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!