18-1, Frequently Asked Questions About Tax Reform (January 3, 2018; Updated August 30, 2018)

This Financial Reporting Alert (FRA) contains responses to frequently asked questions (FAQs) about how an entity should account for the tax effects of the Act in accordance with ASC 740. While the answers to the FAQs reflect our current views, these views are subject to change on the basis of additional input received or further developments in practice. We plan to continue to update this document to reflect developments as they occur and as additional questions surface. The following is a high-level summary of the updates to this FRA thus far:

• Originally issued on January 3, 2018.
• Updated on January 19, 2018, to address a number of additional FAQs and to reflect the activities of the FASB and its staff.
• Updated on March 20, 2018, to cover a number of additional FAQs (e.g., a new section on interim considerations was added) and to incorporate guidance that previously appeared separately in FRAs 18-3 and 18-4.
• Updated on June 20, 2018, principally to provide a new section related to the adoption of ASU 2018-02.
• Updated on August 30, 2018, principally to amend, add, or delete certain FAQs related to measuring the U.S. deferred tax impact of future global intangible low-taxed income (GILTI) inclusions for companies that have elected or will elect to use the deferred method.

Amended, added, and deleted FAQs are marked as such in the question line.

i. How do SAB 118 and the need to record “reasonable estimates” interact with the guidance in ASC 740 regarding uncertain tax positions (i.e., FIN 48) with respect to the Act? [Added March 20, 2018]

SAB 118 addresses certain practical problems created by the enactment of a vast amount of new and complex legislation only nine days before December 31, 2017 — the end of a reporting period for most entities. The Act was developed over a very condensed timeframe, and preparers and practitioners had little time to analyze its preliminary or final versions. As a consequence, there may be tax technical matters with respect to the Act for which it is not feasible to prepare a complete “more-likely-than-not” assessment during the enactment period or potentially even in subsequent quarters within the measurement period.

Accordingly, we believe that uncertainties about how the Act should be interpreted may be accounted for provisionally under SAB 118. More specifically, during the one-year measurement period, an entity may account for an uncertain tax technical matter with respect to the Act on the basis of a reasonable estimate of how the Act will ultimately be interpreted. As new information becomes available, an entity would then adjust its provisional estimate until it can complete its more-likely-than-not assessment. It would need to complete that assessment, along with appropriate measurement of the resulting positions, by the end of the measurement period. In a manner consistent with SAB 118, an entity should make a good faith effort to develop reasonable estimates until it prepares a complete more-likely-than-not assessment.

Determining whether a tax technical matter is within the scope of SAB 118 during the one-year measurement period will of course depend on the specific facts and circumstances of each individual entity and will require considerable judgment.

DTAs and DTLs that exist as of the enactment date and are expected to reverse after the Act’s effective date (January 1, 2018, for calendar-year-end entities) should be adjusted to the new statutory tax rate of 21 percent. Any DTAs and DTLs expected to reverse before the Act’s effective date should not be adjusted to the new statutory tax rate.

Yes. Under ASC 740-10-45-15, the tax effects of changes in tax laws or rates are allocated to income from continuing operations irrespective of the source of the income or loss to which the deferred tax item is related. In a manner consistent with ASC 740-10-30-26, the tax effects of items not included in continuing operations that arose before the enactment date are measured on the basis of the enacted rate at the time the transaction was recognized. (For more information, see Sections 3.65 and 3.66 of Deloitte’s A Roadmap to Accounting for Income Taxes.)

A reporting entity should calculate temporary differences by comparing the relevant book and tax basis amounts as of the enactment date. To determine book basis amounts as of the enactment date, the reporting entity should apply U.S. GAAP on a year-to-date basis up to the enactment date. For example:

