Audit committees at public companies should be aware of some of the accounting implications of the new Tax Cuts and Jobs Act, according to a new report from Ernst & Young.

The report discusses some of the provisions of the tax reform law that could have an impact on corporations, along with recent guidance from staff at the Securities and Exchange Commission and the Financial Accounting Standards Board after passage of the law. The SEC’s Staff Accounting Bulletin 118, or SAB 118, allows a company that hasn’t completed its accounting for the effects of the new law by its financial reporting deadline to report provisional amounts based on reasonable estimates for the items for which the accounting is incomplete. Those amounts are then subject to adjustment for a measurement period of up to one year.

“I think the audit committees have been very focused on making sure that, now that we have the Act, are we going to be able to get this accounted for in a timely fashion given that most companies have to file their 10-K in 60 days,” said Steve Klemash, Americas leader of the EY Center for Board Matters. “The SEC quickly reacted with Staff Accounting Bulletin 118, in allowing companies to record this on a provisional basis. Audit committees wanted to make sure they have the resources, and the external auditor has the resources, to get this accounted for.”

“The SEC staff was very helpful,” said EY partner Richard Jones, chief accountant in EY’s professional practice group. “They were tracking tax reform and they acted very quickly to come up with what I think is a very reasonable model that enables companies to get the best information out in the hands of users of financial statements. That’s SAB 118.”

FASB’s staff has also come out with question and answer guidance on several tax accounting issues stemming from the new law, such as the Base Erosion Anti-Abuse Tax (BEAT) and the Global Intangible Low-Taxed Income (GILTI) provisions. FASB has also proposed an Accounting Standards Update to address issues resulting from the effects of a lower corporate income tax rate on items that were initially accounted for as part of “other comprehensive income.” The EY report recommends companies should continue to monitor FASB’s website for updates and further guidance.

“The SEC, FASB and the other regulators have done a great job here,” said Klemash. “For a significant reform to be issued on December 22 with the expectation that it was going to be formally accounted for 60 some days later I think was going to be a real challenge.”

He believes companies are benefiting from being able to account for taxes on a provisional basis for a year.

“Providing companies the luxury of reflecting and accounting for things on a provisional basis, based upon their best judgments and estimates, was really prudent of the SEC, FASB and others,” said Klemash.

The report recommends that audit committees should make sure management is executing a plan to address the new tax law, including calculating changes to federal deferred tax balances, and calculating the one-time transition tax on previously deferred foreign earnings and its accounting implications.

Audit committees should also ask management questions such as whether the organization has the appropriate resources to address the effects of the tax legislation as well as the implementation efforts relating to the adoption of other accounting standards, including revenue recognition, credit losses and leases, according to the report.

There are also questions for the audit committee to ask the outside auditing firm, according to the report, including what additional audit procedures have been performed as a result of the tax legislation, and have there been any additional audit risks identified by the engagement team?

Audit committees need to keep in contact with management and the outside audit firm as the company adjusts its accounting to the new tax law. “Clearly they want to make sure, because a lot of this will be provisional, that there is a path forward and that they have a solid understanding as to how this will ultimately be resolved over the next 12 months,” said Klemash.

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