The Financial Accounting Standards Board plans to finalize by Feb. 16 guidance that will allow entities to reclassify certain tax effects in equity as a result of recent tax legislation.
Companies are required to reflect the accounting consequences of the Tax Cuts and Jobs Act in their fourth-quarter financial results because the legislation was enacted into law before the end of 2017. The FASB was flooded with unsolicited requests for action to address some concerns over how the rules would treat stranded tax effects sitting in the line item called “accumulated other comprehensive income” on the equity statement of corporate balance sheets.
Entities primarily in the financial services sector appealed to the FASB to allow entities to reclassify those items from AOCI to retained earnings, keeping them in the equity statement and out of the income statement. Proponents of the change said reporting them as required in GAAP would create a mismatch that would be difficult to explain and confusing to investors. Entities in financial services were particularly concerned because it would also have implications for regulatory capital requirements under banking rules.
FASB issued a proposal to permit the change and received approximately 50 comment letters, largely supportive. CFA Institute, which represents financial analysts, didn't entirely agree that investors would be confused by an income statement presentation. “Our experience is that investors pay substantially less attention to the statement of stockholders’ equity accounts — unless there has been a substantial transaction — than they do to the income statement,” wrote Sandra Peters and Aswinpaul Sondhi on behalf of CFA Institute. Reversing the deferred tax effect of the tax law change through AOCI “will draw no attention to the change in value of the deferred tax asset or liability on the value of the enterprise brought about by the 2017 Tax Act,” they say.
Ultimately, CFA Institute supported the proposal, says Peters, who is head of financial reporting policy at CFA Institute, after FASB made changes to its original proposal. "We then supported the proposal to reclassify from AOCI to retained earnings after the adjustment to deferred taxes is reflected in earnings," she says.
FASB plans to proceed with the change it proposed with some clarifications. The board will require entities electing the reclassification option to explain the effect of the change in the tax rate and other stranded tax amounts related to application of the new tax law that are reclassified. Entities electing reclassification will also be required to disclose their accounting policy for releasing those amounts, FASB says.
FASB directed its staff to prepare the final Accounting Standards Update for written ballot vote, with issuance of the final change expected by Feb. 16. The change will be effective for fiscal years beginning in 2019, but will permit early adoption for financial statements that have not already been issued.