Tax Cuts and Jobs Act: SAB 118 and the Impact on Foreign Subsidiaries
By Jason Moi, Partner, Assurance Services
Of the many changes to corporate taxation implemented by the Tax Cuts and Job Act (the “Act”) of 2017, publicly traded corporations with international operations need to take special note of a provision that accelerates the tax due on undistributed earnings of foreign subsidiaries (15.5% for cash and 8% for non-cash assets). Provisions of the Act require recognition and measurement in accordance with ASC 740 and will, therefore, have an impact on financial statements issued for reporting periods ending on or after December 22, 2017. Given the short timeframe available to apply the Act to current and deferred tax calculations, the SEC has issued Staff Accounting Bulletin 118 (“SAB 118”) to help ease the burden on registrants and auditors. Registrants that may not have all of the information needed to reasonably complete their accounting for the effects of the Act will be permitted a one-year measurement period from the date of the enactment to report the full effect of the law in their financial statements. The provisions of SAB 118 were added to Section EE of Topic 5 of the SAB series and contain two general questions with interpretive responses, as well as two examples.
Chief Accountant Wes Bricker stated, “Allowing entities to take a reasonable period to measure and recognize the effects of the Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors.”
The most complex aspect of the new law likely to cause SEC registrants to be unable to complete a deferred tax analysis is expected to be the impact of the transition tax related to unrepatriated foreign earnings. It is expected that any provisions that cannot be reasonably calculated within the time needed to file a Form 10K would be resolved within the one-year measurement period.
A measurement period for any further analysis to come to a reasonable estimate begins in the reporting period that includes the Act’s enactment date of December 22, 2017, and ends when the information is available and analyzed to complete the accounting requirements. However, the measurement period should not extend a full year past the enactment date; this is similar to the current business combinations measurement period rules.
Disclosure and Clarifications
Should an SEC registrant find the need to utilize the measurement period, the following disclosures should be made as to why the ASC 740 analysis is incomplete:
- 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 been completed;
- The reason why the initial accounting is incomplete;
- The additional information 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 recognized during the reporting period; and
- When the accounting for the income tax effects of the Act has been completed.
In addition, Compliance and Disclosure Interpretation 110.02 also provides views of the SEC staff regarding the applicability of Item 2.06 of Form 8-K with respect to reporting the impact of a change in tax rate or tax laws pursuant to the Act. Compliance and Disclosure Interpretation 110.02 clarifies that the re-measurement of the deferred tax asset in relation to changes in the tax laws is not considered an impairment and, thus, SEC registrants may rely on the Instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report.
In summary, the magnitude of the changes in the Act may give rise to certain operational challenges and constraints for entities when complying with the requirements under ASC Topic 740 upon issuance of an entity’s financial statements for the reporting period in which the Act is enacted. SAB 118 may help relieve the burden, but to the extent the accounting is completed for the tax effects of the Act, the results must be reflected in the entity’s financial statements.