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On The Horizon: Tax reform’s impact on current accounting practices

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On the Horizon newsletter Contents Current practice issues: Impact of tax reform

SAB 118 measurement period ended Dec. 22: Considerations and reminders
New developments on sequestration of tax credit refunds

FASB

Board proposes amendments to lessor accounting guidance
Proposal would extend certain private company accounting alternatives to NFPs
Highlights from Dec. 19 meeting posted

SEC

Final Rule requires disclosure of hedging policies
Final Rule extends Regulation A to Exchange Act reporting companies
Request for comment on earnings releases and quarterly reports issued
SEC operational status during the federal government shutdown

AICPA

Final balloted draft of omnibus auditing standard published
Description criteria on SOC for Supply Chain examinations proposed
PEEC proposes interpretation on staff augmentation arrangements
Audit and Accounting Guide on revenue updated

PCAOB

New standard on accounting estimates adopted
Example broker-dealer auditor’s report published
Post-implementation review of standard on engagement quality released

GASB

Implementation guidance on fiduciary activities proposed
Q4 2018 newsletter issued

Comment letter issued

Current practice issues: Impact of tax reform SAB 118 measurement period ended Dec. 22: Considerations and reminders Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 (TCJA) triggered a sweeping overhaul of individual, business, and international taxes. Entities were required to record many of the tax effects of the TCJA in the interim and annual periods that included the new law’s enactment date, which was Dec. 22, 2017. Certain provisions of the TCJA, such as the reduction in corporate tax rates and the interest deduction limitation, were not effective until 2018. As a result, an entity’s taxes on current taxable income were not affected by these provisions until 2018.

Summary of SEC SAB 118

SEC Staff Accounting Bulletin (SAB) 118 added Section EE, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” to Topic 5, “Miscellaneous Accounting,” of the SAB series. SAB 118 provides guidance to public business entities on applying ASC 740, Income Taxes, if the accounting for certain income tax effects of the TCJA was incomplete when the financial statements were issued for a reporting period. This guidance applied only to the application of ASC 740 in connection with the TCJA and should not be used for purposes of applying ASC 740 to other changes in tax laws. Several public business entities initially applied the guidance in SAB 118 to their financial statements for the interim and annual period ended Dec. 31, 2017.

Further, the FASB staff stated that it would not object to private companies and not-for-profit entities applying SAB 118 and that this application would comply with U.S. GAAP. As a result, several privately held entities applied the guidance in SAB 118 to their financial statements for the year ended Dec. 31, 2017.

SAB 118 allowed entities a period of time to finalize their estimates of the income tax effects of the TCJA. During that time, entities accounted for these effects under SAB 118 in one of the following manners:

  • If an entity had completed the accounting for the income tax effects of any provisions of the TCJA by the time it issued the financial statements for a reporting period, the entity recorded those effects in that reporting period. These amounts were not reported as provisional amounts.
  • If an entity had not completed the accounting for the income tax effects of any provisions of the TCJA by the time it issued the financial statements for a reporting period but could determine a reasonable estimate, the entity reported such estimate as a provisional amount in those financial statements.
  • If an entity had not completed the accounting for the income tax effects of any provisions of the TCJA by the time it issued the financial statements for a reporting period and could not determine a reasonable estimate, the entity continued 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 of the TCJA. Therefore, an entity did not adjust its current or deferred income taxes for any specific tax effects of the TCJA until a reasonable estimate of their effect could be determined.

SAB 118 also required entities to include several financial statement disclosures to provide information about the material financial reporting impact of the TCJA when the accounting under ASC 740 was incomplete, regardless of whether a reasonable estimate could be made.

The measurement period under SAB 118

An entity was allowed to use a period of time, referred to as a “measurement period” (similar to the concept of measurement period in ASC 805, Business Combinations) to complete the accounting for the income tax effects of the TCJA. The measurement period begins at 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. As a result, the measurement period under SAB 118 ended on Dec. 22, 2018, for all entities, regardless of whether the entity had obtained, prepared, and analyzed the information necessary to complete these accounting requirements.

