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SEC Issues Tax Reform Guidance

JL Law


On December 22, 2017, the Securities and Exchange Commission (SEC) issued guidance on the accounting ramifications of the recent tax reform legislation signed into law before Christmas and known as the Tax Cuts and Jobs Act, ("the Act").  Among other things, the Act affects re-measuring and re-assessing how taxpayers realize tax-deferred taxes and how a company recognizes taxes on mandatory deemed repatriation/other foreign income. 

SEC's interpretative guidance includes staff views encompassed in three documents:

·  ASC Topic 740

·  SAB 118

·  C&DI 110.02

ASC Topic 740. Accountants formerly knew Accounting Standards Codification (ASC) Topic 740 as "FAS 109 or Statement 109: Accounting for Income Taxes." ASC 740 tries to help companies understand how to account for the effect of changes in tax laws based on income when they file their financial statements.  ASC 740's guidance takes into account the recent far-reaching changes in the new tax laws -- including changes in the corporate tax rate -- that businesses must recognize when filing financial reports for the period that includes December 22, 2017 (the date the law was signed into effect). Please note that because the President signed the law into effect in 2017, taxpayers must reflect the changes in 2017 financial statements.

SEC warns businesses that the Act's changes are of sufficient consequence to cause businesses to face new demands with respect to operations and/or restrictions when filing financial statements under ASC Topic 740 for the reporting period that includes December 22, 2017. That is because ASC 740 may cause significant changes in how a company reports current and/or future income tax expenses or benefits on its financial statement as well as changes in how deferred tax assets or liabilities affect the firm's balance sheet.

SAB 118.  SEC produces Staff Accounting Bulletins (SAB) that reflect the views of SEC staff on various accounting-related financial disclosure standards such as those found under the FASB's accounting standards. SEC's website says SAB bulletins comprise the "interpretations and policies followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws."

In particular, SAB 118 contains the views of SEC staff regarding FASB's ASC Topic 740. The bulletin adds a new Section EE to Topic 5. The revised Topic 5 fleshes out the income tax impact of the new tax laws on the requirements of ASC Topic 740 with respect to the reporting period that includes December 22, 2017, the date the President signed the legislation. The Act's income tax changes include changes to the corporate tax rate as well as revised business exclusions, deductions, and credits.

The relief provided by SAB 118 allows companies to report provisional amounts over a measurement period. A "measurement period" is similar to the measurement period allowed with respect to business combinations when the information is not available, prepared, or analyzed in detail to account for changes in the tax laws.

C&DI 110.02. Compliance and Disclosure Interpretations (C&DI) 110.02 is SEC's guidance on how to comply with the requirements of Section 2.06 of Form 8-K. In the SEC staff's view, the re-measuring a deferred tax asset to take into account the impact of the new law is not enough to trigger filing under Section 2.06. A company that finds that the re-measuring of the deferred tax asset is enough to trigger filing under Section 2.06, may follow Section 2.06's instructions and report the impairment or a provisional amount in the next reporting period.

While primarily focus on exempt securities and verification of accredited investors, it’s important to note that securities law covers so much more.  Proper disclosures and accounting standards are vitally important to all companies in the securities space.