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On the Horizon: FASB issues ASU amending SEC guidance in Codification

RFP
Contents Current reporting issue       Impact of tax reform: accounting for changes to the APB 23 assertion

FASB       ASUs amend SEC guidance related to certain investments and income taxes
      Highlights from March 14 meeting posted

SEC proposes amendments to investment company liquidity disclosures

GAQC guidance on HUD AUP report template for LEAP submissions

CAQ
      Publication for audit committees on non-GAAP measures issued
      Highlights from November 2017 IPTF meeting released
      Guidance related to monitoring inflation published

IASB issues 2018 IFRS taxonomy


Current reporting issue Impact of tax reform: accounting for changes to the APB 23 assertion The Tax Cuts and Jobs Act of 2017 (the Act) subjects unrepatriated foreign earnings to a mandatory one-time transition tax (see NDS 2018-03, “Accounting and financial reporting implications of the Tax Cuts and Jobs Act of 2017”).

The firm has received a number of inquiries related to how an entity should account for changes to its indefinite reinvestment assertion for investments in foreign subsidiaries and joint ventures (often referred to as an “APB 23 assertion”) and how an entity should consider the tax effect of a valuation allowance in an interim period. Some of the questions include

  • How should an entity remeasure its existing deferred tax liabilities and assets on the enactment date when it has not asserted, and it will not change its assertion, that foreign accumulated earnings are indefinitely reinvested?
  • What factors should an entity consider when accounting for a change to its indefinite reinvestment assertion related to outside-basis differences associated with U.S. investments in foreign entities resulting from foreign-currency translation adjustments?
  • Should an entity include the tax effect of a valuation allowance that might be necessary at the end of the year for a deferred tax asset related to originating deductible temporary differences and carryforwards during the year when calculating the estimated annual effective income tax rate in an interim period?

The Act does not change existing guidance related to how an entity should account for and disclose the income tax effects of its investments in certain foreign entities. The guidance in ASC 740-30-25-3, Income Taxes: Other Considerations or Special Areas, includes a presumption that all undistributed earnings of a subsidiary will be transferred to the parent entity and that an entity must have specific, definite plans in order to overcome this presumption. Further, ASC 740-30-25-17 includes guidance on the evidence that is necessary for a parent entity to assert that undistributed earnings are invested indefinitely. An entity that makes an APB 23 assertion would not provide for income taxes on those undistributed earnings until (1) those earnings are either repatriated or deemed repatriated, or (2) the entity can no longer make an APB 23 assertion. When either one of those conditions exists, the entity would recognize a deferred tax liability related to the excess amount of book-over-tax basis in the investment (called the “taxable outside-basis difference”). The outside-basis difference may comprise accumulated earnings, business combination–basis differences, foreign-currency translation adjustments, and other items. Further, an outside-basis difference might be either a taxable or a deductible temporary difference, resulting in a deferred tax liability or asset, respectively.

Entities still need to apply the guidance in ASC 740-30-25-3 when accounting for the tax effects of taxable outside-basis differences related to their investments in certain foreign entities, in spite of the fact that earnings and profits (E&P), typically a significant component of the outside-basis difference, may have already been subject to tax as a result of the one-time transition tax.

For certain entities, there may be other outside-basis differences associated with U.S. investments in foreign entities (other than E&P) resulting from business combinations, cumulative translation adjustments, and other items. Entities still need to evaluate these other outside-basis differences and determine whether they intend to make an APB 23 assertion or whether they should provide for future income taxes on these differences. Additionally, the assertion should be evaluated on an entity-by-entity, tier-by-tier basis, resulting in an APB 23 assertion for non-U.S. investments in subsidiaries and joint ventures.

An entity that does not make an APB 23 assertion should provide for deferred income taxes related to its outside-basis differences and recognize deferred tax liabilities and, if applicable, assets related to these outside-basis differences. The entity should remeasure these deferred tax liabilities and assets on the enactment date of the Act and recognize any adjustments within income tax expense (or benefit) in income from continuing operations, regardless of where the related tax provision or benefit was previously recorded. This is because an entity is prohibited from “backwards tracing” the income tax effects of tax provisions or benefits related to outside-basis differences, such as cumulative translation adjustments, that were originally recorded in other comprehensive income. The tax effects of cumulative translation adjustments that remain within accumulated OCI (AOCI) due to this prohibition are referred to as “stranded tax effects.”