Entities that have not completed the accounting for all of the income tax effects of the TCJA by the end of the measurement period are no longer permitted to apply the guidance in SAB 118 to any areas where the accounting for the income tax effects of the TCJA was incomplete as of the end of the measurement period. This is true even for tax effects that had been accounted for under SAB 118 as of the end of the previous reporting period. After the measurement period ends, these entities should evaluate these tax effects under the guidance on accounting for uncertainty in income taxes in ASC 740, which recognizes a tax position that is more-likely-than-not to be sustained and measures the ultimate tax benefit as the largest amount of benefit (determined on a cumulative probability basis) that is more-likely-than-not to be sustained upon ultimate settlement.

During the measurement period, an entity may have recorded adjustments to provisional amounts, or to amounts that were recorded under the provisions of tax laws that were in effect immediately prior to the enactment of the TCJA, upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date. Such adjustments were recorded in income tax expense (or benefit) from continuing operations in the financial reporting period when they were identified. However, any income tax effects of events either unrelated to the TCJA or related to facts and circumstances that did not exist as of the TCJA’s enactment date were not recorded as measurement-period adjustments. In other words, the guidance in SAB 118 did not apply to accounting effects that arose in periods following the period containing the Act’s enactment date. For example, SAB 118 did not apply to the determination of the estimated effective annual income tax rate for interim periods during the year ended Dec. 31, 2018.

The IRS and the U.S. Department of the Treasury issued tax guidance and proposed tax regulations throughout 2018 related to several provisions of the TCJA, which might have resulted in entities reconsidering the accounting impact of these rule changes during interim periods in 2018. Entities will need to consider all of the final and proposed guidance and regulations issued through the end of the SAB 118 measurement period when making their “final” determinations of the accounting impact of the TCJA. However, entities should not consider tax guidance and regulations issued in 2019 (after the end of the measurement period) when determining the accounting for the income tax effects of the TCJA as of Dec. 31, 2018, even if the financial statements for 2018 had not been issued.

See the Sept. 27, 2018, On the Horizon for certain IRS guidance and proposed regulations interpreting rule changes related to the executive compensation deduction and the one-time transition tax, and how entities might have evaluated the accounting effects of this information in light of the requirements of SAB 118.

See NDS 2018-03, “Accounting and financial reporting implications of the Tax Cuts and Jobs Act of 2017,” for a summary of the financial reporting and other considerations related to the TCJA.

New developments on sequestration of tax credit refunds In March 2018 (updated in November 2018), the IRS published “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations,” which states that under the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain refund payments and elected credits are subject to sequestration based on the then applicable sequestration reduction rate. As a result, entities claiming certain refundable credits, including the alternative minimum tax credit, will be notified by the IRS that a portion of their requested refund was sequestered.

The TCJA repealed the corporate alternative minimum tax (AMT), effective for tax years beginning after Dec. 31, 2017, but allows an entity to claim portions of any unused AMT credits over the next four years to offset its regular tax liability. An entity with unused AMT credits as of Dec. 31, 2017, may first use these credits to offset its regular tax for 2017, and may then claim up to 50% of the remaining AMT credits in 2018, 2019, and 2020, with all remaining AMT credits refundable in 2021.

Refundable AMT credits in excess of amounts used to offset regular tax in any year have been viewed as being subject to sequestration. As a result, these refund payments may be reduced by the applicable sequestration rate, which was 6.6% for the fiscal year ended Sept. 30, 2018.

The guidance in ASC 740-10-25-43 through 25-44 discusses the accounting for AMT credit carryforwards that existed before the TCJA was enacted. That guidance requires entities to recognize a separate deferred tax asset for AMT credit carryforwards, subject to the need for a valuation allowance. Under the TCJA, these existing AMT credit carryforwards offset future regular tax for four years, with any balance remaining refundable in 2021. Because AMT credits will eventually be refundable regardless of whether there is regular taxable income to offset for the year, entities will now be less likely to require a valuation allowance related to these deferred tax assets. However, entities should consider whether a portion of their refundable AMT credits may be reduced by the applicable sequestration rate, resulting in an uncollectible portion of the AMT credit carryforward.

In December 2018, the Office of Management and Budget, in consultation with the Department of Treasury, conducted a legal analysis and concluded that these refundable AMT credits are not subject to sequestration. At this time, neither agency has issued a publicly available revision to this conclusion.

