Alert: FASB Accounting Standards Update No. 2018-05 – Income Taxes – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2018-05 – Income Taxes – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118

On March 13, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-05 Income Taxes (Topic 740) – Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The ASU makes amendments to ASC Topic 740 Income Taxes (ASC 740) to incorporate guidance released by the Securities Exchange Commission (SEC) in its Staff Accounting Bulletin (SAB) No. 118, codified as SEC SAB Topic 5.EE Income Tax Accounting Implications of the Tax Cuts and Jobs Act. The ASU exclusively assists entities in applying ASC 740 with respect to the Tax Cuts and Jobs Act (the Act), and should not be applied for any other changes in United States tax laws.

ASC 740 does not currently address the appropriate application of ASC 740 in situations where an entity does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. This ASU provides guidance on this topic and also provides relevant illustrative examples.

The amendments reflect guidance consistent with the principles under ASC 805 Business Combinations. Specifically, the ASU provides the following clarifications:

  • An entity’s financial statements that include the reporting period in which the Act was enacted must reflect the income tax effects of the Act when the accounting under ASC 740 is complete.
  • If the entity can determine a reasonable estimate for the income tax effects of the Act despite its accounting being incomplete, the entity should include the estimate in its financial statements in the very first reporting period’s financial statements in which the estimate was determinable. Such an estimate would be reported as a provisional amount during the measurement period.
    • The measurement period begins in the reporting period that includes the Act’s enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed to complete the accounting requirements under ASC 740.
      • This period cannot extend beyond one year from the enactment date.
    • An entity may obtain, prepare, or analyze additional information about facts and circumstances that existed as of the enactment date that, if known, would have impacted the tax effects recognized in the financial statements. During the measurement period, an entity is permitted to adjust its previously recorded provisional amounts, or report additional tax effects, to reflect such facts and circumstances.
      • These measurement period adjustments should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.
      • Note that any income tax effects of events unrelated to the Act should not be reported as measurement period adjustments.
  • If the entity cannot determine a reasonable estimate for the income tax effects of the Act due to its accounting being incomplete, the entity should not include any provisional amounts. The entity would continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted.
    • Provisional amounts should be recorded in the first reporting period in which a reasonable estimate becomes determinable.

Entities should include financial statement disclosures about the material impacts of the Act for which the accounting under ASC 740 is incomplete, including:

  • Qualitative disclosures of the income tax effects;
  • Disclosures of items reported as provisional amounts;
  • Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed, and the reason why the initial accounting is incomplete;
  • The additional information that is needed to be obtained, prepared, or analyzed to complete the accounting requirements under ASC 740;
  • The nature and amount of any measurement period adjustments recognized during the reporting period, including their effect on the effective tax rate; and
  • When the accounting for the income tax effects of the Act has been completed.

To access the full script of ASU No. 2018-05, click here.

To access the full script of the SEC SAB Topic 5.EE Income Tax Accounting Implications of the Tax Cuts and Jobs Act, click here.

 This communication contains a general overview of the topic and is current as of March 13, 2018. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2018. All rights reserved.
 

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.