On December 22, 2017, President Trump signed US tax reform legislation (the 2017 Act or tax reform), which includes a broad range of provisions. Some of the significant changes affecting businesses had immediate accounting impacts in the period of enactment (i.e., periods that include December 2017). These included the reduction in the corporate tax rate, the mandatory deemed repatriation of foreign earnings, and making the Alternative Minimum Tax carryforwards refundable.
To help companies with the accounting implications of the 2017 Act, the FASB staff weighed in on certain accounting issues through Staff Q&As. In addition, the FASB addressed the accounting for stranded tax effects in accumulated other comprehensive income (AOCI) resulting from tax reform. Further, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows companies to account for the effects of the change in tax law on a provisional basis if the accounting is incomplete, for a period not to exceed one year from the date of enactment.
Beyond the aspects of the tax law change that were required to be accounted for in 2017, there are a number of considerations that companies will face for the first time in 2018. There are provisions in the tax law that are without accounting precedent, such as the global intangible low-taxed income (GILTI) tax and the base erosion and anti-abuse tax (BEAT). In addition, some of the 2017 Act provisions that went into effect in 2018 are familiar concepts, but will require accounting reassessment. These include new net operating losses (NOLs) that will have an indefinite life with no carryback availability, and expanded limitations on the deductibility of interest, which will now likely apply to a much broader base of companies. Each of these changes have implications to analyses such as estimating annual effective tax rates and assessing valuation allowances. Some of the more significant items to consider this quarter and in subsequent periods are:
In addition to accounting for the continued impacts of tax reform in 2018, companies may also be impacted by adoption of the new guidance for the tax effects of intra-entity asset transfers and should consider any deferred taxes arising from the implementation of the new revenue standard. For more information on these topics, refer to In depth US2017-18, Simplified tax accounting for intra-entity asset transfers and our Q4 2017 edition of The quarter close, respectively.
For more information on tax reform, refer to PwC’s dedicated tax page on CFOdirect.com and In depth US2018-01, Frequently asked questions: Accounting considerations of US tax reform. Also, see our video library on CFOdirect.com for additional guidance, including the following recent videos.
Most calendar-year public business entities (PBEs) adopted the new revenue standard on January 1, 2018. Here are some key reminders about the revenue disclosure requirements, early trends from SEC comment letters, and considerations for processes and controls to help companies prepare for the first quarter of 2018.
The new revenue standard requires expanded disclosures that are applicable to most companies. The new annual disclosure requirements for public companies include disaggregating revenue into categories, reconciling contract balances, and providing additional information about performance obligations, significant judgments, costs to obtain or fulfill a contract, and the use of certain practical expedients. As a reminder, SEC rules require companies to provide both the annual and the interim period disclosures for each interim reporting period in the initial year of adoption (that is, in the company’s first, second, and third quarter Form 10-Qs).
Companies should consider the impact of the expanded disclosure requirements on their processes, controls, and financial reporting systems, as they will need to be able to produce and rely on the information needed to comply with the new guidance. Some disclosures will also require management to make judgments about the amount of information to provide and the most appropriate presentation format.
Companies are also required to include information to help the readers understand the nature, timing, and amount of future cash flows resulting from the satisfaction of performance obligations. These disclosures should not be “boilerplate” and should supplement companies’ revenue accounting policy disclosures.
Further, while segment disclosures include revenue data, do not assume this level of disaggregation will automatically meet the disaggregated data requirement under the new revenue guidance. A key driver of the difference is that segment disclosures have criteria for aggregation, while the revenue standard does not. A good starting point would be looking at other information the company provides to investors, such as earnings releases or other investor communications. Also, recognize companies may need to disaggregate revenue in more than one way to meet their disclosure objectives, for example, by geography and sales channel.
For additional insights, see our video on disclosures under the new revenue standard. Also, see our Revenue from contracts with customers guide, Section 12.3, Disclosures.
