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Senior finance and accounting executives who thought their companies might be given extra time to report the effects of the Tax Cuts and Jobs Act had better think again.
On December 22, the same day that President Trump signed the act into law, the Securities and Exchange Commission published staff guidance to help publicly traded companies, auditors, and others ensure that disclosure of the accounting effects of the act is done in a timely way.
Among other things, the guidance tells filers what they should do if the facts on how the law will affect their financials are incomplete. It also outlines the cases in which estimates are acceptable. But what the guidance doesn’t do is to give companies more time to make changes, other than what’s available through their normal reporting periods.
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“Some people thought that maybe [they] could get a deferral, that there would be some sort of pushback of the implementation, and my perception of [the SEC staff guidance] is that it’s not that,” says Matt Himmelman, a senior consultation partner at Deloitte. “In other words, you can’t go pencils down.”
Public companies must “continue on the path of accounting for the tax effects of the act in the period of enactment, which was the fourth quarter for calendar-year-end companies,” he adds. Non-calendar-year-end companies will have to report the effects for the fiscal quarter in which December 22 fell.
That said, the SEC staff publication does offer guidance about three public-filing categories, according to Himmelman.
The three “buckets,” as he calls them, are (1) the reporting of financial-statement items that can be completed by the time a company files the 10-K or 10-Q that includes the period of enactment; (2) the reporting of items that can’t be completed but can be reasonably estimated; and (3) the items that can neither be completed nor estimated in that timeframe.
In terms of the first bucket, registrants should immediately book “those items that [they] can complete and actually be done with,” Himmelman says. For example, by the time a company files the 10-K or 10-Q including the period of enactment, companies should be able to fully report the effects of the tax act’s reduction of the corporate maximum rate of 35% to a flat 21% on their deferred tax assets and liabilities.
Making such balance-sheet adjustments is something that “probably can be completely done and, as a result, [companies] should book those tax assets and liabilities in that quarter,” says Himmelman.
While the law’s enactment happened in the fourth quarter for calendar-year companies, they will have to book its effects for their 2017 10-Ks, he added.
Buckets two and three involve items that can’t be recorded by the time a company files its 10-K or 10-Q that includes the period of enactment , according to the accountant. In terms of bucket two, filers “should make a reasonable estimate and record that estimate, even if [they’re] not fully complete with any of the work [they] may have to get to.”
For example, filers will need to report estimates of the “deemed repatriation tax” in the law — the tax on foreign earnings that haven’t been repatriated to the United States. Because the provision is new, companies will have to estimate their deferred tax liabilities from scratch.
“That calculation involves, in some cases, going back a number of years” to calculate a company’s overseas earnings and refining the estimates “to make sure [the company has] the right numbers for subsidiaries,” explains Himmelman. Such estimates may be possible for companies to make by the time a company files its 10-K or 10-Q that includes the period of enactment, he thinks.
In the third case, in which companies aren’t even able to make a reasonable estimate of the act’s effects, “don’t book anything,” Himmelman says. “You essentially disclose the fact that you’re still working and haven’t reached that point yet. You essentially stay with your existing accounting.”
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