• Any book basis accounts that must be remeasured at fair value under U.S. GAAP would be adjusted to fair value as of the enactment date (e.g., certain investments in securities or derivative assets or liabilities).
• Book balances that are subject to depreciation or amortization would be adjusted to reflect current period-to-date depreciation or amortization up to the enactment date.
• Book basis account balances such as pension and other postretirement assets and obligations for which remeasurement is required as of a particular date (and for which no events have occurred that otherwise would require an interim remeasurement) would not be remeasured as of the enactment date (i.e., no separate valuation of the benefit obligation is required as of the enactment date) for purposes of adjusting the temporary difference that will be measured to the new statutory tax rate as of December 22, 2017. For example, a calendar-year reporting entity that has a pension plan with an annual measurement date of December 31 would adjust its balance sheet accounts for the effects of current-year net periodic pension cost and other contribution and benefit payment activity through the date of enactment.
• Any book basis balances associated with share-based payment awards that are classified as liabilities would be remeasured (on the basis of fair value, calculated value, or intrinsic value, as applicable) as of the enactment date. In addition, for those share-based payment awards that ordinarily would result in future tax deductions, compensation cost would be determined on the basis of the year-to-date requisite service rendered up to the enactment date.

No. Subject to materiality, an entity should adjust DTAs and DTLs for the effect of a change in tax laws or rates as of the enactment date even if such date does not coincide with the end of a financial reporting period.

The tax effects of year-to-date activity before enactment would be allocated in accordance with the intraperiod tax allocation guidance in ASC 740-20.

Not exactly. Given the mechanics of Internal Revenue Code (IRC) Section 15,5 we believe that the change in tax rate resulting from the Act will be administratively effective for a fiscal-year-end entity at the beginning of the entity’s fiscal year. Accordingly, in a manner consistent with the guidance in ASC 740-270-55-50 and 55-51, the applicable tax rates for deferred tax balances are as follows:

• For balances expected to reverse after the enactment date and within the current fiscal year, the applicable rate is the “blended tax rate” (see FAQ 1.7 below), which will be effective for the fiscal year.
• For balances not expected to reverse within the current fiscal year, the applicable rate is the new statutory tax rate of 21 percent, which will be effective for the first fiscal year beginning after January 1, 2018.

For the period that includes enactment, the blended tax rate should be determined in accordance with IRC Section 15 and therefore based on the applicable rates before and after the change and the number of days in the period within the taxable year before and after the effective date of the change in tax rate.

As illustrated in the table below, the domestic federal statutory tax rate (blended tax rate) for all non-calendar-year-end entities with the same fiscal year-end will be the same, regardless of income (or projected income used for interim reporting). It is assumed in the table that the entities’ fiscal year-end is March 31, 2018, and the effective date of the new tax rate is January 1, 2018.

In a manner consistent with the guidance in IRC Section 15 discussed above, such an entity should use its blended tax rate to calculate the U.S. federal tax expense/benefit to include in its AETR computation. The new AETR would then be applied to pretax income or loss for the year to date at the end of the interim period that includes the enactment date, and for all subsequent interim periods in the year.

The entity should use the blended tax rate as explained in FAQ 1.7.

Yes. An entity must consider taxable income expected in future years for measurement of a DTA related to the carryforward of a current-year loss from continuing operations. For example, assume that a calendar-year-end company with a full valuation allowance has a current-year $1,000 loss in continuing operations and a $100 gain reported in OCI related to an available-for-sale (AFS) security that is in an overall gain position, resulting in a DTA and DTL of $210 and $21, respectively, as of December 31, 2017. A $21 tax benefit and $21 tax expense would be allocated to continuing operations and OCI, respectively. See Sections 7.07 and 7.21A of Deloitte's A Roadmap to Accounting for Income Taxes for more information.

The U.S. shareholder’s income inclusion is offset by a deduction designed to generally result in an effective U.S. federal income tax rate of either 15.5 percent or 8 percent. The 15.5 percent rate applies to the extent that the SFCs hold cash and certain other assets (the U.S. shareholder’s “aggregate foreign cash position”), and the 8 percent rate applies to the extent that the income inclusion exceeds the aggregate foreign cash position.

The Act permits a U.S. shareholder to elect to pay the net tax liability8 interest free over a period of up to eight years.

In the period of enactment, a U.S. shareholder should record a current/noncurrent income tax payable for the transition tax due. ASC 210 provides general guidance on the classification of accounts in statements of financial position. An entity should classify as a current liability only those cash payments that management expects to make within the next 12 months to settle the transition tax. The installments that the entity expects to settle beyond the next 12 months should be classified as a noncurrent income tax payable.