A small number of companies early adopted the new revenue standard in 2017. Although it is difficult to identify trends in SEC staff comments due to the limited number of publicly available comment letters, we note that the SEC staff has raised the following issues:
Additional topics on which the SEC staff commented include contract modification accounting, the disclosure of remaining performance obligations and practical expedients, estimating variable consideration, and considerations related to nonmonetary exchange transactions.
We encourage companies to keep these comment letter trends in mind as they navigate the first quarter reporting cycle. Companies can take action now by assessing these trends and documenting their position for each applicable issue. For example, consider and document why performance obligations satisfied over time or at a point in time provide a faithful depiction of the transfer of control for goods or services.
The new revenue standard introduces accounting guidance that may require companies to develop new estimates. For example, companies must now estimate the amount of variable consideration to include in the transaction price, the standalone selling price of a good or service when it is not directly observable, and the amortization period for capitalized costs.
As a result, companies may need to develop new processes to analyze data and to develop these estimates. In many cases, these are not “set it and forget it” estimates, but instead will need to be reassessed on a recurring basis each reporting period.
No new process would be complete without considering the related internal control implications. Companies will need to consider the financial reporting risks associated with each new process and ensure controls are designed and operating effectively to mitigate these risks. The controls should not only address the initial determination of an estimate, but also the ongoing reassessment and related disclosures.
For more information on the new revenue standard, see our Revenue from contracts with customers guide and In transition US2017-01, The new revenue recognition standard - FAQs about SEC reporting and transition. Also, see our video library on CFOdirect.com for guidance on adopting the new revenue standard, including our recent video on revenue financing.
The January 1, 2018 effective date of the new revenue standard for calendar year-end PBEs has come and gone. In the meantime, companies should focus on the other guidance that is also effective on January 1, 2018. Similar to the implementation of the revenue standard, companies need to think through the implications of adopting each of the following, including any updates to processes and controls or new disclosure requirements.
For further information about the new accounting guidance, including additional PwC resources, refer to the following links.
Also, see our video for important reminders for interim reporting.
Specific considerations related to the new cash flows guidance and the downstream SEC reporting impacts of certain of the new accounting standards effective in 2018 continue to generate a lot of interest. These are discussed below.
The new cash flows guidance prescribes specific presentation in the statement of cash flows for various types of transactions. This includes the sale of trade accounts receivable under arrangements in which the entire purchase price is not received immediately in cash. Instead, for this type of transaction, a portion of the purchase price is deferred (deferred purchase price or DPP), which represents a beneficial interest that entitles the seller to receive the remaining cash at a later date. Companies with these programs should be aware that the new guidance requires the cash received later from the DPP to be reported as investing cash flows. It may have been previously reported as part of operating cash flows.
For more information, please refer to In depth US2017-31, Sales of trade receivables get new statement of cash flow treatment, In brief US2016-35, FASB finalizes guidance to simplify elements of cash flow classification, and our Financial statement presentation guide, Chapter 6, Statement of cash flows.
If a company plans to raise capital after filing its 2018 first quarter Form 10-Q, registration statement requirements will impact which periods need to reflect new, retrospectively-applied accounting guidance. Accounting standards that may require retrospective application to each period presented include, but are not limited to, the new guidance related to revenue and the statement of cash flows.
In preparing a new registration statement (e.g., Form S-3), companies that applied retrospective transition for the adoption of new accounting standards should assess whether the impact of the adoption is material under the securities laws. If the impact is material, the 2017 Form 10-K included in the registration statement will need to be recast to reflect adoption of the new standard. As a result, an additional year (i.e., 2015) would be required to be recast for purposes of the registration statement because it is the earliest period presented in the 2017 Form 10-K. Absent a new registration statement, the 2015 annual financial statements would not otherwise be required to be recast when the company files its 2018 annual financial statements.
The analysis would be different if a company conducts an offering as a takedown from an existing shelf registration statement. In that case, the company would not need to recast prior year information unless it concludes the adoption of the new accounting standard represents a “fundamental change,” which is a legal determination.
