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SEC Staff Provides Guidance on Reporting Impact on Deferred Tax Assets under New Tax Cuts and Jobs Act

New staff interpretative guidance clarifies for publicly traded companies and their auditors and legal and tax advisors the applicability of reporting the impact of a change in tax rates on deferred tax assets under Item 2.06 of Form 8-K.

Last week, the U.S. Congress approved and the President signed into law the Tax Cuts and Jobs Act (the “Act”) that significantly reformed the Internal Revenue Code of 1986, as amended. The new law included changes to U.S. federal income tax rates, imposed significant new limitations on the deductibility of interest and allowed for the immediate expensing of certain capital expenditures through December 31, 2022.  Among the consequences to publicly traded companies, net deferred tax assets and liabilities will need to be revalued at the newly enacted U.S. corporate rate and the impact to their tax expense will need to be recognized in the year of enactment.  Many accounting and disclosure teams at publicly traded companies were concerned about the timing of the Act’s passage since companies must generally reflect the effects of tax changes on their financial statements for the quarter in which the changes become law.

On December 22, 2017, the SEC staff provided interpretative guidance in new Compliance and Disclosure Interpretation 110.02 expressing its view on how publicly traded companies will be expected to comply with their obligations under Item 2.06 of Form 8-K with respect to disclosure of material impairments of assets resulting from the new federal income tax reform.

In response to the C&DI question -- Does the re-measurement of a deferred tax asset to incorporate the effects of newly enacted tax rates or other provisions of the Act trigger an obligation to file under Item 2.06 of Form 8-K? -- the staff answered “No,” the re-measurement of a deferred tax asset to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC Topic 740.

The SEC staff stated, however, enactment of new tax rates or tax laws could have implications for a publicly traded company’s financial statements, including whether it is more likely than not that the deferred tax asset will be realized.  As discussed in Staff Accounting Bulletin (SAB) No. 118 (released by the SEC Office of the Chief Accountant on December 22, 2017), a publicly traded company that has not yet completed its accounting for certain income tax effects of the Act by the time the company issues its financial statements for the period that includes December 22, 2017 (the date of the Act’s enactment) may apply a “measurement period” approach to comply with ASC Topic 740.

Publicly traded companies employing the “measurement period” approach (as contemplated by SAB 118) which conclude an impairment has occurred due to changes resulting from the enactment of the Act 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 Form 10-Q or Form 10-K report. The measurement period may not extend beyond one year from the date of enactment.

Publicly traded companies should report provisional amounts for any specific income tax effects of the Act for which the accounting is incomplete but a reasonable estimate can be determined.  If no reasonable estimate can be determined, reporting would continue to be based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Act.  The SEC staff in SAB 118 encouraged companies to consult with staff members for interpretative assistance.

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