Although ASC 740-10-30-8 clearly prohibits discounting of DTAs and DTLs, it does not address income tax liabilities payable over an extended period. In the absence of explicit guidance in ASC 740, we believe that an entity would need to consider ASC 835-30. Specifically, we note the following:

• ASC 835-30 is generally applied to “exchange transactions” rather than nonreciprocal transactions.
• ASC 835-30-15-3(e) notes that the guidance in ASC 835-30 does not apply to “[t]ransactions where interest rates are affected by the tax attributes or legal restrictions prescribed by a governmental agency (for example, industrial revenue bonds, tax exempt obligations, government guaranteed obligations, income tax settlements).”
• Because the amount of the deemed repatriation transition tax is inherently subject to uncertain tax positions, measurement of the ultimate amount to be paid is potentially subject to future adjustment.

Accordingly, we do not believe that the deemed repatriation transition tax should be discounted.

In January 2018, the FASB staff issued a Q&A stating that the deemed repatriation transition tax liability should not be discounted.

Although we generally believe that the recognition of a liability related to a foreign subsidiary would be limited to the amount that corresponds to the entity’s outside basis difference in the foreign subsidiary, we believe that it would be appropriate to record the entire amount of the deemed repatriation transition tax in the period of enactment given the unique circumstances presented in this FAQ (i.e., the amount due is calculated by reference to the greater of the E&P amounts determined as of November 2, 2017, or December 31, 2017 — that is, E&P related to past transactions — and will simply be payable in a subsequent year).

On the basis of the unique nature of tax reform and the mandatory one-time deemed repatriation income inclusion, we believe that the deemed repatriation transition tax liability may be classified as a noncurrent income tax payable.

Yes. Even under the new tax system, an entity may still be subject to income tax on its foreign investments (e.g., foreign exchange gains or losses on distributions, capital gains on sale of investment, foreign income taxes, and withholding taxes) and should consider whether it needs to record any deferred taxes on outside basis differences in foreign investments. In making this determination, an entity should consider its outside basis differences at each level in the organization chart, starting with the subsidiary at the lowest level in the chain.

Example 1 in SAB 118 discusses a Bucket 3 fact pattern and states the following:

In addition, SAB 118 indicates that the SEC staff’s views were informed by FASB FSP FAS 109-2,9 which contains similar guidance and states, in part:

Accordingly, we believe that, in a manner similar to the guidance in FSP FAS 109-2, and as specified in Example 1 of SAB 118, an entity should apply ASC 740 as it completes its plans for reinvestment of its outside basis difference, including its plans for reinvestment or repatriation of unremitted foreign earnings. More specifically, to the extent that an entity has finalized its plans and can calculate the resulting tax effects, the entity should disclose those plans and record the associated tax effects (Bucket 1). If an entity has completed all or portions of its assessment (e.g., made the decision to repatriate from all or certain entities) and has the ability to reasonably estimate the effects of that assessment (or portions thereof), it should record provisional amounts for those effects and disclose the status of its efforts (Bucket 2). If an entity has made insufficient progress to reasonably estimate its plans, it should disclose the status of its evaluation and should not adjust its previous indefinite reinvestment assertions for the effects of the Act (Bucket 3).

An entity should be mindful that its plans for reinvestment or repatriation of unremitted foreign earnings could be affected by matters other than those associated with the Act. For example, if an entity’s cash flow needs in the United States change significantly for reasons other than those caused by the Act (e.g., the need for cash in the United States to pay off debt, settle litigation, or fund an acquisition), the entity should evaluate those matters outside the SAB 118 framework to ensure that its prior intent related to reinvestment is still appropriate.

3.6 If an entity changes its indefinite reinvestment assertion with respect to its investment in a foreign subsidiary (or foreign corporate joint venture that is essentially permanent in duration) because it now intends to distribute earnings subject to the deemed repatriation transition tax, may the entity change its historic accounting policy and approach for determining the DTL for withholding taxes that are within the scope of ASC 740?