For more information on potential registration statements, see In transition US2017-01, The new revenue recognition standard - FAQs about SEC reporting and transition.
SEC rules require a company to disclose any change in its internal control that occurred during the quarter that materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. Companies should assess the internal control changes implemented as a result of adopting new accounting standards to determine if disclosure is required under these rules.
On January 11, 2018, Robert Jackson and Hester Peirce were sworn in as new SEC Commissioners, marking the first time the SEC has had a full slate of Commissioners since 2015. The SEC is now expected to pursue its rulemaking agenda, which could include movement on its disclosure effectiveness project and other efforts to enhance the organization and readability of disclosures.
As companies put the finishing touches on adopting the guidance effective in 2018 and the accounting impacts of tax reform, they may also consider implementing other new accounting standards effective in 2019 and beyond. All of the guidance listed below can be early adopted in 2018. Although they may require significant effort during implementation, companies should consider the potential benefits of early adoption. These benefits may include (1) simplifying accounting earlier than the required adoption date and (2) realizing efficiencies by implementing multiple standards contemporaneously.
For further information about the new accounting guidance, including additional PwC resources, refer to the following links.
Among the topics eligible for early adoption, some of the most pervasive impacts are expected to relate to the new goodwill impairment, hedging and leases guidance. These are discussed below.
The new goodwill impairment guidance eliminates time and effort by removing step 2 of what was previously a two-step impairment test. However, the guidance does not impact the timing or order of impairment testing.
Companies that adopt the guidance for their annual impairment test must also apply it to any interim testing. For example, assume a calendar year-end company expects to early adopt the new goodwill impairment test in the fourth quarter of 2018 for its annual test. In that case, the company must also apply the new guidance if there is a triggering event in any interim periods in 2018. Conversely, if the company performs a trigger-based interim test under the current guidance, it must also perform its annual test using the same guidance.
For more information, read In depth US2017-03, Measuring goodwill impairment to get easier.
The new hedging guidance can be adopted in any interim period before the mandatory effective date of January 1, 2019 for calendar year-end PBEs. However, if adopted in an interim period, the hedging guidance is required to be reflected as of the beginning of the fiscal year that includes the interim period (e.g., January 1, 2018). Therefore, first quarter implementation may simplify transition for companies considering early adoption.
For additional considerations when early adopting the new hedging guidance, see our video.
The new leases standard, which is effective for calendar-year PBEs on January 1, 2019, also can be early adopted. The FASB has issued and proposed several amendments to help companies apply the new standard, including targeted improvements to the transition method.
The most recent proposal would allow entities the option to apply the new leases guidance as of the beginning of the period of adoption (e.g., January 1, 2019), without adjusting the comparative periods presented (e.g., 2017 and 2018), as would currently be required. Prior period financial statements and disclosures would be presented in accordance with existing leases guidance. Companies that elect this transition option will need to comply with presentation and disclosure requirements under either the existing or new guidance for each year presented, as applicable.
This proposal could simplify transition to the new guidance, particularly for lessees. For example, if a lessee elects the new transition option, it would not be required to measure or recognize leases that expired or were terminated prior to the effective date. Additionally, when calculating the lease liability under the new transition option, lessees would use a discount rate as of the effective date (e.g., January 1, 2019) instead of needing to determine the applicable discount rate in periods prior to the date of adoption. The new guidance provides a similar benefit for operating leases that are denominated in a currency other than the entity’s functional currency. If elected, the new guidance eliminates the need for lessees to determine historical foreign exchange rates that were in effect prior to the effective date.
The FASB also continues to discuss a proposed lessor practical expedient for nonlease components. Stay tuned to CFOdirect.com for updates on the latest developments on this proposal.
