FASB updates accounting for stranded income taxes under the Tax Cuts and Jobs Act

The Financial Accounting Standards Board released an accounting standards update Wednesday to help companies deal with the stranded income tax effects in accumulated other comprehensive income stemming from the Tax Cuts and Jobs Act.

FASB voted last week to move forward with the new standard, despite some opposition from the CFA Institute (see FASB plans accounting changes in reaction to Tax Cuts and Jobs Act). It proposed the update last month only a few weeks after passage of the new tax law, reacting quickly to some of the issues facing multinational companies in dealing with deferred taxes (see FASB proposes income tax accounting fixes for new tax law).

The update gives financial statement preparers an option to reclassify stranded tax effects within accumulated other comprehensive income, or AOCI, 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 of the new law) is recorded.

The update requires preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act, along with information about the other income tax effects that are reclassified.

The amendments will affect any organization that’s required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. It will have a particular impact on multinational corporations, however.

The amendments take effect for all organizations for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. FASB is also allowing early adoption. It advised organizations to apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut
FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut

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