Historically, we have accepted the following two approaches for determining whether a parent should recognize a DTL for withholding taxes that would be imposed by the local tax authority on a distribution:

• Parent jurisdiction approach — A parent10 would apply ASC 740-10-55-24 by treating the withholding tax as a tax that the parent would incur upon the reversal of a taxable temporary difference in the parent’s jurisdiction that is attributable to its investment in the foreign subsidiary. The parent would be unable to recognize a DTL when the financial reporting carrying value of the investment does not exceed the tax basis in the investment as determined by application of tax law in the parent’s jurisdiction. However, if an outside basis difference does exist in the parent’s investment in the foreign subsidiary, the parent would apply ASC 740-10-55-24 when measuring the DTL to be recognized.
• Subsidiary jurisdiction approach — An entity considers the perspective of the jurisdiction that is taxing the recipient (i.e., the local jurisdiction imposing the withholding tax) when determining whether the parent has a taxable temporary difference. From the perspective of the local jurisdiction, the parent has a financial reporting carrying amount in its investment in the distributing entity that is greater than its local tax basis (i.e., from the perspective of the local jurisdiction, the IRC Section 965(a) transition income inclusion that increased the tax basis is not relevant in the local jurisdiction). Therefore, there is an “outside” taxable temporary difference and, in accordance with ASC 740-10-55-24, the measurement of the DTL should reflect withholding taxes to be incurred when the taxable temporary difference reverses.

These approaches would continue to be appropriate for determining whether a parent should recognize a DTL for withholding taxes after the effective date of the tax law change. For more information about the two approaches, see Section 3.06 of Deloitte’s A Roadmap to Accounting for Income Taxes.

Note that the tax effect of any change in the indefinite reinvestment assertion (e.g., a withholding tax DTL) would be considered an indirect effect of tax reform for purposes of the disclosure required under ASC 740-10-50-9(g).

3.7 Should an entity consider the one-time deemed repatriation income inclusion to be a source of income when analyzing the realization of DTAs in the year of the inclusion?

Yes. An entity should consider the one-time deemed repatriation income inclusion to be a source of taxable income when analyzing the realization of DTAs. The entity should verify that the one-time deemed repatriation income inclusion coincides with the timing of the deductions and other benefits associated with the DTAs.

For more information about sources of taxable income that may enable realization of a DTA, see Section 4.22 of Deloitte’s A Roadmap to Accounting for Income Taxes.

Generally speaking, an election made under Revenue Procedure 2006-45 would be considered an automatic change from one permissible method to another. Accordingly, the financial statement impact would be reflected in the period in which the entity has concluded that it qualifies for the change in accounting method and that it has the intent and ability to file the change.

For more information about when to recognize the impact of tax method changes, see Section 3.51 of Deloitte’s A Roadmap to Accounting for Income Taxes.

3.9 What factors should an entity consider in measuring the one-time deemed repatriation transition tax? [Added January 19, 2018]

Typically, we would expect the one-time deemed repatriation transition tax to be based on the facts that exist as of the balance sheet date (e.g., E&P amounts, cash and other asset balances) or a prior date if required by law. However, in some instances, certain actions (or elections) that management expects to take (make) and for which no other impediments or regulatory hurdles to execution exist (i.e., the plans are within the entity’s control) can be considered in the measurement of the tax liability. In such cases, an entity would need to use significant judgment and assess its individual facts and circumstances.

A domestic corporation is permitted a deduction of up to 50 percent of the sum of the GILTI inclusion and the amount treated as a dividend, because the corporation has claimed a foreign tax credit (FTC) as a result of the inclusion of the GILTI amount in income (“IRC Section 7811 gross-up”). If the sum of the GILTI inclusion (and related IRC Section 78 gross-up) and the corporation’s foreign-derived intangible income (FDII) (see FAQ 5.1) exceeds the corporation’s taxable income, the deductions for GILTI and for FDII are reduced by the excess. As a result, the GILTI deduction can be no more than 50 percent of the corporation’s taxable income (and will be less if the corporation is also entitled to an FDII deduction). The maximum GILTI deduction is reduced to 37.5 percent for taxable years beginning after December 31, 2025.

