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On The Horizon: SEC issues guidance on accounting for tax reform

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Contents FASB       Highlights from December 20 meeting posted
      2018 GAAP Financial Reporting Taxonomy available

SEC issues guidance on accounting for tax reform PCAOB updates staff guidance on changes to auditor’s report AICPA       FinREC releases revenue recognition implementation issue for broker-dealers

GASB issues OPEB implementation guidance


FASB Highlights from December 20 meeting posted All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on December 20 to discuss a potential project to add the overnight index swap rate based on the secured overnight financing rate (SOFR OIS) as a benchmark interest rate for hedge accounting purposes under ASC 815, Derivatives and Hedging.

As a result, the Board tentatively decided to

  • Add a project to the technical agenda to consider including the SOFR OIS as a benchmark interest rate for hedge accounting purposes
  • Add the SOFR OIS rate as a benchmark interest rate for (1) fair value hedges of fixed-rate financial instruments, and (2) cash flow hedges of forecasted purchases or issuances of fixed-rate financial instruments
  • Require an entity to apply any proposed amendments prospectively
  • Include a question in a proposed ASU on this topic asking whether the Board should establish a broader SOFR swap rate as a benchmark interest rate

The Board directed the staff to draft a proposed ASU for vote by written ballot, with a comment period ending on March 30.

2018 GAAP Financial Reporting Taxonomy available The FASB announced the availability of the 2018 GAAP Financial Reporting Taxonomy and the 2018 SEC Reporting Taxonomy, pending final acceptance by the SEC.

The 2018 GAAP Financial Reporting Taxonomy contains updates for accounting standards and other improvements made to the official taxonomy previously used by SEC issuers.

The SEC Reporting Taxonomy, which is new for 2018, contains elements necessary to meet SEC requirements for (1) financial schedules required by the SEC, (2) condensed consolidating financial information for guarantors, and (3) disclosures about oil- and gas-producing activities. This taxonomy also includes dimensional elements that are commonly used by filers for which specific recognition and measurement guidance is lacking in U.S. GAAP.



SEC issues guidance on accounting for tax reform Staff Accounting Bulletins (SABs) are neither rules nor interpretations of the Commission. They represent interpretations and practices followed by the staff of the Division of Corporation Finance and the Office of the Chief Accountant in administering the financial, accounting, and disclosure requirements of the federal securities laws. The SEC staff intends SABs to be applied to analogous situations.

The Compliance and Disclosure Interpretations described below reflect the views of the SEC staff. They are not rules, regulations, or statements of the Commission and have not been approved by the Commission. The interpretations are intended as general guidance and should not be relied on as definitive.


The SEC staff recently announced the publication of guidance to help ensure timely public disclosures of the accounting impact of the Tax Cuts and Jobs Act (the Act), while acknowledging the challenges some entities will face in recognizing tax changes in the financial reporting period that includes the Act’s enactment date (December 22, 2017). The guidance in Staff Accounting Bulletin (SAB) 118 and in Exchange Act Form 8-K Compliance and Disclosure Interpretation (C&DI) 110.02, along with an Information Update from the SEC’s Division of Investment Management, is summarized below.

SAB 118 SAB 118 adds Section EE, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, to Topic 5, Miscellaneous Accounting, of the SAB Series, which provides guidance on applying ASC 740, Income Taxes, if the accounting for certain income tax effects of the Act are incomplete by the time the financial statements are issued for a reporting period. This guidance applies only to the application of ASC 740 in connection with the Act and should not be applied for other changes in tax laws.

SAB 118 states that the SEC staff expects entities to act in good faith to complete the accounting under ASC 740; therefore, the guidance in SAB 118 does not imply that entities have additional time to recognize the impact of the Act. However, in issuing SAB 118, the staff recognizes that the impact of the Act will result in many complex calculations in an entity’s financial statements, which may take more than one reporting period to finalize.

The following flowchart summarizes the guidance in SAB 118, based on whether an entity has completed the accounting requirements under ASC 740 as of the reporting date.

Chart for

Tax effects for which accounting is complete

For the income tax effects of the Act for which an entity has completed the accounting by the time it issues the financial statements for a reporting period, the entity should record those effects in that reporting period. These amounts should not be reported as provisional amounts.

Tax effects for which accounting is incomplete – an estimate can be made

For the income tax effects of the Act for which an entity has not completed the accounting by the time it issues the financial statements for a reporting period but can determine a reasonable estimate, such estimate should be reported as a provisional amount in those financial statements.

Tax effects for which accounting is incomplete – an estimate cannot be made

For the income tax effects of the Act for which an entity has not completed the accounting by the time it issues the financial statements for a reporting period and a reasonable estimate of the income tax effects of the Act cannot be determined, the entity should continue to apply ASC 740 (for example, when recognizing and measuring current and deferred income taxes), based on the provisions of the tax laws that were in effect immediately prior to the enactment date of the Act. Therefore, an entity should not adjust its current or deferred income taxes for any specific tax effects of the Act until a reasonable estimate of their effect can be determined.

