By: George M. Wilson, SEC Institute
As prospects of a government shut-down loom, the SEC has published its “Operations Plan Under A Lapse In Appropriations And Government Shutdown”. Hopefully it will not have to be used, but just in case you can find some details of how certain operations will continue on page 12.
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
On January 10, 2018, the FASB met to begin addressing several of the more complex accounting implications of the Tax Act. Their first formal meeting in this area addressed accounting for tax issues stranded in AOCI and five other accounting challenges in the ACT.
Tax Effects “Stranded” in AOCI
The FASB decided to start a narrow-scope project for tax effects “stranded” in AOCI. For example, if a company has available-for-sale securities the change in fair value and the related tax effect both are recorded in AOCI. Existing GAAP requires that revaluation of these tax effects should go through tax expense in the period of enactment. This can seem a bit “out-of-period.” The Board’s project is expected to move very quickly, with a 15-day comment period and provisions for early adoption for this year.
Other Issues
The FASB Staff presented position papers dealing with five other issues to the Board. Based on discussions in the meeting an FAQ document will be prepared and presented at the January 18, 2018, EITF meeting for the first four issues below. The last issue, dealing with private companies and not-for-profits, will be addressed in an FAQ document expected to be posted on the FASB’s webpage.
Issue One – Should a company discount the tax liability on a deemed repatriation?
The tax liability on deemed repatriations may be paid over an eight-year period. The staff’s position, briefly summarized, was that since under current GAAP deferred tax assets and liabilities are not discounted this liability should not be discounted.
Issue Two – Should a company discount alternative minimum tax credits that become refundable?
The staff’s position here was similar to issue one (i.e., that the amounts should not be discounted).
Issue Three – Is the new base erosion anti-abuse tax (BEAT) a separate tax
The staff analogized to the old AMT and suggested accounting for GILTI as we did for the AMT.
Issue Four – How should companies account for global intangible low-taxed income (GILTI);
This new tax provision presents a very complex issue about whether it should be accounted for in future periods or as a deferred tax item. The staff presented views that both positions could be supported and that perhaps a policy election with appropriate disclosure would be an appropriate path forward. The need for future standard setting will also be considered.
Issue Five – Should private companies and not-for-profit entities be allowed to use the guidance in SEC Staff Accounting Bulletin 118 if they cannot complete their accounting for the new tax law before relevant financial reporting deadlines?
The staff’s position, with which the board agreed, was that use of SAB 118 by these entities would “not be objected to.”
All of the above discussions have next steps, particularly the narrow-scope project for stranded tax effects and the actual drafting of the FAQs, so stay tuned!
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
As we posted back in early December the FASB, after significant constituent feedback, developed plans to make changes to their new lease accounting standard to ease the transition and reduce the impact of the new standard, particularly for lessors.
The board issued the planned exposure draft on January 5, 2018. You can read about the exposure draft in this press release and find the actual exposure draft here. The main provisions of the exposure draft are:
Adding a transition option that would permit application of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements.
Adding an optional practical expedient, by class of asset, for lessors to not separate nonlease components from the associated lease components if certain conditions are met. Election of the practical expedient would require disclosures.
The comment period for the proposed ASU ends on February 5, 2018.
Land Easements Final ASU Still in Process
The FASB also decided back in December to proceed with the issuance of a final ASU that provides an optional transition practical expedient for land easements that are not currently accounted for using existing lease guidance under ASC 840. Companies would not have to reconsider accounting for these land easements. This new standard will also clarify that after its effective date companies would use the new standard to evaluate new and modified land easements. This Final ASU is still in process with an estimated completion date in the first quarter of 2018.
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
The new Tax Cuts and Jobs Act creates massive changes in taxation with deep, complex accounting and reporting ramifications. PLI is offering two programs to help you begin dealing with these changes.
First, on January 22, 2018 we will offer “The Tax Cuts and Jobs Act of 2017: Navigating the New Landscape”. This half-day program will be offered live in our New York training center and also via webcast.
For this program PLI has invited representatives from the Internal Revenue Service, the Department of the Treasury, the Senate Finance Committee and the House Ways and Means Committee to join our panel of tax experts and share their thoughts on the international and domestic implications of the tax reform package.
Topics discussed will include:
As a follow-on to this program we will also offer a one-hour briefing on February 26, 2018 – “Tax Reform – Getting the Accounting and Disclosure Right!”