If a GILTI inclusion is not expected in future years, no U.S. deferred taxes would be recorded. In addition, even if a GILTI inclusion is expected in future years, U.S. deferred taxes would not be required.

In January 2018, the FASB staff issued a Q&A stating that a company may elect, as an accounting policy, to either (1) treat taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current-period expense when incurred or (2) factor such amounts into the company’s measurement of its deferred taxes (the deferred method). The FASB staff acknowledged that companies that elect to factor GILTI into the measurement of deferred taxes will face additional implementation issues but did not explain how those issues should be addressed.

A U.S. investor in a CFC has a financial reporting carrying value (i.e., book basis) and an outside tax basis for U.S. tax purposes in its foreign investment. If those amounts are not the same, the U.S. investor would have an outside basis difference in the foreign investment. In addition, the U.S. investor has U.S. tax basis in the CFC's underlying assets and liabilities held that will be used for calculating GILTI inclusions. Accordingly, a U.S. investor may have book/U.S. tax inside basis differences that, upon reversal, will increase or decrease the GILTI inclusion and, because GILTI inclusions increase the U.S. tax basis in the foreign investment, will also affect the outside basis difference in the foreign investment.

Accordingly, in determining the amount of U.S.-investor-level deferred taxes necessary for foreign investments under this model, companies should “look through” the outside basis of the CFC to determine how the book/U.S. tax inside basis differences will reverse and how such reversals will affect future GILTI inclusions and the outside basis difference.

Any residual outside basis difference that is not related to the CFC’s underlying assets or liabilities (i.e., inside/outside tax basis disparities) should then be analyzed in the determination of whether that residual basis difference would result in a taxable or deductible amount when the investment is recovered and, if so, whether an ASC 740 outside basis exception (i.e., ASC 740-30-25-18(a) or ASC 740-30-25-9) applies. Unlike other situations involving outside basis differences in foreign subsidiaries, this “look through” approach would be employed even if no overall outside basis difference in the CFC exists, or if only an overall deductible outside basis difference in the CFC exists.

In addition, in assessing the GILTI impact of the CFC’s underlying assets and liabilities, a company would, in a fashion similar to branch accounting, establish U.S. DTAs or DTLs to account for the U.S. income tax effects of the future reversal of any in-country DTAs and DTLs (also referred to as “anticipatory foreign tax credit/deduction” or “anticipatory” DTAs and DTLs). When determining the amount of a U.S. anticipatory DTA or DTL, an entity must carefully consider all applicable provisions in the tax law, since the amount of the incremental foreign taxes that will be creditable and realizable, or forgone, because of the future reversal of the local in-country DTAs and DTLs may be difficult to assess and subject to limitations (e.g., an 80 percent limitation, limitations as a result of expense allocations, and a limitation on utilization as a result of the absence of a carryforward or carryback period). For example, a local-country DTL that will reverse in the same year(s) in which a GILTI inclusion is expected may be creditable against the U.S. tax in that year, subject to the 80 percent limitation. In addition, U.S. DTAs that reverse in the same year as the local in-country deferred might further limit the FTC. Future FTCs directly related to future book income and future expense allocation limitations directly related to future book expense generally should not be included in the measurement of the anticipatory DTA or DTL until such income or expense, or both, are recognized (i.e., such FTCs and expense allocation limitations should be limited to those directly tied to existing temporary differences).

For more information about accounting for foreign branch operations, see Section 3.51A of Deloitte’s A Roadmap to Accounting for Income Taxes.

In summary, recorded GILTI DTAs and DTLs under this model will consist of the following three items:

• DTAs and DTLs related to inside book/U.S. tax basis differences that will affect future GILTI inclusions, identified by “looking through” the CFC’s outside basis to the CFC’s underlying assets and liabilities.
• DTAs and DTLs related to the U.S. tax consequences of settling the CFC’s in-country DTAs or DTLs (i.e., anticipatory DTAs and DTLs).
• Any DTA or DTL related to a residual outside basis temporary difference for which an exception has not been applied.

