The SEC recently issued Staff Accounting Bulletin 118, setting out some views of the SEC staff on applying the so-called “Tax Cuts and Jobs” Act, signed into US law on December 22nd and therefore “substantively enacted” before the year end (and in time to mess up the holiday season for expert practitioners in the area).
It seems generally acknowledged even by most of its supporters that aspects of the new law were written in a hurry, and enacted with little if any detailed consideration of their full range of implications. This entails, as SAB 118 soberly puts it, that: “registrants will potentially encounter a situation in which the accounting for certain income tax effects of the Act will be incomplete by the time financial statements are issued for the reporting period that includes the enactment date.”
Against this backdrop, the SEC is taking the following view of US GAAP:
- To the extent that Company A’s accounting for certain income tax effects of the Act is incomplete, but Company A can determine a reasonable estimate for those effects, the staff would not object to Company A including in its financial statements the reasonable estimate that it had determined…The reasonable estimate would be reported as a provisional amount in Company A’s financial statements during a “measurement period.”
- An entity may not have the necessary information available, prepared, or analyzed (including computations) for certain income tax effects of the Act in order to determine a reasonable estimate to be included as provisional amounts. The staff would expect no related provisional amounts would be included in an entity’s financial statements for those specific income tax effects for which a reasonable estimate cannot be determined. In circumstances in which provisional amounts cannot be prepared, the staff believes an entity should continue to apply… the provisions of the tax laws that were in effect immediately prior to the Act being enacted. That is, the staff does not believe an entity should adjust its current or deferred taxes for those tax effects of the Act until a reasonable estimate can be determined.
The measurement period will end when the company has obtained, prepared and analyzed all the required information, in no circumstances extending beyond a year. During that period, any adjustments will be included in income from continuing operations as an adjustment to tax expense or benefit. The bulletin sets out various disclosures intended to clarify the operation of all this. Readers will recognize, as the SEC acknowledges, that the approach flows in part from the notion of a measurement period deployed in accounting for business combinations, although the mechanics there are necessarily different. The key point perhaps is that any adjustments made during the period aren’t taken to indicate errors in the original accounting, which they might possibly be absent this guidance.
Although, as noted, the focus of SAB 118 is on US GAAP, it does include the following comments on IFRS:
- The staff would also not object to a Foreign Private Issuer reporting under International Financial Reporting Standards applying a measurement period solely for purposes of completing the accounting requirements for the income tax effects of the Act under International Accounting Standard 12, Income Taxes.
Now of course this doesn’t inherently direct what IFRS preparers should actually do – it only says what it says, that the SEC wouldn’t object. On the other hand, the SEC is still a looming enough presence that its non-objection counts for a lot. The problem is that the approach in SAB 118 might not easily be rationalized as being entirely consistent with IAS 12. As an E&Y publication had summarized earlier:
- If the tax legislation is (substantively) enacted on or before December 31, 2017, then calendar year-end companies must apply the new tax legislation (e.g., new tax rates) in measuring their current and deferred tax assets and liabilities in their 2017 annual financial statements. There is no relief from this requirement under IAS 12, even to deal with circumstances in which complex legislation is (substantively) enacted shortly before year-end. In the preparation of financial statements, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires a company to use reliable information that was available when those financial statements were authorized for issue and could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements…
On the face of it then, aspects of the SEC’s guidance – particularly the portion about knowingly applying the old rather than the new tax laws in certain circumstances – wouldn’t necessarily result in compliance with IFRS. E&Y points instead to the recently-issued IFRIC 23 Uncertainty over Income Tax Treatments (not effective until 2019) as a relevant source of guidance, in that it addresses situations where it may be “unclear how tax law applies to a particular transaction or circumstance” (although the primary purpose of IFRIC 23 was to address situations where the law is inherently unclear and may not become clearer until addressed by a taxation authority or court in the future, rather than those in which the lack of clarity results from newness and lack of processing time). Among other things, IFRIC 23 requires reflecting the effect of uncertainty for each uncertain tax treatment by recognizing either the most likely amount or the sum of the probability-weighted amounts in a range of possible outcomes, depending on which method the entity expects to better predict the resolution of the uncertainty.
Needless to say, year-end reporting entities affected by this issue will already be some way along in analyzing the issue for themselves. We’ll have to wait and see whether we obtain any commentary or guidance of broad applicability…
The opinions expressed are solely those of the author