Existing accounting rules, generally referred to as Generally Accepted Accounting Principles (GAAP), require that an entity’s balance sheet should reflect the impact of the tax law in effect at the balance sheet date. The fact that President Trump signed into law the new tax bill on Dec. 22 (2017 Act) means that corporate accountants need to analyze what impact the changes the 2017 Act have on an entity’s balance sheet as of dates on or after Dec. 22, 2017, with only days remaining for those companies with a calendar year-end.
While changes in tax law are not unusual, sweeping changes like the ones embedded in the new bill are. Tax law, both before and after the changes created by the 2017 Act, is extremely complex, as is the accounting for it.
The Financial Accounting Standards Board (FASB) has already received questions on some aspects of the new law, and those questions are likely just the tip of the iceberg. Individual FASB members are already considering how FASB can issue timely guidance to its constituents without violating its dedication to appropriate due process: Should it form a new Transition Resource Group (TRG) to address the issues, or should it consider resorting to a practice it hasn’t used in more than 15 years and have the staff issue staff Questions and Answers? Significant practical issues, as well as issues that are fundamental to the standard-setting process, exist in any path the FASB selects to deal with the questions it receives.
The issues facing FASB in dealing with questions that arise related to the 2017 Act are miniscule compared to those facing corporate America. First, all corporations need to read the law and then assess the impact on their financial statements. Corporations will need to consider the impact of the change in the tax rate, the repeal of the alternative minimum tax, changes in the deduction for net operating losses, full expensing of qualified property additions, deemed repatriation of undistributed foreign earnings and profits, state tax considerations, and more.
While the company is evaluating the impact of the 2017 Act on its 2017 financial statements, it also needs to evaluate the impact of the various changes included in the 2017 Act on its effective tax rate for 2018. The problem is there are finite resources available within each company with the expertise and knowledge to work on these changes in a short amount of time.
As I was typing this, an e-mail appeared in my inbox that included a copy of SAB 118, issued Dec. 22 by the Securities and Exchange Commission, which includes the SEC staff’s views of a series of issues related to the 2017 Act. That document effectively permits different treatments of dealing with unremitted foreign earnings depending on whether a company can reasonably estimate its liability or not. This could place a significant burden on auditors to evaluate whether a company truly cannot make a reasonable estimate.
FASB could eliminate that pressure. For the 2017 Act only, FASB could amend the requirements of GAAP so that the provisions of the 2017 Act need not be applied to the 2017 financial statements. I understand why current GAAP requires tax amounts to be presented in accordance with the existing law, and I agree with it. However, when complicated, sweeping changes to the law are sure to raise a series of both technical and practical questions and require significant effort to reflect them correctly, practicality needs to be considered by the standard setters.
I truly believe the extra month or two will be significant in terms of providing more time for FASB to properly consider those issues that need to be addressed to enable preparers to apply the standard correctly and consistently, and for preparers to properly assess the impact of the 2017 Act, while delaying information about the impact of the 2017 Act on tax balances to users of financial statements for a very short time period.
Larry Smith is a senior managing director in FTI Consulting’s Forensic & Litigation Consulting segment serving as a member of FTI’s National Office consulting with engagement teams and clients on complex accounting issues and as a testifying expert in litigation matters involving the application of GAAP. On June 30, 2017, Smith completed his second five-year term as a member of the Financial Accounting Standards Board. The views expressed are those of the author and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.