It’s not often we talk about financial reporting issues in this venue, but the enactment of the Tax Cuts and Jobs Act creates issues for financial reporting involving accounting for income taxes under Accounting Standards Codification (ASC) 740. Under ASC 740-10-35-4 an entity must take into account the impact of a change in tax law on the entity’s deferred tax liabilities, assets and valuation allowances. ASC 740-10-55-62 makes clear this takes place in the period that includes the date of enactment of the revised law.
The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, which makes that the date of enactment of the law. Given the complex changes that are part of this law, it may not be possible to complete an evaluation of the impact of this law on an entity’s deferred tax liabilities, assets and valuation allowances in time for reporting activity for the period ended December 31, 2017.
In recognition of this issue, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118. The bulletin allows registrants to make a reasonable estimate of the effects of TCJA and report that as a provisional amount during the “measurement period.”
The measurement period is defined as:
The measurement period begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. During the measurement period, the staff expects that entities will be acting in good faith to complete the accounting under ASC Topic 740. The staff believes that in no circumstances should the measurement period extend beyond one year from the enactment date.
If it is not possible for an entity to make a reasonable estimate of the effects at the time a statement is issued, the bulletin provides the following guidance:
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. 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.
Reporting for the provisional amounts and subsequent adjustments to those amounts are to be handled as follows:
Any provisional amounts or adjustments to provisional amounts included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.
The bulletin also provides disclosures that should be made while the determination of proper accounting for TCJA under ASC 740 is incomplete and/or finally completed. Those disclosures are:
- Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;
- Disclosures of items reported as provisional amounts;
- Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
- The reason why the initial accounting is incomplete;
- The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;
- The nature and amount of any measurement period adjustments recognized during the reporting period;
- The effect of measurement period adjustments on the effective tax rate; and
- When the accounting for the income tax effects of the Act has been completed. [Staff Bulletin 118, Question 2]