You may have heard that the Republican tax overhaul (originally known as the Tax Cuts and Jobs Act of 2017) was signed into law on December 22, 2017. That same day, the SEC staff provided helpful disclosure guidance in the form of Staff Accounting Bulletin No. 118 and C&DI 110.02. Together, this timely guidance clarifies how companies should disclose certain income tax effects of the new law and the extent to which Item 2.06 of Form 8-K (disclosure of asset impairments) is implicated.
SAB 118 responds to widespread concern over how to comply with applicable financial and other reporting requirements while companies are still figuring out the impact of the new tax law. SAB 118 specifically addresses, and is limited to, issues related to tax recognition for the current year and deferred tax liabilities and assets for future years in accordance with FASB Accounting Standards Codification Topic 740. The guidance acknowledges that there may be situations where the accounting for certain tax effects of the law will be incomplete by the time financial statements are issued for a company’s reporting period that includes December 22, 2017 and seeks to provide more certainty and consistency of views where a company does not have the necessary information available, prepared or analyzed (including computations) by the applicable filing date.
Essentially, SAB 118 allows companies to provide reasonable estimates of the tax effects for the first reporting period in which the company is able to determine the reasonable estimate. If a reasonable estimate has not been determined, then no estimate should be provided, and the company should report based on the tax laws in effect immediately prior to the GOP tax plan being enacted.
The period between December 22, 2017, and the date when a company has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC Topic 740 is known as the “measurement period.” The staff expects companies to act in good faith to complete the accounting analysis and believes that in no circumstances should the measurement period extend beyond one year from the law’s enactment date.
The staff states that companies should include financial disclosures about the material impacts of the tax overhaul for which the accounting under ASC 740 is incomplete, including:
- Qualitative disclosures of the income tax effects 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 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 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 has been completed.
SAB 118 applies only to ASC 740 in connection with the new tax law and should not be relied on for applying ASC 740 to any other tax law changes.
C&DI 110.02 states that the accounting impact of the tax law does not trigger asset impairment disclosure under Item 2.06 of Form 8-K. Rather, a company utilizing the measurement period approach described above may disclose any such impairment in its next Form 10-Q or 10-K.
Finally, the guidance encourages companies and their auditors to consult with the staff at the SEC Division of Corporation Finance and the Office of the Chief Accountant, as appropriate, for interpretive assistance.
Obviously, responsibility for this disclosure falls primarily on a company’s finance department in coordination with its outside auditors. In addition, however, be sure that your Disclosure Committee is aware of this transitional situation in order to ensure the proper functioning of your disclosure controls and procedures, as well asthe ongoing accuracy of applicable certifications.