FASB Issues Proposed Guidance on the Tax Cuts and Jobs Act

The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) for public comment that is intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (the Act). Comments on the proposed ASU are due by February 2, 2018.

Stakeholders expressed concerns about current Generally Accepted Accounting Principles that required organizations to adjust deferred tax liabilities and assets after a change in tax laws or rates. It is expected that this proposed ASU will eliminate the stranded tax effects associated with the Act’s change in the federal corporate income tax rate, while improving the usefulness of information reported to financial statement users.

If adopted as proposed, the amendments would require financial statement preparers to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act (or portion thereof) is recorded. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate.

In the period of the reclassification, organizations would be required to make the following transition disclosures:

  • The nature and reason for the change in accounting principle;
  • A description of the prior-period information that has been retrospectively adjusted; and
  • The effect of the change on affected financial statement line items.

If adopted as proposed, the amendments would be effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption would be permitted. Organizations would be required to apply the proposed amendments retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized.

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