The decision tree below illustrates the approach for determining the deferred tax accounting for outside basis differences in foreign investments as a result of the GILTI provision.

We believe that in a manner consistent with the mechanics of the GILTI computation, GILTI DTAs and DTLs should generally be computed on a U.S.-shareholder-by-U.S.-shareholder basis. Therefore, multiple CFCs under one U.S. shareholder would be analyzed in the aggregate. If a U.S. shareholder has a mixture of profitable and unprofitable CFCs that, in the aggregate, are not profitable such that future GILTI inclusions are not expected at the U.S. shareholder level, no GILTI DTAs and DTLs would be recorded. Conversely, if a U.S. shareholder has a mixture of profitable and unprofitable CFCs that, in the aggregate, are profitable such that future GILTI inclusions are expected, that U.S. shareholder should measure GILTI DTAs and DTLs in accordance with FAQ 4.2.

4.3 Given that the CFC’s routine return is excluded from the GILTI inclusion, how should an entity account for the routine return when recording GILTI DTAs and DTLs? [Amended January 19, 2018; August 30, 2018]

We believe that there is more than one acceptable approach to accounting for the routine return in the measurement of GILTI DTAs and DTLs, including the following:

• Special deduction — The routine return could be treated akin to a special deduction, with the benefit recognized when the GILTI inclusion is reduced by the routine return. Under this approach, the routine return is viewed as dependent on future events, including future investments in QBAI and interest expense deductions, and it therefore would not be factored into the tax rate expected to apply to the temporary differences.
• Graduated tax rate — Under this approach, the amount of taxable income equal to the routine return would be considered income taxed at a zero rate. Accordingly, if the routine return represents a significant factor, companies would measure GILTI DTAs and DTLs by using the average graduated tax rate applicable to the amount of estimated annual taxable income in the periods in which the aforementioned deferred taxes are estimated to be settled or realized. Companies will need to use judgment in determining the periods in which GILTI DTAs and DTLs will reverse and the estimated annual taxable income in each of those periods. See Sections 4.09 and 4.10 of Deloitte’s A Roadmap to Accounting for Income Taxes for more details.

Other models may also be acceptable in certain situations (e.g., a portion of the book/U.S. tax basis difference that will reverse and represent a routine return might not be considered a taxable temporary difference for which a deferred tax would be recorded in accordance with ASC 740-10-25-30).

The approach an entity selects would be an accounting policy election that, like all other such elections, must be applied consistently.

No. While many “branch-like” principles are employed in the model described in FAQ 4.2, unlike a branch, a CFC that will have substantially all of its income taxable in the United States as a result of a GILTI inclusion still has an outside tax basis that is relevant in certain instances, such as a sale or distribution. Accordingly, measurement of deferred taxes should also factor in the residual outside basis difference as described in FAQ 4.2.

For more information about accounting for foreign branch operations, see Section 3.51A of Deloitte’s A Roadmap to Accounting for Income Taxes.

4.5 [Deleted August 30, 2018]

4.6 [Deleted August 30, 2018]

The GILTI deduction is intended to lower the GILTI income inclusion (with the intent of lowering the effective tax rate on the included income) and, in many cases, will immediately apply when a company has a GILTI inclusion. Accordingly, we believe that if a company generally expects to be able to apply the full GILTI deduction in the period in which the GILTI DTAs and DTLs reverse, it should consider the deduction in the measurement of the GILTI DTAs and DTLs in accordance with ASC 740-10-55-24. As noted above, however, the GILTI deduction is “up to,” rather than “guaranteed” to be, 50 percent and could be reduced by the taxable income limitation, which is applied in combination with the FDII deduction (see FAQ 5.1). An entity should carefully consider this limitation when factoring the GILTI deduction into the measurement of U.S. GILTI DTAs and DTLs. For example, when the taxable income limitation and expense allocation limitations are expected to apply and be significant (e.g., in situations in which the U.S. operations generate significant losses or an entity expects to forgo the GILTI deduction because it expects to use existing NOL carryforwards), entities may conclude that factoring the GILTI deduction into the rate is not appropriate. See additional discussion in FAQ 4.11.

