreed-Upon Procedures Engagements.



© 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.