After an entity recognizes the tax effects of remeasuring its deferred tax liabilities and assets, it should consider the guidance in ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives the entity the option to reclassify stranded tax effects resulting from the tax law and tax rate changes under the Act from AOCI to retained earnings.

An entity might change its indefinite reinvestment assertion related to its outside-basis difference for a foreign-currency translation adjustment and, as a result, would need to provide deferred income taxes. The entity should consider several factors when determining the amount, financial statement presentation, and limitations when recognizing deferred tax liabilities and assets related to its outside-basis differences, including the following guidance:

  • ASC 830-30-45-21, Foreign Currency Matters: Translation of Financial Statements, states that if deferred income taxes are not provided on the unremitted earnings of a subsidiary, an entity should not provide for deferred income taxes on the related foreign-currency translation adjustments. As a result, when an entity has made an APB 23 assertion, any cumulative translation adjustment recognized within AOCI is not presented “net of deferred income taxes.”
  • Under the Act, an entity no longer asserting indefinite reinvestment effective as of or later than the enactment date of tax reform should initially provide for deferred income taxes on the cumulative amount of the foreign-currency translation adjustment based on the U.S. income tax rate of 21 percent. Recognizing deferred income taxes because an entity no longer asserts indefinite reinvestment is not considered to be an adjustment to deferred income taxes resulting from the Act and is therefore not subject to the guidance in ASU 2018-02 discussed above.
  • Under the guidance in ASC 740-30-25, the amount of any deferred tax asset related to the cumulative translation adjustment that an entity should recognize might be limited based on whether it is apparent that the deductible temporary difference will reverse in the foreseeable future. Deferred tax liabilities and assets for outside-basis differences related to most investments in foreign entities are deemed to have an indefinite reversal period. As the guidance in ASC 740-30-25 addresses the initial recognition, rather than the realizability, of a deferred tax asset, an entity should not apply the more-likely-than-not realizability threshold when determining whether it is apparent that the deductible temporary difference will reverse in the foreseeable future.
  • If an entity recognizes a deferred tax asset associated with outside-basis differences because it asserts that it is apparent that the deductible temporary difference will reverse in the foreseeable future, it would then determine a need for, and the amount of, a valuation allowance by applying the more-likely-than-not realizability threshold.
  • ASC 740-30-25 also addresses whether an entity may consider a deferred tax liability related to a taxable outside-basis difference as a source of taxable income when determining a need for, and the amount of, a valuation allowance for any deferred tax assets related to other outside-basis differences. An entity should only consider this taxable outside-basis difference as a source of taxable income to the extent that a deferred tax liability has been recognized for existing undistributed earnings.

ASC 740-270-25, Income Taxes: Interim Reporting, includes guidance related to how and when an entity should recognize income tax expense (or benefit) in interim periods, and distinguishes between ordinary income (or expense) items that are recognized in the estimated annual effective income tax rate and items that are recognized discretely as they occur (referred to as “discrete items”). Under ASC 740-270-30-7, an entity should include the tax effect of a valuation allowance that it deems necessary for a deferred tax asset at the end of the year for originating deductible temporary differences and carryforwards during the year in the effective tax rate. The income tax effect of changes in judgment related to the beginning-of-year valuation allowance during an interim period should be recognized as a discrete item in the interim period the change in judgment occurs.



FASB ASUs amend SEC guidance related to certain investments and income taxes The FASB has issued ASU 2018-04, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, and ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which amend SEC guidance in the Codification related to certain investments and income taxes, respectively.

ASU 2018-04 amends the Codification to reflect the guidance in SEC Staff Accounting Bulletin (SAB) 117, which conforms the existing SEC guidance to that in ASC 321, Investments – Equity Securities. The guidance in ASC 321 was added to the Codification with the issuance of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. SAB 117 also states that the SEC guidance in SAB Topic 5.M, “Other Than Temporary Impairment of Certain Investments in Equity Securities,” which is codified in ASC 320-10-S99-1, will be superseded once an entity adopts the guidance in ASU 2016-01.

