SAB 118 Guidance –Change in Estimate(s) Between Earnings Release Date and Filing Date
The staff views the accounting for one or more tax effects related to Tax Reform as falling into one of three outcomes:
- Accounting is completed – Recognize all income tax effect(s) that are considered “complete” by the due date of the financial statements.
- Reasonable estimate(s) – Determine and recognize reasonable estimate(s) if the assessment and quantification of some or all of the Income tax effect(s) are incomplete by the due date of the financial statements.
- Accounting is incomplete – Apply the tax law in effect prior to the Act if a reasonable estimate cannot be made by the due date of the financial statements.
Generally, management’s decisions and expectations as to whether the accounting for one or more tax effect(s) is complete, is based on a reasonable estimate, or is incomplete are assumed to be made by the earnings release date, i.e., by the time an entity closes its books.
The staff understands entities will continue to refine and finalize reasonable estimate(s) for a period of time, i.e., until all necessary information, data, interpretations, and calculations have been completed. Therefore, continuous refining of estimates after the earnings release date and before the filing date of a Company’s financial statements would not require updating the accounting unless the changes stem from an error.
The staff encourages a balanced approach – i.e., use professional judgment and practical considerations when there is new information that would result in a material adjustment to a Company’s initial estimate after the earnings release date and before the filing date of the Company’s financial statements. Under these circumstances, the staff would not object to a company updating the accounting for a material adjustment prior to filing the financial statements.
GILTI Tax – Accounting Policy Choice & Preferability Letter
The FASB staff issued a Q&A on January 22, 2018 regarding the “Accounting for Global Intangible Low-Taxed Income” tax (GILTI tax) and concluded that GILTI tax can be recognized in the financial statements per an accounting policy choice by: (1) recording a period cost (permanent item) or (2) providing deferred income taxes stemming from certain basis differences that are expected to result in GILTI tax.
The staff believes that an accounting policy to recognize deferred income taxes for GILTI tax can be made within the SAB 118 measurement period and would be considered adopted in the first period that material deferred income taxes are provided. Once adopted as a policy, a preferability letter would be required to make a change.
The staff expects that reporting entities subject to GILTI tax would begin to recognize the estimated current tax impact as a component of the annual effective tax rate calculation, notwithstanding the possibility that they might later decide to provide deferred income taxes for GILTI tax. That is, recognition of a current income tax provision (starting in Q1-2018 for calendar year entities) does not necessarily establish an accounting policy.
This accounting would be appropriate only as long as the entity has yet to recognize material deferred income taxes and has appropriately disclosed (as part of SAB 118 disclosures) the fact that it is still considering or evaluating its accounting policy choice.
To discuss these changes in more detail, please reach out to the team at MFA.