Given the pervasiveness of the impact of the new leases standard, implementation efforts may be impacted by the availability of the required information due to restrictions resulting from current systems and business processes. As companies move beyond implementation of the new guidance effective in 2018 and tax reform, they should remember to leverage lessons learned and keep the following best practices in mind to facilitate a successful implementation:
For more information on the new leases standard, please refer to In brief US2017-31, FASB proposes to simplify the new leases guidance and PwC’s CFOdirect Podcast series, Episode 33: Leasing - recent proposals, impairment and subleases.
With the adoption dates for the new standards on leases and credit impairment approaching, companies should consider their SAB 74 disclosures. These disclosures should become more specific as the effective date of a standard nears.
Below is a summary of the disclosures of the potential impact of adopting the leases and credit losses standards in annual and quarterly filings by Fortune 500 companies between January 1, 2018 and February 28, 2018.
During the first quarter of 2018, companies spent significant time evaluating the implications of tax reform. Below is a summary of the percentage of companies that recorded and disclosed a provisional estimate under SAB 118 for certain elements of the 2017 Act.1 None of the disclosures indicated that the accounting for the impacts of tax reform was complete.
1As disclosed in the 27 annual and quarterly filings by the members of the Dow 30 between January 1, 2018 and February 28, 2018.
We also identified where in their SEC filings these companies disclosed the impacts of tax reform during the first quarter. The pervasive nature of tax reform is indicated by its broad impact throughout these companies’ SEC filings, as shown below:
In May 2017, the FASB asked the EITF to address customer accounting for implementation costs in a cloud computing arrangement that is considered a service contract. A primary objective of this request was to reduce diversity in practice. At the January 18, 2018 meeting, the EITF reached a consensus-for-exposure that certain implementation costs associated with a cloud computing arrangement that is considered a service contract should be capitalized. Costs would be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. Companies would expense the capitalized implementation costs over the non-cancellable term of the contract plus any reasonably-certain renewal periods. The expense would be presented in the same income statement line item as the fees for the associated hosting arrangement.
The EITF also recommended specific disclosures for all internal-use software and hosting arrangements, including a general description of the terms and conditions of the arrangement, significant judgments and estimates made in applying the amendments, and a qualitative and quantitative description of the costs capitalized and expensed. The EITF also decided that companies should be able to apply either a retrospective or prospective transition method.
A proposed ASU was issued on March 1, 2018 and is subject to a comment period ending on April 30, 2018. Please refer to EITF observer, Summary of the January 18, 2018 meeting for more information.
Blockchain technology is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without the need for a central certifying authority. The use of blockchain technology is wide-ranging, with potential applications that include payment systems, the issuance, transfer, and settlement of securities, and election and proxy voting.
There are four main concepts around blockchain technology:
Blockchain technology offers the ability to improve the business processes that occur between, and within, companies. The immutability of data stored in blockchains provides a level of trust and transparency few technologies can match. In addition, many companies anticipate big cost reductions for transaction processing and recordkeeping. One single distributed ledger can eliminate the time and effort that go into reconciling information stored in multiple places.
Companies in the financial services industry have been the first to adopt blockchain. Nearly 40 financial institutions around the world formed the Post Trade Distributed Ledger Working Group to investigate how blockchain technology can be used to enhance clearing, settlement, and reporting of trades. Companies in other industries are also exploring applications for blockchain technology:
While blockchain technology holds great opportunities, it also poses risks and uncertainties. For example, because the ledger is tamper-proof, some people may believe they are in a fully-protected environment. However, there is the question of how to implement controls to ensure that the people doing the transactions are trustworthy. Without those controls in place, the system itself and the recorded actions cannot be trusted, and there could be unintended consequences.
As blockchain continues to gain traction, boards will want to discuss with management whether and how the company plans to use the technology. Boards should also understand any potential risks and opportunities.
To learn more about blockchain, refer to PwC’s The Essential Eight technologies Board byte: blockchain. This report is one in an eight-module series that explores emerging technologies, providing the board and management with information to have more effective conversations about how these technologies may impact their company’s strategy.
Partner, National Professional Services Group, PwC US
Partner, National Professional Services Group, PwC US