The amendments in ASU 2018-04 are effective when an entity adopts ASU 2016-01. Public business entities that report based on a calendar year are required to adopt ASU 2016-01 during the first quarter ending March 31, 2018.

ASU 2018-04 also updates the Codification to reflect SEC guidance related to intercompany items and transactions in SEC Release 33-9273, “Rescission of Outdated Rules and Forms, and Amendments to Correct References.”

ASU 2018-05 updates the Codification to reflect the guidance in SAB 118, which adds Section EE, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” to SAB Topic 5, “Miscellaneous Accounting.” SAB 118 also provides guidance on applying ASC 740, Income Taxes, if the accounting for certain income tax effects of the Tax Cuts and Jobs Act of 2017 is incomplete when the financial statements are issued for a reporting period.

See the January 4 On the Horizon for a summary of SAB 118.

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

The FASB met on March 14 to discuss two proposed ASUs that would amend the disclosure requirements for business entities about government assistance and for employers that sponsor defined benefit or other postretirement plans.

The Board made no decisions on the proposed disclosure requirements about government assistance. It continued its discussion of the amendments in the proposed ASU, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans, and confirmed its previous tentative decision to eliminate the disclosure of the effects of both a one-percentage-point increase and a one-percentage-point decrease in the assumed health-care-cost trend rates for public entities from the guidance in ASC 715-20, Compensation – Retirement Plans: Defined Benefit Plans – General.

The Board also clarified the disclosure about aggregate information for underfunded (including unfunded) pension plans by tentatively deciding that this disclosure should be based on both the projected benefit obligation and the accumulated benefit obligation.

The effective date of the amendments upon issuance of an ASU would be fiscal years ending after December 15, 2020 for public business entities, and fiscal years ending after December 15, 2021 for all other entities. Early adoption would be permitted for all entities.

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



SEC proposes amendments to investment company liquidity disclosures On March 14, the SEC issued a Proposed Rule, Investment Company Liquidity Disclosure, to add, amend, and rescind certain disclosure requirements for registered open-end investment companies, including certain disclosures on Form N-PORT adopted in the 2016 Final Rule, Investment Company Liquidity Risk Management Programs. Among other things, the proposal would replace the pending requirement in Form N-PORT that a fund publicly disclose, on an aggregate basis, the percentage of its investments that it has allocated to each liquidity classification category with a new narrative discussion in the fund’s annual report regarding its liquidity risk management program.

The comment period ends 60 days after the Proposed Rule is published in the Federal Register.

The Proposed Rule, as well as the previously published Interim Final Rule, Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, along with the updates to the Investment Company Liquidity Risk Management Programs FAQs, stem from outreach related to the implementation of the 2016 Final Rule. Refer to On the Horizon dated March 1, 2018 for further discussion on the Interim Final Rule and FAQs.



GAQC guidance on HUD AUP report template for LEAP submissions The U.S. Department of Housing and Urban Development (HUD) has been updating its hard-coded electronic agreed-upon procedures (AUP) engagement report templates to reflect revisions resulting from the issuance of the AICPA’s clarified attestation standards. The clarified standards are effective for reports dated on or after May 1, 2017. The AUP report templates used for submissions in the Lender Electronic Assessment Portal (LEAP) have not yet been updated to reflect the wording requirements of the clarified standards, so the updated templates will not be available in time for the March 31, 2018 submission deadline for lenders with December 31, 2017 year-ends.

The Government Audit Quality Center (GAQC), after consultation with the AICPA’s Audit and Assurance staff, has issued an alert advising practitioners performing lender audits to proceed with clicking “Submit” to process the electronic AUP report in LEAP so that the auditee is able to meet the submission requirement deadline. The GAQC is recommending that the practitioner also issue a separate AUP report reflecting the requirements of the clarified standards to the client in order to support that an AUP report was issued in accordance with the clarified standards.