This One-Hour Briefing will help you effectively deal with the accounting and SEC reporting implications of the new Tax Act. Our panel will review the detailed requirements of the FASB’s Accounting Standards Codification to determine the timing and process for recording the effect of the new Act as well as the related new SEC guidance about recording provisional amounts with appropriate disclosures. They will also discuss in-depth the SEC reporting issues involved in making complex judgments about appropriate disclosures in Forms 10-K and 10-Q for all aspects of the Act.
Jay Hanson, former PCAOB Board Member and George M. Wilson, a Director at SEC Institute, will address topics including:
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
One of the major challenges in 2017 year-end accounting arose late last year when President Trump signed the new Tax Act. In this post, we began outlining some of the accounting challenges created by this new Act.
To help us all along this path, on December 22, 2017, the SEC staff issued guidance after previewing it at various public forums and conferences. The guidance has two pieces:
Staff Accounting Bulletin (SAB) No. 118
Compliance and Disclosure Interpretation 110.02 – Item 2.06 of Form 8-K
SAB 118 discusses the staff’s views about applying the provisions of U.S. GAAP in initial accounting for the income tax effects of the Act. If a company’s accounting for the Act is not complete when issuing financial statements, the SAB provides for the use of “provisional amounts” with an appropriate “limited” measurement period to complete the accounting. Supplemental disclosures would also be required.
The new C&DI provides the following guidance clarifying that an adjustment to deferred tax assets as a result of the Act does not require an Item 2.06 Impairment Form 8-K. The C&DI does have some incremental guidance if companies use the measurement period approach in SAB 118.
Question 110.02
Question: Does the re-measurement of a deferred tax asset (“DTA”) to incorporate the effects of newly enacted tax rates or other provisions of the Tax Cuts and Jobs Act (“Act”) trigger an obligation to file under Item 2.06 of Form 8-K?
Answer: No, the re-measurement of a DTA to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC Topic 740. However, the enactment of new tax rates or tax laws could have implications for a registrant’s financial statements, including whether it is more likely than not that the DTA will be realized. As discussed in Staff Accounting Bulletin No. 118 (Dec. 22, 2017), a registrant that has not yet completed its accounting for certain income tax effects of the Act by the time the registrant issues its financial statements for the period that includes December 22, 2017 (the date of the Act’s enactment) may apply a “measurement period” approach to complying with ASC Topic 740. Registrants employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the Act may rely on the Instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report. [December 22, 2017]
To learn more about the accounting and SEC reporting implications of the new Tax Act, join us on January 26 as we present a One-Hour Briefing titled, “Tax Reform – Getting the Accounting and Disclosure Right!”
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
As we posted back in May, several companies have early adopted the new revenue recognition accounting of ASC 606, blazing a trail for those in this process. And, as part of the learning curve, as we reviewed in this October post and this November post, some of these companies have received comments from the SEC.
In mid-August, General Dynamics (one of the early adopters) received a comment letter with several interesting revenue recognition comments. As you read the comments below, notice how often the issues raised by the Staff focuses on disclosures and how the company has made judgments:
Note B. Revenue, page 10 General
Performance Obligations, page 10
Contract Estimates, page 11
Interestingly, in this new revenue recognition world, none of these comments required revision of a prior filing. Each was resolved with a discussion of the judgments involved and several resulted in a commitment by General Dynamics to provide more disclosure in future filings.
These comments are very consistent with those received by other early adopters. They provide us all with a message to thoughtfully and carefully make and document our judgments in applying the new standard, and then make appropriate disclosures! You may have read our post about how much the new standard affected General Dynamics’ disclosures, perhaps thinking the new disclosures were almost too much. In this new principles-based world, we may need to disclose more than we thought we would!
If you hear of any other early adopters and related news, please feel free to share it in a response to our post. As we say in our workshops, we all learn together!
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
Many of us have likely been in the position of reviewing an SEC disclosure requirement and thinking that the exact form of the requirement may not fit our particular circumstances. Sometimes we may believe such situations could create incremental work and cost while not providing particularly meaningful information to investors.
Is there any way to seek a discussion and discover a potentially better way to provide useful information to investors? It turns out, yes!
At the SEC’s conference in Washington, D.C. in early December, both Chair Jay Clayton and CorpFin Director William Hinman emphasized that the SEC is encouraging companies to consider using an historically little mentioned rule to avoid potentially complex costly disclosures that don’t provide material information to investors.
Regulation S-X Rule 3.13
210.3-13 Filing of other financial statements in certain cases.
The Commission may, upon the informal written request of the registrant, and where consistent with the protection of investors, permit the omission of one or more of the financial statements herein required or the filing in substitution therefor of appropriate statements of comparable character. The Commission may also by informal written notice require the filing of other financial statements in addition to, or in substitution for, the statements herein required in any case where such statements are necessary or appropriate for an adequate presentation of the financial condition of any person whose financial statements are required, or whose statements are otherwise necessary for the protection of investors.
