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Financial Reporting Alert 18-4 — FASB issues ASU on reclassifying certain tax effects from AOCI

Published on: Feb 12, 2018

Download PDF(Updated February 16, 2018)

Background

On February 14, 2018, the FASB issued ASU 2018-021 to address industry concerns related to the application of ASC 7402 to certain provisions of the new tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”).3 Specifically, some constituents in the banking and insurance industries had expressed concerns about the requirement in ASC 740 that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations in the reporting period that contains the enactment date of the change. That guidance applies even in situations in which the tax effects were initially recognized directly in other comprehensive income at the previous rate, resulting in “stranded” amounts in accumulated other comprehensive income (AOCI) related to the income tax rate differential.

Key Provisions of ASU

The following is a summary of the ASU’s key provisions:

  • Upon adopting the ASU, an entity is required to disclose:
    • Its accounting policy related to releasing income tax effects from AOCI (e.g., the portfolio approach or the security-by-security approach).4
    • Whether it has elected to reclassify, to retained earnings in the statement of stockholders’ equity, the stranded tax effects in AOCI related to the Act.
    • If it has elected to reclassify to retained earnings the stranded tax effects in AOCI related to the Act, what the reclassification encompasses (whether it only includes the change in the federal corporate tax rate or whether it also includes other changes resulting from the Act that affect AOCI). Other effects might include, for example, the income tax effects of accounting for foreign subsidiaries when a deferred tax liability had previously been recorded for an excess of the amount for financial reporting over the tax basis in the investments.

      The exposure draft (ED) on which the ASU was based had required all entities to record the reclassification, to retained earnings, of the stranded tax effects (principally the income tax effects related to the change in the federal corporate tax rate) in AOCI related to the Act.

  • The guidance in the ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted. An entity will apply this guidance to each period in which the effect of the Act (or portion thereof) is recorded and may apply it either (1) retrospectively as of the date of enactment or (2) as of the beginning of the period of adoption. The Board decided to permit early adoption for public business entities for which financial statements have not yet been issued and for all other entities for which financial statements have not yet been made available for issuance. The ED had also allowed early adoption but had required retrospective application.
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    If a registrant elects to apply the guidance retrospectively after it files its annual financial statements in its Form 10-K (e.g., the first quarter of 2018 for a calendar-year entity) and subsequently files a new or amended registration statement that incorporates by reference the interim financial statements that reflect the impact of the adoption, the registrant must consider the need to retrospectively revise its annual financial statements that are incorporated by reference in that new or amended registration statement (i.e., the annual financial statements in its Form 10-K). This requirement does not apply to a registrant that chooses to (1) apply the new guidance as of the beginning of the period of adoption or (2) early adopt the new guidance in its annual financial statements that include the period of enactment (e.g., the annual financial statements in its 2017 Form 10-K for a calendar-year entity).

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1 FASB Accounting Standards Update No. 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income.

2 FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes.

3 H.R. 1/Public Law 115-97 states that it is an “Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”

4 For more information on the portfolio approach and security-by-security approach, see Section 7.18 of Deloitte’s A Roadmap to Accounting for Income Taxes.

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