CAQ Publication for audit committees on non-GAAP measures issued The Center for Audit Quality (CAQ) issued a publication, “Non-GAAP Measures: A Roadmap for Audit Committees,” to help audit committees enhance their oversight of non-GAAP measures used by company management. The publication provides a set of key considerations for audit committees, including leading practices to assess whether a company’s non-GAAP measures present a balanced representation of the company’s performance.

When assessing non-GAAP measures, the CAQ suggests that the audit committee

  • Put itself in the investor’s shoes when evaluating if the non-GAAP measures and related disclosures presented align with the company’s overall strategy and performance
  • Ask management whether it has an internal policy that provides guidelines for determining how non-GAAP measures are generated, calculated, and presented
  • Discuss with management how the company makes changes to the non-GAAP measures it presents and the rationale for why it would or would not make changes
  • Ask company management to compare or benchmark its non-GAAP measures to its peers
  • Leverage external auditors as a resource when evaluating non-GAAP measures

The CAQ also released a companion video featuring interviews with audit committee chairs that provides additional context and examples of audit committee views and expectations related to overseeing non-GAAP measures.

Highlights from November 2017 IPTF meeting released The highlights of joint meetings between the Center for Audit Quality’s SEC Regulations Committee’s International Practices Task Force and the SEC staff summarize issues discussed. The highlights do not represent official positions of the AICPA, the FASB, or the IASB, and are neither authoritative positions nor interpretations issued by the SEC or its staff.

The CAQ recently issued the highlights of the joint meeting between its International Practices Task Force (IPTF) and the SEC staff held on November 21, 2017. Discussions at the meeting included the following topics:

  • Whether a company could omit the earliest of the three years required for Regulation S-X, Rule 3-05 or for target company financial statement financial statements in Forms S-4 or F-4 in reliance on General Instruction G of Form 20-F when previously issued financial statements were prepared on a basis substantially consistent with IFRS
  • The applicability of the three options in Section 6340.4 of the SEC’s Division of Corporation Finance (CorpFin) Financial Reporting Manual to Regulation S-X, Rule 3-05 financial statements when the interim financial statements are prepared using IFRS, but the most recent annual financial statements are prepared using the company’s previous GAAP
  • Whether Questions 101.04 and 101.05 of CorpFin’s Securities Act Forms Compliance and Disclosure Interpretations could apply to foreign private issuers (FPIs) wanting to omit certain interim financial information or more current published information, pursuant to Item 8.A.5 of Form 20-F, from draft registration statements if such financial information will be superseded by more current information in a subsequent amendment
  • The IFRS Taxonomy, published on March 1, 2017, which is available for FPIs that prepare their financial statements in accordance with IFRS as issued by the IASB. FPIs are required to submit their financial statements in XBRL in their first annual report filed on either Form 20-F or 40-F for a fiscal period ending on or after December 15, 2017.

Guidance related to monitoring inflation published The Document for Discussion summarizes issues discussed only among members of the Center for Audit Quality’s SEC Regulations Committee’s International Practices Task Force specific to monitoring inflation. The discussion document does not represent official positions of the AICPA, the FASB, or the IASB, and is neither an authoritative position nor an interpretation issued by the SEC or its staff.

The CAQ, in conjunction with the IPTF, published the Document for Discussion, “Monitoring Inflation in Certain Countries,” which addresses hyperinflationary accounting considerations related to the economies of Argentina, Venezuela, and Ukraine, among other countries.



IASB issues 2018 IFRS taxonomy The IASB has issued IFRS Taxonomy 2018 as well as two IFRS Taxonomy Updates, Annual Improvements, and Prepayments Features with Negative Compensation (Amendments to IFRS 9).

The IFRS Taxonomy assists entities with the electronic reporting of financial statements that comply with IFRS Standards. It reflects the presentation and disclosure requirements in IFRS Standards and includes elements for disclosures not specifically required by IFRS Standards that entities commonly report.

Updates to the IFRS Taxonomy are released during the year to reflect changes to IFRS Standards, common reporting practice by companies that apply IFRS Standards, general improvements to the IFRS Taxonomy, or technology changes.



© 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.