As a result of these new developments, entities will need to monitor the available information relating to the applicability of sequestration and consider whether such information constitutes sufficient evidence to support either the establishment or the removal of a valuation allowance relating to the realizability of deferred tax assets for refundable AMT credits in the annual or interim financial statements.

FASB Board proposes amendments to lessor accounting guidance The FASB issued the proposed ASU, Leases (Topic 842): Codification Improvements for Lessors, which would impact how certain lessors (1) determine the fair value of an asset that is the subject of a lease (referred to as an “underlying asset”), and (2) present principal payments received under sales-type and direct financing leases.

The proposal calls for the following amendments:

  • A lessor that is not a manufacturer or a dealer would determine the fair value of the underlying asset at cost upon lease commencement, reflecting any volume or trade discounts in that amount, unless a significant amount of time had elapsed between acquiring the underlying asset and lease commencement. In these circumstances, the fair value of the underlying asset would be determined using the definition of “fair value” in ASC 820, Fair Value Measurement.
  • A lessor that is a depository or a lending institution within the scope of ASC 942, Financial Services – Depository and Lending, would continue to present all principal payments received under sales-type and direct financing leases within investing activities in the statement of cash flows using the existing guidance in ASC 942.

Public business entities and certain other entities that were required to adopt ASC 842 for fiscal years beginning after Dec. 15, 2018, would apply the proposed amendments for fiscal years beginning after Dec. 15, 2019, and for interim periods within those fiscal years. All other entities would apply the proposed amendments for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020.

Early adoption would be permitted. Entities would apply the proposed amendments using the same transition methodology used in adopting ASC 842.

The FASB staff also issued proposed taxonomy improvements related to the proposed ASU.

Comments on the proposed ASU and on the related proposed taxonomy improvements are due Jan. 15.

Proposal would extend certain private company accounting alternatives to NFPs The FASB issued the proposed ASU, Intangibles – Goodwill and Other (Topic 350), Business Combinations (Topic 805), and Not-for-Profit Entities (Topic 958): Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities, which would permit not-for-profit entities (NFPs) to apply the private company accounting alternatives in the following ASUs:

  • ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council)
  • ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)

The amendments in the proposed ASU would apply to all NFPs, as that term is defined in the Codification’s Master Glossary, including those NFPs that are conduit bond obligors.

The Board will determine the effective date of the proposed amendments, including whether to offer NFPs the same indefinite effective date and unconditional one-time election that’s available for private companies, after it considers stakeholder feedback on the proposal.

An NFP would apply the proposed amendments related to goodwill, if elected, prospectively for all existing goodwill and for all new goodwill resulting from acquisitions completed after the effective date of a final ASU. The accounting alternative in ASC 805, if elected, would be applied when the first transaction within the scope of the alternative occurs.

The FASB staff also issued proposed taxonomy improvements related to the proposed ASU.

Comments on the proposed ASU and on the related proposed taxonomy improvements are due Feb. 18.

Highlights from Dec. 19 meeting posted The Board met on Dec. 19 to redeliberate a proposal that would amend the definition of collections for not-for-profit entities, and a proposal that would improve the existing guidance on measuring credit losses on financial instruments. The Board also discussed, but made no tentative decisions about, its projects on segment reporting and the disaggregation of performance information, directing the staff to perform additional research-related activities.

The Board’s actions related to the proposed ASUs are summarized below.

Updating the definition of ‘collections’

The Board redeliberated the proposed ASU, Not-for-Profit Entities (Topic 958): Updating the Definition of Collections, and tentatively decided to affirm its previous decision to include the concept of direct care in the definition of collections in the Codification’s Master Glossary. But, the Board also tentatively decided not to include a description of what comprises “direct care” in the final ASU.

What’s more, the proposed ASU would require an entity holding a collection to disclose its policies for using the proceeds from removed (deaccessioned) collection items, as well as what the entity considers to be direct care if the proceeds are used for that purpose.

Entities would be required to apply the amendments in the final ASU prospectively for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020.

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

Financial instruments – credit losses implementation

The Board tentatively decided to extend the comment letter period to Jan. 18, 2019, for the proposed ASU, Codification Improvements – Financial Instruments.

