A new accounting standards update (ASU) from the Financial Accounting Standards Board allows financial statement preparers the option of reclassifying stranded tax effects within accumulated other comprehensive income (AOCI) as retained earnings in each period in which the effect of the change in the federal corporate income tax under the new tax law is recorded.
The ASU — No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income — requires the following of financial statement preparers:
A description of the accounting policy for releasing income tax effects from AOCI.
Whether they choose to reclassify the stranded income tax effects from the tax law, and
Information about other income tax effects that are reclassified.
The ASU affects organizations that are required to apply Topic 220 and have items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by generally accepted accounting principles (GAAP).
The amendments pertain to fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. Early adoption is allowed. According to the FASB, organizations should apply the ASU amendments either during the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax in the new law is recognized.
Here’s the back story. Stakeholders in banking and insurance were concerned about GAAP guidance that required 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 of the new law.
The GAAP guidance applies even when the related income tax effects of items in AOCI were originally recognized in other comprehensive income (rather than in income from continuing operations).
According to stakeholders, because the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within AOCI — known as stranded tax effects — don’t indicate the appropriate tax rate.
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.