New SEC Interpretive Guidance Addresses Tax Reform
In response to the passing of the Tax Cuts and Jobs Act, the Securities and Exchange Commission (“SEC”) has released interpretive guidance to help public companies and auditors adapt to the tax changes and comply with accounting for income taxes.
The first guidance is in the form of Staff Accounting Bulletin (“SAB”) No. 118 (Topic 5.EE, Income Tax Accounting Implications of the Tax Cuts and Jobs Act). Under SAB No. 118, companies preparing their 2017 fourth-quarter and end-of-year financial statements and regulatory filings will be allowed to provide what the SEC calls “reasonable estimates” and “provisional amounts” for tax-related line items. However, the provisional period is capped at one year from the tax law’s enactment date of December 22, 2017. The SEC noted that some companies might be unable to accurately assess their taxes until the end of 2018. If a public company cannot estimate the impact of the Tax Cuts and Jobs Act, its financial statements should be based on its interpretation of Topic 740 while applying the previous tax law until an estimate from using the new tax law can be provided.
The SEC also issued Compliance and Disclosure Interpretations (C&DIs) 110.02, which offers guidance regarding how issuers should comply with the requirements under Item 2.06 of Form 8-K when considering the effects of the Tax Cuts and Jobs Act on their financial reporting. Per C&DI 110.02, the re-measurement of a deferred tax asset will not force companies to file an Item 2.06 Form 8-K. The SEC, in its opinion, does not consider changes to deferred tax assets as a result of the new tax law to be an impairment as outlined in Topic 740, Income Taxes.
Also covered in the staff guidance is what disclosures public companies must provide in financial statement footnotes. Such disclosures include the new tax law’s impact on a company’s taxes; items disclosed as provisional amounts; an explanation regarding the inability to calculate some tax payments; and the adjustments’ effect on a company’s tax rate.
Under SAB No. 118 (Topic 5.EE), the market regulator emphasized its belief that public companies should apply Topic 740 to financial statements and regulatory filings submitted for the fourth quarter and year-end 2017, as well as in 2018. The SEC is also asking public companies and auditors to seek advice from its Division of Corporation Finance and Office of the Chief Accountant when preparing their regulatory filings.
While the SEC’s interpretive guidance is exclusive to public companies, Financial Accounting Standards Board (“FASB”) Chairman Russell Golden says his board is reviewing the SEC’s response to the new tax law and is considering its impact on privately held companies. Since private companies have more flexibility in preparing their end-of-year financials, Golden said the FASB could take its time before deciding whether issuing formal guidance is necessary. For now, he has collected information through meetings with companies and auditors on the need for interpretive guidance.