The FASB has concluded to allow private companies and not-for-profit entities to apply SEC Staff Accounting Bulletin No. 118 as they account for the impact of tax reform under US GAAP. Watch our high-level summary video for some of the key messages.
Hi, I'm Jon Crowell, a senior manager in PwC's national office.
At its meeting in early January, the FASB Board agreed to allow private companies and not-for-profit entities to apply Staff Accounting Bulletin 118, as they account for the impact of tax reform under US GAAP. SAB 118 was issued by the SEC staff to address the application of US GAAP in situations when a company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for tax reform. This is good news as financial statement preparers work through the complex task of accounting for the most significant change in US tax law since 1986.
By way of background, SAB 118 provides guidance under three scenarios. The accounting for these scenarios is subject to a measurement period which can not exceed one year from the December 22, 2017 enactment date.
The first scenario is for those aspects of the new tax law for which the accounting is complete. In these instances, companies must reflect the tax effects in their current reporting.
The second scenario addresses when the accounting is incomplete for aspects of the law but a reasonable estimate can be made. In these instances, a provisional amount is recorded in a Company's current reporting. Any provisional amounts or adjustments recorded during the measurement period are included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined.
In the third scenario when a reasonable estimate can not be made for aspects of the law - companies would continue to apply existing tax guidance based on the provisions of the tax laws that were in effect immediately prior to the enactment of US tax reform.
A company may be able to complete the accounting for some aspects of the law earlier than others and as a result may need to apply all three scenarios.
For example, assume that a company is able to re-measure its deferred tax assets based on the new tax rate but is not able to make a reasonable estimate for the recognition or release of a related valuation allowance. In this case, the Company would record the remeasurement of the deferred tax asset in the period of enactment based on the change in tax rates but would not record the valuation allowance adjustment, if any, until the period when it was able to obtain, prepare and analyze the necessary information to make a reasonable estimate.
As a general reminder, the SEC staff expects that companies will act in good faith to complete their income tax accounting for the new tax act. SAB 118 provides that the measurement period is closed when a company's accounting is complete. As mentioned, the measurement period cannot extend beyond one year from the enactment date.
SAB 118 also includes disclosure requirements. As highlighted on the screen, companies should disclose aspects of the accounting that are not complete including the reasons and what additional information still needs to be obtained. Other disclosures include the provisional amounts recorded and the nature and amount of any measurement period adjustments recognized and their impact on the effective tax rate. Companies will also need to disclose when the accounting for the income tax effects of the 2017 Act has been completed.
For more information, refer to our In brief summarizing the SEC Staff's interpretive guidance, which is available on CFOdirect.com. The In brief also includes links to the Staff Accounting Bulletin 118.