SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, Income Taxes, based on the provisions of the tax laws that were in effect immediately prior to tax reform being enacted. Since tax reform has multiple components, it is possible that a company could be in one of these buckets for certain effects, while being in another bucket(s) for other effects.
One important question that has been raised is whether a company’s determination as to which bucket(s) it is in must be updated through the issuance of the financial statements. We believe it is reasonable for a company to assess which bucket(s) it falls into as of the normal closing date for the financial statements of the period that contains the enactment date or, if desired, a subsequent date up to and including the issuance date of the financial statements. The disclosure guidance in SAB 118 should also be considered in this context. We understand that the SEC staff would not object to this approach.
We anticipate that any further standard setting activity specific to tax reform would provide transition provisions consistent with the above approach and the intent of SAB 118.
Note that the information discussed above is specific to the SAB 118 guidance and accounting for income tax reform. It should not be relied upon for purposes of assessing subsequent events in any other circumstances.
The ability to select an assessment date on which a registrant determines its “buckets” under SAB 118 allows for improved planning related to completion of the “good faith effort” required to account for the impact of tax reform. It will also allow for consistency in the information shared with investors in earnings calls and the information subsequently reported in the financial statements.
Registrants should continue their efforts to account for the impact of income tax reform. Registrants will vary significantly in their ability to complete the accounting or record reasonable estimates before filing their 2017 financial statements. As a result, we expect a significant focus on the transparency of the disclosures required by SAB 118.
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