The Board also tentatively decided to conduct further research and analysis before issuing a proposed ASU, which would require entities to present total gross write-offs and total gross recoveries by class of financing receivable and major security type within the vintage disclosure for credit quality information under ASC 326-20, Financial Instruments – Credit Losses: Measured at Amortized Cost.

The Board will hold a public roundtable in January 2019 to discuss the topic outlined in the previous paragraph, along with a proposal submitted by a group of banks asking the Board to consider an alternative approach for presenting expected credit losses on the income statement.

See the Nov. 29 On the Horizon for a summary of the proposed ASU.

SEC Final Rule requires disclosure of hedging policies On Dec. 18, 2018, the SEC adopted the Final Rule, Disclosure of Hedging by Employees, Officers and Directors, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rule requires a registrant to disclose in certain proxy or information statements its policies or practices regarding the ability of its employees, officers, or directors to engage in certain hedging transactions that involve company equity securities.

Most issuers must comply with the Final Rule during fiscal years beginning on or after July 1, 2019; however, smaller reporting companies and emerging growth companies must comply with the Final Rule during fiscal years beginning on or after July 1, 2020. Foreign private issuers and listed closed-end funds are not subject to the Final Rule.

Final Rule extends Regulation A to Exchange Act reporting companies On Dec. 19, the SEC adopted the Final Rule, Amendments to Regulation A, to permit companies subject to the reporting requirements of Exchange Act Sections 13 or 15(d) to use Regulation A. The amendments provide greater flexibility for such companies to raise capital because Regulation A provides an exemption from registration under the Securities Act for offerings of securities up to $50 million in a 12-month period. Under the amendments, Exchange Act reporting companies may use their Exchange Act reports to meet the ongoing reporting requirements of Regulation A.

The Final Rule is effective upon publication in the Federal Register.

Request for comment on earnings releases and quarterly reports issued On Dec. 18, 2018, the SEC issued a Request for Comment on how it can reduce the administrative burdens related to quarterly reporting while improving or, at a minimum, maintaining the current levels of investor protection and disclosure effectiveness. The SEC is seeking feedback on the nature, content, and timing of quarterly reports and earnings releases, as well as issues such as how current quarterly reporting practices might promote an undue emphasis on short-term results by managers and others.

The comment period ends on March 21, 2019.

SEC operational status during the federal government shutdown In accordance with the agency’s plan during a shutdown, the SEC is operating with a limited number of staff members who are available to respond to emergency situations involving market integrity and investor protection, including law enforcement. During the shutdown, EDGAR will continue to accept registration statements, offering statements, and all other filings.

However, the Divisions of Corporation Finance and Investment Management are not available to answer general questions, commence or complete filing reviews, or conduct other normal operating activities. This will impact the timing when most registration statements become effective and will delay the qualification of any Form 1-A offering statements. More information on the SEC’s operational status is available on the SEC’s website, including Questions and Answers from the Division of Corporation Finance.

AICPA Final balloted draft of omnibus auditing standard published The Auditing Standards Board (ASB) of the AICPA published a final balloted draft of Statement on Auditing Standard (SAS) 13Y, Omnibus Statement on Auditing Standards — 2019. The requirements therein reduce unnecessary differences between ASB standards and guidance and PCAOB auditing standards regarding communications with those charged with governance and related parties. The ASB previously voted to issue SAS 13Y as a final standard and expects to vote this SAS as final, along with a group of SASs on auditor reporting, at their meeting in mid-January. The expected effective date would be no earlier than for audits of financial statements for periods ending on or after Dec. 15, 2020.

Description criteria on SOC for Supply Chain examinations proposed The AICPA Assurance Services Executive Committee’s (ASEC’s) SOC for Supply Chain Working Group issued an Exposure Draft, Proposed Description Criteria for a Description of An Entity’s Production, Manufacturing, or Distribution System in a SOC for Supply Chain Report, which proposes new description criteria for systems in a SOC for Supply Chain examinations.

The SOC for Supply Chain examination would be performed in accordance with Statements on Standards for Attestation Engagements. An attestation guide, SOC for Supply Chain: Reporting on an Examination of Controls Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy in a Production, Manufacturing, or Distribution System, is also in development.