Subsequent changes to the provisional amounts of tax effects related to the Act

The entity is allowed to use a “measurement period” similar to the concept of a measurement period used in ASC 805, Business Combinations, to complete the accounting for the income tax effects of the Act. The measurement period begins from the enactment date and ends when the entity has obtained, prepared, and analyzed the information required to complete the accounting requirements under ASC 740. The measurement period cannot extend beyond one year from the enactment date.

During the measurement period, an entity may record adjustments to provisional amounts, or to amounts that are recorded under the provisions of tax laws that were in effect immediately prior to the enactment of the Act, upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date. Such adjustments should be recorded in income tax expense (or benefit) from continuing operations in the financial reporting period they are identified. However, any income tax effects of events that are unrelated to the Act or are related to facts and circumstances that did not exist as of the Act’s enactment date should not be recorded as measurement-period adjustments.

Disclosures

Entities should include the following financial statement disclosures to provide information about the material financial reporting impact of the Act if the accounting under ASC 740 is incomplete, whether or not a reasonable estimate can be made:

  • Qualitative information about the income tax effects of the Act for which the accounting is incomplete
  • Items reported as provisional amounts
  • Existing current or deferred tax amounts for which the income tax effects of the Act have not been completed
  • Reason why the initial accounting is incomplete
  • Additional information that needs to be obtained, prepared, or analyzed to complete the accounting requirements under ASC 740
  • Nature and amount of any measurement-period adjustments recognized during the reporting period
  • Effect of measurement-period adjustments on the effective income tax rate
  • When the accounting for the income tax effects of the Act has been completed

Exchange Act Form 8-K C&DI 110.02 C&DI 110.02 states that the remeasurement of a deferred tax asset to reflect the impact of a change in tax rates or tax law is not considered to be an impairment under ASC 740. As a result, this remeasurement does not require an entity to file under Item 2.06, Material Impairments, of Form 8-K. However, the interpretation also states that the enactment of new tax rates or tax laws could impact an entity’s determination of whether it is more likely than not that a deferred tax asset will be realized.

Under the interpretation, entities using the measurement-period approach in SAB 118 that conclude an impairment of a deferred tax asset resulting from the enactment of the Act has occurred may rely on the instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report (Form 10-Q or Form 10-K) rather than in a current report filing.

Division of Investment Management Information Update The SEC’s Division of Investment Management recently confirmed that investment companies that account for income taxes under ASC 740 may rely on the guidance in SAB 118 for purposes of calculating net asset values (NAV) and reporting measurement-period adjustments. The division also reminded registrants that they must disclose relevant information to investors, including information about the material impact of the Act on its calculation of NAV, and material provisions of the Act for which the accounting is incomplete, if applicable. The disclosure about those effects may be made in a press release, website disclosure, or some other reasonable manner.



PCAOB updates staff guidance on changes to auditor’s report The PCAOB updated the auditor’s reporting guidance, initially issued on December 4, 2017, to provide additional information on determining auditor tenure. The new guidance permits auditors that cannot readily determine when the initial engagement letter was signed to determine tenure based on their own records, company records, or publicly available information, such as company filing information available on the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. In the absence of other evidence, auditors can determine tenure based on the year in which the auditor first issued an audit report on the company’s financial statements or, if earlier, the auditor’s estimate of when work would have commenced to enable the issuance of such report.



AICPA FinREC releases revenue recognition implementation issue for broker-dealers The AICPA Financial Reporting Executive Committee (FinREC) released a working draft of a revenue recognition implementation issue for comment. This latest working draft discusses considerations about, and provides illustrative examples for, broker-dealers implementing the new revenue standard.

This implementation issue will be added to the AICPA audit and accounting guide on revenue recognition after the review of public comments and finalization of the issue.

The comment period for this working draft ends February 15, 2018.



GASB issues OPEB implementation guidance The Governmental Accounting Standards Board (GASB) issued Implementation Guide 2017-3, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting), which contains questions and answers intended to clarify, explain, or elaborate on guidance for other postemployment benefits (OPEB) under Statement 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, as amended, and for OPEB plans under Statement 74, Financial Reporting for Postemployment Benefits Plans Other Than Pension Plans, as amended.

Most of the questions and answers in the guide are effective for reporting periods beginning after June 15, 2017, but certain questions and answers are not effective until reporting periods beginning after June 15, 2018. Earlier application is encouraged if Statement 75 and Statement 74 have already been adopted.

State and local governments should apply the provisions of the guide retroactively by restating financial statements for all prior periods presented. If retroactive restatement is not practicable, these provisions should be applied as a restatement of beginning fiduciary net position for the earliest period restated, and certain disclosures are required.



© 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.