The U.S. Securities and Exchange Commission published staff guidance regarding public company disclosure of the accounting impacts of the Tax Cuts and Jobs Act (the Act).¹

The recently adopted tax legislation may require substantial adjustment to the tax provisions in the income statements and balance sheets of reporting companies. Among other things, deferred tax assets will have to be calculated on the basis of the present value of amounts calculated on the new rates. While calendar year companies will have 90 days to analyze and reflect any changes, companies with a different fiscal year may have to reflect the effect of the new tax law in their Quarterly Reports on Form 10-Q that are required to be filed more quickly. The SEC staff has provided relief and guidance to issuers to facilitate the transition. 

Staff Accounting Bulletin (SAB) No. 118 

The new SAB 118 guidance, which appears in new Section EE to Topic 5, applies when a company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740⁴ for certain income tax effects of the Act at the time of the issuance of the company's financial statements for the reporting period which includes December 22, 2017 (the period in which the Act was enacted). 

Under the new staff guidance in SAB 118, in a company’s financial statements that include the reporting period in which the Act was enacted, the company must first reflect the income tax effects of the Act for which the accounting under ASC Topic 740 is complete. These completed amounts would not be provisional amounts. The company would then also report provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 will be incomplete but a reasonable estimate can be determined. For any specific income tax effects of the Act for which a reasonable estimate cannot be determined, the company would not report provisional amounts and would continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. For those income tax effects for which the company was not able to determine a reasonable estimate (such that no related provisional amount was reported for the reporting period in which the Act was enacted), the company would report provisional amounts in the first reporting period in which a reasonable estimate can be determined.

The provisional amounts would be subject to adjustment during a "measurement period" until the accounting under ASC 740 is complete. The staff believes that in no circumstances should the measurement period extend beyond one year from the enactment date. 

The staff's guidance also describes supplemental disclosures that should accompany the provisional amounts, including:

• Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;

• Disclosures of items reported as provisional amounts;

• Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;

• The reason why the initial accounting is incomplete;

• The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;

• The nature and amount of any measurement period adjustments recognized during the reporting period;

• The effect of measurement period adjustments on the effective tax rate; and

• When the accounting for the income tax effects of the Act has been completed.

Compliance and Disclosure Interpretation (C&DI) 110.02

Item 2.06 of Form 8-K requires disclosure when a company concludes that a material charge for impairment to one or more of its assets is required under GAAP. Under C&DI 110.02, the re-measurement of a deferred tax asset to reflect the impact of a change in tax rate or tax laws does not trigger an obligation to file under Item 2.06 of Form 8-K because it is not an impairment under ASC Topic 740. However, the enactment of new tax rates or tax laws could have implications for a company’s financial statements, including whether it is more likely than not that the deferred tax asset will be realized. Companies employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the Act may rely on the Instruction to Item 2.06⁵ and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report (e.g., Form10-Q or Form 10-K).