The Securities and Exchange Commission is giving companies some leeway as they prepare their quarterly financial statements after passage of the Tax Cuts and Jobs Act.
On Friday, the SEC issued Staff Accounting Bulletin (SAB) No. 118 laying out the views of the SEC staff about applying U.S. GAAP when preparing an initial accounting of the income tax effects of the Act. It also issued Compliance and Disclosure Interpretation 110.02, which gives the views of the SEC staff about the applicability of Item 2.06 of Form 8-K in terms of reporting the impact of a change in tax rate or tax laws in terms of the new Tax Cuts and Jobs Act.
The tax reform bill, which President Trump signed into law on Friday, makes sweeping changes to the tax laws and is expected to have a substantial impact on the bottom line of many companies. The SEC is providing guidance on ASC Topic 740, the FASB Accounting Standards Codification for accounting for income taxes.
In the guidance, the SEC gives companies some leeway on making reasonable estimates of the potential impact of the new tax law. “To the extent that Company A’s accounting for certain income tax effects of the Act is incomplete, but Company A can determine a reasonable estimate for those effects, the staff would not object to Company A including in its financial statements the reasonable estimate that it had determined," said the SEC. "Conversely, the staff does not believe it would be appropriate for Company A to exclude a reasonable estimate from its financial statements to the extent a reasonable estimate had been determined. The reasonable estimate should be included in Company A’s financial statements in the first reporting period in which Company A was able to determine the reasonable estimate. The reasonable estimate would be reported as a provisional amount in Company A’s financial statements during a ‘measurement period.’”
The SEC staff believes reporting provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act will address circumstances in which an entity doesn't have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740.
"An entity may not have the necessary information available, prepared, or analyzed (including computations) for certain income tax effects of the Act in order to determine a reasonable estimate to be included as provisional amounts," according to the SEC. "The staff would expect no related provisional amounts would be included in an entity’s financial statements for those specific income tax effects for which a reasonable estimate cannot be determined. In circumstances in which provisional amounts cannot be prepared, the staff believes an entity should continue to apply ASC Topic 740 (e.g., when recognizing and measuring current and deferred taxes) based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. That is, the staff does not believe an entity should adjust its current or deferred taxes for those tax effects of the Act until a reasonable estimate can be determined."
"This guidance recognizes that investors demand and deserve high-quality information, while also recognizing that entities may face challenges in accounting for one of the most comprehensive changes to the U.S. federal tax code since 1986,” said SEC director of the Division of Corporation Finance Bill Hinman in a statement.
The SEC staff encourages publicly traded companies, auditors, and others to consult with the staff for interpretative assistance with respect to SEC rules, forms, or generally accepted accounting principles. Guidance for consulting is available for the Division of Corporation Finance at https://www.sec.gov/forms/corp_fin_interpretive and for the Office of the Chief Accountant at https://www.sec.gov/info/accountants/ocasubguidance.htm.
“Allowing entities to take a reasonable period to measure and recognize the effects of the Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors,” said SEC Chief Accountant Wes Bricker in a statement.
The SEC staff is issuing guidance in SAB 118 to address certain fact patterns where the accounting for changes in tax laws or tax rates under ASC Topic 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Tax Cuts and Jobs Act is enacted.
Under the staff guidance in SAB 118, in the financial reporting period the new law is enacted, the income tax effects of the law would be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a "measurement period" until the accounting under ASC 740 is complete. The measurement period would be limited under the staff's guidance. The guidance also discusses supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the extra information or analysis needed, and other information relevant to why a registrant wasn’t able to complete the accounting required under ASC 740 in a timely manner.
The SEC staff is issuing guidance in Compliance & Disclosure Interpretation 110.02 to clarify how registrants making use of the measurement period approach in Staff Accounting Bulletin 118 will be expected to comply with their obligations for disclosing material impairments of assets.
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