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Tax Flash - Tax Return Compliance


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FASB's Q&A Guidance on the Impact of Tax Reform on Financial Accounting


In our recent Marcum Tax Flash, The Impact of Tax Reform on Financial Accounting, the Marcum tax professionals highlighted some of the more significant aspects of how the Tax Cuts and Jobs Act of 2017 (the "Act") will affect financial statement reporting. After the Act was passed, concerns were raised to the Financial Accounting Standards Board ("FASB") regarding implementation of certain provisions of the new tax law. In response to these concerns, the FASB provided guidance in question and answer format.

Following are some of the concerns addressed in the guidance:

Given the longstanding practice of private companies electing to apply SABs (SEC Staff Accounting Bulletins), would FASB staff object to private companies and not-for-profit entities applying SAB 118 regarding reporting requirements for the effects of the Act?

The Securities and Exchange Commission issued SAB 118 during January 2018 to address the concerns of public companies that do not have the necessary information reasonably available, analyzed, or prepared to complete accounting for the effects of the Act under U.S. GAAP. In summary, SAB 118 advises that:

  1. To the extent the accounting is completed for the tax effects of the Act, the results must be reflected in the financial statements.
  2. To the extent a reasonable estimate can be determined, such amounts must be reported.
  3. If a reasonable estimate cannot be determined, ASC 740 should be applied based on the tax laws in effect immediately prior to the enactment date.

Although SABs are not directly applicable to private and not-for-profit entities, in the past these entities have voluntarily applied the guidance of the SABs. FASB staff believes that if either a private company or not-for-profit entity applies SAB 118, it should apply all relevant aspects of the SAB in its entirety, including the disclosures. The staff also believes that an entity should disclose its accounting policy of applying the SAB in accordance with ASC 235-10-50-1 through 50-3.

Should the tax liability on the deemed repatriation of earnings be discounted?

The FASB was asked to comment on whether or not the tax on repatriation should be discounted under ASC 740 and interest imputed according to ASC 835-30. The staff believes the tax should not be discounted, indicating that ASC 740-10-30-8 guidance prohibiting the discounting of deferred taxes is applicable to the transition tax. Furthermore, because estimation may be involved as well as future resolution of uncertain tax positions regarding the calculation of repatriated earnings, it would not be appropriate to discount this tax liability when any uncertain position directly related to the tax is not discounted as well. Conversely, the FASB does not believe imputed interest should be applied to the tax under the provisions of ASC 835-30 because the tax is not a result of a bargained transaction.

Should AMT (Alternative Minimum Tax) credit carryforwards be discounted at December 31, 2017, because they will be refundable in future years?

The question of discounting the credit under ASC 740 was raised. The staff response was consistent with the response it gave with regards to the transition tax. The staff believes that any AMT credit carryforwards presented as deferred tax assets should not be discounted, indicating that ASC 740-10-30-8 guidance is also applicable in this case. Again, the FASB agreed that imputed interest should not be applied to the tax under the provisions of ASC 835-30 because the tax is not a result of a bargained transaction, and the scope exception under 835-30-15-3(e) applies.

Should deferred tax assets and liabilities be measured at the statutory tax rate of the regular tax system or the lower Base Erosion Anti Abuse Tax ("BEAT") tax rate related to payments to foreign related parties, if the taxpayer expects to be subject to the BEAT?

The question arose regarding whether or not deferred tax assets and liabilities should be measured at the regular tax statutory rate or if the new BEAT tax rate should be applied. The FASB regards the BEAT in a manner similar to that of the AMT under former law, which was designed to be an incremental tax whereby an entity would not pay less than the regular tax. ASC 740-10-30-11 and 740-10-55-32 both address the AMT, requiring a company to measure its deferred tax assets and liabilities using the statutory rate used to calculate its regular tax lability. The staff indicated this guidance should also be applied to the new BEAT, signifying that deferred taxes should not be measured using the lower BEAT rate but should continue to be accounted for using the regular tax statutory rate. This guidance should be applied regardless of whether or not an entity anticipates it will be subject to the BEAT in the future. The FASB believes that the incremental effect of any BEAT should be recognized in the year in which it is incurred.

Should an entity recognize deferred taxes for temporary basis differences expected to reverse as Global Intangible Low Taxes Income ("GILTI") in future years, or should the tax on GILTI be included in tax expense in the year it is incurred?

The staff was asked if they believe an entity should recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years. If not, should the tax be included in tax expense in the year in which it is incurred? The staff responded by saying they do not believe that ASC 740 is clear with respect to the reporting treatment of the GILTI. Some stakeholders believe that because a corporation's GILTI is based on aggregate income of all its interests in foreign corporations, it is not appropriate to recognize deferred taxes on an individual CFC's inside and outside basis differences. Aggregation means that the unit of account is not the corporation's investment in the individual CFC or that CFC's assets and labilities. Staff believes that ASC 740's guidance on using the asset and liability approach does not deal with the complication of taxes assessed on aggregate income across multiple jurisdictions. Furthermore, the GILTI is based on future events and should be accounted for as period costs. Others believe that tax imposed on GILTI is similar to that of the tax imposed on Subpart F income, and as such, deferred taxes should reflect basis differences that are expected to affect future GILTI when reversed.

Because the staff believe that the guidance under 740 is not clear regarding accounting for GILTI, an entity may apply either interpretation. An entity must disclose its accounting policy regarding GILTI inclusions in accordance with ASC 235-10-50-1 through 50-3. The staff will monitor the reporting over the next few quarters and will provide an update to the Board in the future.

Marcum Observations

The above Q&A is an excerpt from certain FASB disclosures and is meant to provide informative guidance to the reader. We suggest that you contact your Marcum tax professional to assist you with your financial statement reporting.




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