The Financial Accounting Standards Board proposed an accounting standards update Thursday to help organizations reclassify some of the stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act that President Trump signed into law last month.

The proposed update would require preparers of financial statements to reclassify the stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the new tax law (or a portion thereof) is recorded. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.

In the period of the reclassification, organizations would make several transition disclosures:

  • The nature and reason for the change in accounting principle;
  • A description of the prior-period information that has been retrospectively adjusted, and
  • The effect of the change on affected financial statement line items.

The new tax law encourages U.S.-based multinational corporations to repatriate the foreign profits they have held abroad by bringing them back to the U.S. at lower tax rates. A series of companies, including Morgan Stanley and Goldman Sachs, have been declaring heavy charges to their earnings in the past month related to deferred tax assets with the expectation of much lower taxes in the future.

“After the Tax Cuts and Jobs Act was enacted, stakeholders expressed concerns about current Generally Accepted Accounting Principles that required organizations to adjust deferred tax liabilities and assets after a change in tax laws or rates,” said FASB Chairman Russell G. Golden in a statement. “This proposed ASU will eliminate the stranded tax effects associated with the Act’s change in the federal corporate income tax rate, while improving the usefulness of information reported to financial statement users.”

FASB chairman Russell Golden
FASB chairman Russell Golden

The proposed changes would take effect for all organizations for fiscal years starting after Dec. 15, 2018, and interim periods within those fiscal years. FASB would also allow early adoption of the changes. Organizations would apply the proposed amendments retrospectively to each period or periods in which the effect of the change in the federal corporate income tax rate in the new tax cuts law is recognized.

FASB is asking for comments on the proposal by Feb. 2, 2018.

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