The Financial Accounting Standards Board (FASB) has issued a proposed accounting update regarding the new tax law’s effect on deferred tax liabilities and assets presented in accumulated other comprehensive income.
Comments to Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income are due by Feb. 2 to addresses described at the top of the update.
According to the update, the banking and insurance industries submitted unsolicited letters to the FASB about “a narrow-scope financial reporting issue” that arose after the enactment of the Tax Cuts and Jobs Act of 2017.
The industries’ concerns focus on the guidance in current generally accepted accounting principles (GAAP), which requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date.
The GAAP guidance applies even in situations in which the related income-tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in net income.
Industry representatives told the FASB that because the adjustment of deferred taxes due to the new 21 percent corporate income tax rate must be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects in the update) don’t reflect the appropriate tax rate.
The proposed amendments in the update would affect any organization required to apply Topic 220, and which has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP.
The amendments in the proposed update would be effective for all entities for fiscal years beginning after Dec. 15, and interim periods within those fiscal years.
So what are the proposed update’s key provisions? Here’s a list:
A reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects as a result of the new federal corporate income tax rate.
The amount of the reclassification would be the difference between the historical corporate tax rate and the new rate.
The amendments in the proposed update would eliminate the stranded tax effects associated with the change in the corporate tax rate and would improve the usefulness of information reported to financial statement users.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.