by Anna Kooi, Mary Miske and Carrie Small
On Jan. 18, 2018, the Financial Accounting Standards Board (FASB) released an exposure draft, Proposed Accounting Standards Update, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, related to the reclassification of certain tax effects from accumulated other comprehensive income (AOCI). The FASB issued the exposure draft to solicit public comment on proposed changes to Topic 220 of the FASB Accounting Standards Codification with the comment period ending Feb. 2, 2018.
Deferred tax assets (DTAs) and deferred tax liabilities (DTLs)
On Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA or the Act) reduced the corporate federal income tax rate to 21 percent. Currently, generally accepted accounting principles (GAAP) requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates in the reporting period that includes the enactment date. The tax effect of the rate change is included in income from continuing operations even when the deferred taxes were originally recorded in other comprehensive income (OCI). Thus, AOCI includes the deferred taxes recorded at the historical tax rate and does not reflect the adjustments made to the deferred tax assets or liabilities for the newly enacted tax rate of 21 percent. The exposure draft refers to this difference as stranded tax effects.
The proposed Accounting Standards Update (ASU) would require a reclassification from accumulated other comprehensive income to retained earnings to eliminate the stranded tax effects from the adoption of the newly enacted federal corporate tax rates as a result of TCJA. The amount of the reclassification is calculated as the difference between the amount initially charged to other comprehensive income at the time of the previously enacted tax rate that remains in AOCI and the amount that would have been charged using the newly enacted tax rate, excluding any valuation allowance previously charged to income.
It is important to note that the proposed ASU only applies to the stranded tax effects resulting from the enactment of the TCJA and it does not address the current prohibition in GAAP on backwards tracing.
The proposed ASU would be effective for fiscal years beginning after Dec. 15, 2018 and interim periods within those fiscal years, with early adoption permitted. Comments on the proposed ASU are due Feb. 2, 2018.
The FASB is likely to proposed additional clarifications and guidance as questions arise. We recommend you consult with your Baker Tilly advisors to understand all of the implications for your organization.
For more information on the accounting implications of tax reform on 2017 financial reporting and beyond, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.