FASB votes to allow reclass of stranded tax effects caused by US tax reform

In brief Feb 08, 2018

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FASB votes in favor of optional reclassification of stranded tax effects caused by US tax reform. Final guidance coming soon.

What happened?

At its February 7, 2018 meeting, the FASB voted to approve the final drafting of an
Accounting Standards Update (ASU) that will give companies the option to reclassify
stranded tax effects caused by the newly-enacted US Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive income (AOCI) to retained earnings.

In response to concerns raised during the public comment period, adoption of the final
ASU will be optional. It would have been required under the initial proposal. A company will need to disclose if it elects not to adopt the ASU.

The final ASU will include revised wording regarding the scope of the amount to be
reclassified that will differ from the wording in the initial proposal. These changes may
impact the calculation of the amount.

Why is this important?

Under US GAAP, the effect of a change in tax law is recorded discretely as a component of the income tax provision related to continuing operations in the period of enactment. This is true even if the deferred taxes being remeasured were established through a financial statement component other than continuing operations (e.g., other comprehensive income (OCI)). Adjusting the deferred taxes for temporary differences that arose from items of income or loss that were originally recorded in OCI through continuing operations may result in a disproportionate tax effect lodged in AOCI.

By removing the tax effects stranded in AOCI by the TCJA enactment, the FASB has
addressed concerns from certain stakeholders (particularly regulated stakeholders in the financial services sectors) regarding perceived distortions in the amount of tax effects lodged in AOCI. However, by making the ASU optional, the FASB has addressed concerns from other stakeholders that reclassifying the stranded tax effects caused by the TCJA does not provide more meaningful financial information, and that the information necessary to determine the reclassification adjustment may not be readily available.

What's next?

The FASB Staff is expected to provide the Board with a final draft of the ASU on Friday, February 9. However, it is unclear how soon the final standard will be issued. The FASB has indicated that the ASU cannot be adopted until it is issued.

The ASU will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption will be permitted, including adoption in any interim period, for financial statements that have not yet been issued or made available for issuance. Entities will have the option to apply the amendments retrospectively or to record the reclassification as of the beginning of the period of
adoption.

To have a deeper discussion, contact:

Brett Cohen

Partner, National Professional Services Group

Email

Kassie Bauman

Director, National Professional Services Group

Email

Megan Bowles

Senior Manager, National Professional Services Group

Email

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David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group
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