The Financial Accounting Standards Board is considering whether to take up any new rule-making as a result of the accounting consequences of the Tax Cuts and Jobs Act.
FASB is devoting its next open meeting to decide whether to add “a narrow-scope project” on the reclassification of certain tax effects that are currently sitting on corporate balance sheets in accumulated other comprehensive income, a line item in the equity area of the balance sheet. The American Bankers Association and others in the financial services sector have appealed to FASB to consider making a change to U.S. GAAP as a result of the recent tax law.
Accounting Standards Codification Topic 740 on income taxes requires companies to remeasure any deferred tax assets or deferred tax liabilities currently on the balance sheet at the new corporate tax rate, which fell from 35 percent to 21 percent under the recent change in tax law. Any differences, which some entities say will be significant, must be reflected in net income.
That will produce a mismatch in financial statements, says the ABA, because some of those deferred taxes are sitting in AOCI, which resides in equity. Financial statement users in the banking sector will be confused, especially when adjustments recorded through net income have different regulatory capital implications than those in AOCI.
The ABA says the ongoing accounting will require reconciliation “and potentially burdensome tracking” for preparers and investors. “This is especially true in accounting for DTAs and DTLs related to the unrealized capital gains and losses of available-for-sale debt securities,” the ABA points out.
The ABA points out additional mismatches will be problematic in areas such as foreign currency translation adjustments, certain pension adjustments, gains and losses on cash flow hedges, other-than-temporary impairments in held-to-maturity securities, and the credit risk portion of a entity’s own debt when reported at fair value.
The ABA’s proposed solution is to permit in U.S. GAAP a provision currently required in International Financial Reporting Standards called “backward tracing,” which would result in related items being reflected within OCI and AOCI rather than net income.
In addition to considering the AOCI issue, FASB’s meeting agenda says it will also consider other implementation issues associated with the new tax law, including whether to discount the tax liability on any repatriation of foreign-earned income, whether to discount alternative minimum tax credits that become refundable, how to account for the base erosion anti-abuse tax, and how to account for global intangible low-taxed income.
FASB also will consider whether to extend to private companies the “measurement period” approach developed by the Securities and Exchange Commission under Staff Accounting Bulletin No. 118 for public companies to ease the year-end reporting burden associated with the new tax law.