Such requests will certainly require judgment, and both Chair Clayton and CorpFin Director Hinman emphasized that requests will be granted only when they are consistent with the goals of investor protection. That said, if an alternative to a formal rule will provide the information investors need Rule 3.13 can help avoid delay and unnecessary costs.
Director Hinman and CorpFin Chief Accountant Mark Kronforst (who you have likely heard will be leaving the SEC soon) discussed these process related issues:
First, all fact patterns are different, and it is important to not make any assumptions about how the process will work.
If you have a simple question you could begin by using the contact information in the CorpFin Financial Reporting Manual to get an initial plan in place.
The staff prefers that a formal request begin with email.
In your communication with the staff it is very important to explain all facts concisely and completely.
You should support you position with a clear explanation of why is it consistent with investor protection.
Early involvement of auditors also makes these requests proceed more smoothly.
The staff is working to respond promptly to each request and you should hear back in about 10 days unless the request is made during one of the periods when CorpFin is very busy.
Examples of areas where requests may arise include:
Significance tests – if one of the three parts of this test seems out of the norm then there may be other, more appropriate, considerations in making a determination whether separate financial statements are useful.
Pre-and post-acquisition periods for rule 3.05 – when appropriate it may be best to use an analysis that is less mechanical and focuses on trend issues that are meaningful and helps assess how the acquisition may impact on post-acquisition results.
Predecessor/Successor issues – relevance of stub periods may not be as relevant or reliable carve out F/S may not be possible to build. For example, it may be that abbreviated financial statement may provide the information that investors need.
IFRS financial statements may be acceptable for some acquisitions and equity method investees – if company could be a foreign private issuer the staff may accept IFRS financial statements.
Mechanical compliance with a rule sometimes is not the best way to provide investors with the information they need. It is a good thing to know that there are alternatives. So, when you think you are in this situation, go talk to the staff!
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
Amidst all the activity and uncertainty about tax reform is the additional, potentially complex question: “How will this affect financial reporting?”
It is not too early to begin preparing to answer this question!
The starting point in this assessment is this part of ASC 740-10:
Changes in Laws or Rates
25-47 The effect of a change in tax laws or rates shall be recognized at the date of enactment.
25-48 The tax effect of a retroactive change in enacted tax rates on current and deferred tax assets and liabilities shall be determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment.
For existing deferred tax assets and liabilities this change may have a significant impact because of this requirement in ASC 740-10-30-2:
30-2
The following basic requirements are applied to the measurement of current and deferred income taxes at the date of the financial statements:
In other words, what this means is that at the date of enactment of the new tax law all deferred tax accounts will be remeasured to the new rates. The impact of this remeasurement will flow through current period tax expense. This impact on current period tax expense will even include remeasurment of deferred taxes related to items classified on OCI. As a result, it is likely that deferred tax assets will be reduced, resulting in higher tax expense, and deferred tax liabilities will also be reduced, resulting in lower tax expense.
Other areas that could be affected include:
How much disclosure will be appropriate at year end, especially in this uncertain environment?
How will the potential movement to a territorial system affect existing tax accounts and valuation allowances?
Will these changes result in repatriation of cash and if so what should be disclosed?
The legal profession is also focusing on this issue. In this post from TheCorporateCounsel.net there is mention of the potential write down of deferred tax assets and even discussion about whether this event may trigger in Item 2.05 Impairment 8-K.
We should all stay tuned to how the legislative process proceeds, and be ready with appropriate disclosures when it concludes.
As always, your thoughts and comments are welcome!
By: George M. Wilson, SEC Institute
On December 12, 2017, the SEC appointed a new Chair and four new members to the PCAOB. The new appointees are:
William D. Duhnke III – Chair
Robert Brown – Board member
Kathleen M. Hamm – Board member
James G. Kaiser – Board member
Duane M. DesParte – Board member
These appointments bring the board to its full complement of five members. Following the SOX requirements two of the appointees, Mr. Kaiser and Mr. DesParte, are accountants. Mr. Duhnke, Dr. Brown and Ms. Hamm have background as lawyers. All of the new Board members bring a variety of deep and relevant experience to the Board.
You can read about the appointments and find out more about the new members in this press release and in this statement from SEC Chair Clayton.
Meanwhile, the two nominations for the open commissioner positions at the SEC are still awaiting confirmation by the full senate.
As always, your thoughts and comments are welcome!