The comment period ends Feb. 28.

PEEC proposes interpretation on staff augmentation arrangements The AICPA’s Professional Ethics and Executive Committee (PEEC) proposed a new interpretation, “Staff Augmentation Arrangements” (ET Section 1.295.157). The proposed interpretation acknowledges that audit firms offer staff augmentation as a nonattest service wherein the firm loans personnel to the client to perform certain activities, and that these arrangements might create self-review or management participation threats to independence.

The proposed interpretation addresses both the management participation threat and the threat of the appearance of simultaneous employment, which might exist if a firm provides nonattest services under such arrangements.

The proposed interpretation provides:

  • A requirement for members to evaluate the significance of the management participation threats as well as certain safeguards that must be met in order for the threats to be reduced to an acceptable level
  • Guidance in evaluating and safeguarding against the threat of prohibited employment and examples of potential safeguards to consider
  • Certain situations in which staff augmentation would impair independence

Comments on the proposal are due by March 7, 2019.

Audit and Accounting Guide on revenue updated The AICPA issued a new version of the Revenue Recognition Audit and Accounting Guide, updated as of Dec. 1. The guide primarily adds industry-specific implementation guidance for the following areas:

  • Chapter 4, “Asset Management”
  • Chapter 5, “Brokers and Dealers in Securities”
  • Chapter 6, “Gaming Entities”
  • Chapter 7, “Health Care Entities”
  • Chapter 10, “Airlines”
  • Chapter 13, “Telecommunications Entities”
  • Chapter 17, “Hospitality Entities"

PCAOB New standard on accounting estimates adopted The PCAOB adopted a new Auditing Standard (AS), Auditing Accounting Estimates, Including Fair Value Measurements, which

  • Replaces AS 2501, Auditing Accounting Estimates, now retitled Auditing Accounting Estimates, Including Fair Value Measurements
  • Rescinds both AS 2502, Auditing Fair Value Measurements and Disclosures, and AS 2503, Auditing Derivative Instruments, Hedging Activities, and Investments in Securities

The new standard emphasizes professional skepticism, including appropriately considering management bias, and addresses fair value information based on third-party pricing sources.

The PCAOB also adopted amendments to several auditing standards related to the Auditor’s Use of the Work of Specialists, which strengthen the requirements related to a company’s specialist and an auditor’s specialist.

If approved by the SEC, the final standard and related amendments are effective for audits of financial statements for fiscal years ending on or after Dec. 15, 2020.

Example broker-dealer auditor’s report published The PCAOB staff published an “Annotated Example Auditor’s Report for the Audit of a Broker or Dealer.” The example is an unqualified auditor’s opinion under AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, on the financial statements of a broker or dealer reporting under Rule 17a-5 of the Securities Exchange Act of 1934.

Post-implementation review of standard on engagement quality released The PCAOB staff released a “Post-Implementation Review of AS 1220, Engagement Quality Review,” which is the PCAOB’s first post-implementation review. The review’s objectives included evaluating whether the standard accomplishes its intended purpose, identifying potential costs and benefits, and determining unintended consequences.

GASB Implementation guidance on fiduciary activities proposed The Governmental Accounting Standards Board (GASB) issued a proposed Implementation Guide, Fiduciary Activities, which contains new questions and answers, along with amendments to previously issued questions and answers, that are designed to clarify, explain, or elaborate on the requirements of Statement 84, Fiduciary Activities. The GASB issued Statement 84 in January 2017, and it became effective for financial statements for fiscal years beginning after Dec. 15, 2018.

The requirements of the final guide would be effective for reporting periods beginning after Dec. 15, 2018, except for certain questions and answers that would be effective for reporting periods beginning after June 15, 2019. Earlier application is encouraged if the guidance addressed by the question and answer has already been applied.

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

Comments on the proposal are due by Feb. 28.

Q4 2018 newsletter issued The GASB issued the Q4 2018 edition of its GASB Outlook e-newsletter, which includes summaries of the Board’s projects and key activities.

Comment letter issued On Dec. 19, 2018, the firm issued a comment letter in response to the FASB’s proposed ASU, Codification Improvements – Financial Instruments.



© 2019 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.