FASB plans accounting changes in reaction to Tax Cuts and Jobs Act

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The Financial Accounting Standards Board is moving forward with a proposed accounting standards update to reclassify the stranded tax effects from the Tax Cuts and Jobs Act of 2017, although at least one investor group has some concerns.

At a FASB meeting last week, the board discussed the feedback it received on the proposed accounting standards update. According to a summary of the meeting posted on FASB’s website, the board decided to clarify that the reclassification amount should include (a) the effect of the change in the U.S. federal corporate tax rate and (b) other stranded tax amounts related to the application of the Tax Cuts and Jobs Act that an entity elects to reclassify. An entity will be required to disclose the other stranded tax amounts related to the application of the new tax law that are reclassified.

FASB will also allow entities an option to elect to reclassify the stranded tax amounts related to the application of the new tax law. An entity will be required to disclose whether it elects to make the reclassification. FASB also decided to require entities with stranded tax effects to disclose their accounting policy for releasing those amounts. It will allow entities an option to record the reclassification either retrospectively or at the beginning of the annual or interim period in which the amendments are adopted.

FASB will also require the transition disclosures it proposed. It will allow early adoption for public companies whose financial statements haven’t yet been issued and all other entities for which financial statements haven’t yet been made available for issuance. The effective date will be for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. FASB plans to issue a final version of the accounting standards update by this Friday, Feb. 16.

The CFA Institute, a global association of investment professionals, submitted a comment letter this month reacting to FASB’s recent proposal (see FASB proposes income tax accounting fixes for new tax law). The group sees potential problems with a balance sheet-only approach.

“When people wrote in asking FASB to act, some of them said just allow this tax effect to be unwound on the balance sheet and not put the deferred tax effect associated with these things in other comprehensive income to the income statement,” said Sandy Peters, head of the Financial Reporting Policy Group at CFA Institute. “So the FASB proposed to continue to leave it through the income statement, which we were OK with. Some people didn’t want that, but FASB said no, it’s going to stay in the income statement. But you still have some stranded effects. They’re just sitting in other comprehensive income, so rather than having $100 taxed at 21 percent, it’s $100 taxed at 35 percent. You have some incorrect amounts of accumulated comprehensive income, so the FASB then proposed just a balance sheet approach to reclass it from accumulated other comprehensive income to retained earnings, and we said if we want to go through the income statement, mechanically we’re going to have to support the proposal. We supported the proposal as long as the deferred tax effect on these unrealized amounts went through the income statement. What we didn’t support in the letter was the fact that, the FASB was going to allow optional early adoption because different people will adopt this at different dates. So you won’t have comparability of the amounts in accumulated other comprehensive income. We said we have to support the proposal if we want the taxes to go through the income statement, but we didn’t support the effective date. We were the only investor organization to comment.”

Most of the other comments came from accounting and auditing firms, and they had a different perspective, particularly those working with banks. “I understand why the preparers would want the right amount in accumulated other comprehensive income, particularly the banks and financial institutions that return on equity and the like,” said Peters. “A lot of people back it out, the accumulated other comprehensive income items, so I get why they would want it that way, but we still want the change in those through the income statement.”

The American Bankers Association and 52 state bankers associations supported the proposal, as it would allow them to adjust the regulatory capital balances that were affected by the new tax law, and banks would be able to apply the accounting standards update to their 2017 results.

The final standards update is expected to mostly echo the proposal that was released for comment in January.

Both FASB and the SEC have been rushing to provide companies with guidance in response to the new tax law. FASB has been providing staff Q&A documents on some of the international tax implications, while the SEC has issued Staff Accounting Bulletin 118 giving companies the opportunity to make provisional estimates of the impact on their financials for up to a year (see SEC offers guidance on accounting effects of Tax Cuts and Jobs Act). Many investors may not fully understand the implications of that, however. “I don’t think investors are tuned into that concept yet,” said Peters. “I don’t think they understand that this was just an estimate, and I don’t think that investors have an idea which of the three categories these tax estimates are going to be in. My guess is that very few of them will say they are complete. They will want to leave themselves some room. They’ll be in the second bucket, which says they’re reasonably complete and here are some of the things that are missing. … The rules are complicated, and I think it’s a complex calculation. And I get that they need more time. I think it would be unrealistic to say that they are completely done. I just think that investors should probably have some idea of what’s outstanding. The tax footnote in the filed financial statements is going to be interesting.”

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