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On The Horizon: FASB discusses financial reporting effects of tax reform

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Contents FASB discusses financial reporting effects of tax reform SEC staff issues FAQs on investment company LRM programs IASB issues update to IFRS Taxonomy 2017


FASB discusses financial reporting effects of tax reform All decisions reached at Board meetings are tentative and may be changed at future meetings.

The Board met on January 10 to discuss the financial reporting effects of the Tax Cuts and Jobs Act (the Act), including the accounting for “stranded tax effects” of deferred tax items within accumulated other comprehensive income (AOCI), as well as five other implementation issues. These discussions are summarized below.

Reclassification of certain tax effects from AOCI to retained earnings The Board discussed issues raised by stakeholders related to the effects of tax rate changes on deferred taxes originally recorded in other comprehensive income (OCI). These deferred taxes, which are carried in AOCI, are referred to as “stranded tax effects.”

Under the existing guidance in ASC 740, Income Taxes, adjustments to deferred tax liabilities and assets resulting from a change in tax laws or rates are included in income from continuing operations, regardless of where the related tax provision or benefit was previously 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.

As a result of this discussion, the Board tentatively decided that entities would be required to reclassify the stranded tax effects resulting from the tax rate changes under the Act from AOCI to retained earnings in each period the effect of the tax rate change is recorded.

In addition, certain transition disclosures would be required, and early adoption would be permitted for public business entities that have not issued financial statements and for all other entities that have not made financial statements available for issuance.

The proposed amendments to ASC 740 would be effective for all entities for fiscal years beginning after December 15, 2018 and for all interim periods within those fiscal years; however, if an entity does not early adopt the proposed amendments, it would apply them retrospectively.

The Board directed the staff to draft a proposed ASU, with a comment period of 15 days.

The Board also tentatively decided to add a research project to its agenda on accounting for the subsequent effects of changes in deferred tax liabilities and assets that were originally charged or credited directly to equity.

Other implementation issues The Board discussed the staff’s preliminary views on the following issues related to the Act, but did not make any tentative decisions:

  • Use of SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, by private companies and not-for-profit entities: On January 11, the FASB staff issued a Staff Q&A related to this issue, which states that the staff would not object to private companies and not-for-profit entities (NFPs) applying SAB 118, and that this application would be in compliance with U.S. GAAP. In addition, the Q&A states that if a private company or an NFP applies SAB 118, they should apply all of its requirements, including disclosures, which should also include the accounting policy of applying SAB 118.
  • Whether to discount the tax liability on the deemed repatriation of foreign earnings: 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’s preliminary view on this issue is that this liability should not be discounted.
  • 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’s preliminary view is that deferred tax assets or an income tax receivable for AMT credits that become refundable should not be discounted.
  • 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 Board discussed questions raised by stakeholders related to 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’s preliminary view is that an entity should measure deferred tax liabilities and assets using the regular tax rate, similarly to the existing guidance for AMT.
  • 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 Board discussed 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’s preliminary view is that entities should be permitted to make an accounting policy election to either account for these effects in the future period the tax arises or to recognize them as part of deferred taxes. The Board asked the staff to continue to evaluate this view.

The FASB staff will issue a final FASB Staff Q&A on the last four issues as it finalizes its views.



SEC staff issues FAQs on investment company LRM programs 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 interpretive FAQs.

The staff of the SEC’s Division of Investment Management recently issued Investment Company Liquidity Risk Management (LRM) Programs FAQs related to the program requirements adopted in October 2016. The FAQs address various questions on sub-advised funds and exchange-traded funds.

The Final Rule was discussed in the Weekly Update dated October 18, 2016.



IASB issues update to IFRS Taxonomy 2017 The International Accounting Standards Board (IASB) has issued an IFRS Taxonomy Update, IFRS Taxonomy 2017 – IFRS 17 Insurance Contracts, to capture the effects of IFRS 17, Insurance Contracts, in the 2017 taxonomy.

IFRS 17 is effective for annual reporting periods beginning on or after January 1, 2021. Early application of IFRS 17, and therefore use of the taxonomy elements, is permitted for entities that apply IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers, on or before the initial application date of IFRS 17.

IFRS 17 supersedes the guidance in IFRS 4, Insurance Contracts. Therefore, the taxonomy elements related to IFRS 4 will no longer be used when IFRS 17 becomes effective.



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