Entities are required to adopt ASU 2016-16 on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the year of adoption. ASC 250-10-45-8 requires entities to include the direct effects of a change in accounting principle, including any related income tax effects, when applying that principle retrospectively. Although ASU 2016-16 will be applied on a modified retrospective basis, we believe that a similar concept would apply in this situation. Therefore, the corresponding change in the measurement of deferred taxes attributable to GILTI would be considered a direct effect and, accordingly, would be recognized as an adjustment directly to retained earnings as well.

While SAB 118 does not explicitly refer to accounting policy choices, we believe that the following application of its guidance to a company’s GILTI policy election would be appropriate:

• A company is not required to adopt an accounting policy for GILTI in the financial statements for the period that includes the enactment date. To create and preserve the flexibility to make that election at some time during the measurement period, however, the company must disclose that it has not yet adopted an accounting policy. This guidance applies even if the company already knows, or has reasonable estimates of, the effect of the two different accounting policies on the financial statements and the difference is material.
• If a company’s accounting policy is still “open” during any subsequent quarters within the one-year measurement period, a policy is not established by including the current-year estimated actual tax effects of GILTI as a current-period expense in the company’s AETR used for calculating its interim tax provision.
• Once a company records deferred taxes with respect to GILTI, and the recognition of such deferred taxes is considered material, the company has elected an accounting policy regardless of whether the amount recorded is considered a provisional amount under SAB 118. Changes made to that policy during or after the measurement period would be subject to ASC 250.
• Subsequent adjustments of the deferred tax amount recorded for GILTI, including adjustments related to the company’s policies used to calculate such amount (e.g., inside basis vs. outside basis), would not be subject to ASC 250 provided that (1) they occur during the one-year measurement period and (2) the amounts recorded in prior periods were marked as provisional.
• Once the deferred tax amount for GILTI is considered final, ASC 250 would apply to any future adjustments related to the company’s policies used to calculate such amount.

This application of SAB 118 has been discussed with the SEC staff, and we understand that the staff will not object to it as long as a company provides the disclosures required by the SAB.

We believe that FDII deductions related to future book income are analogous to the special deductions cited in ASC 740-10-25-37 and should be accounted for as such.

For more information, see Section 4.17 of Deloitte’s A Roadmap to Accounting for Income Taxes.

We believe that the BEAT system can be analogized to an AMT system. ASC 740 notes that when alternate tax systems like the AMT exist, deferred taxes should still be measured at the regular tax rate. Because the BEAT provisions are designed to be an “incremental tax,” an entity can never pay less than its statutory tax rate of 21 percent. Like AMT preference items, related-party payments made in the year of the BEMTA are generally the BEMTA’s driving factor. The AMT system and the BEAT system were both designed to limit the tax benefit of such “preference items.” Further, as was the case under the AMT system, an entity may not know whether it will always be subject to the BEAT tax, and we believe that most (if not all) taxpayers will ultimately take measures to reduce their BEMTA exposure and therefore ultimately pay taxes at or as close to the regular rate as possible. Accordingly, while there is no credit under the Act such as the one that existed under the AMT regime, we believe that the similarities between the two systems are sufficient to allow BEAT taxpayers to apply the existing AMT guidance in ASC 740 and measure deferred taxes at the 21 percent statutory tax rate. (See ASC 740-10-30-8 through 30-12 and ASC 740-10-55-31 through 55-33.)

In January 2018, the FASB staff issued a Q&A stating that companies should measure deferred taxes without regard to BEAT (i.e., should continue to measure deferred taxes at the regular tax rate), with any payment of incremental BEAT reflected as a period expense.

Yes. Since the AMT credit will now be fully refundable regardless of whether there is a future income tax liability before AMT credits, the benefit of the AMT credit will be realized. Therefore, any valuation allowance should be released, and an income tax benefit should be recognized.

Because an entity may either apply an AMT credit carryforward against its future income tax liability or receive a refund if it never has taxable income, we would accept either presentation as long as it is accompanied by appropriate disclosure.

No. As discussed in FAQ 3.2, ASC 740 prohibits discounting, but only in the context of DTAs and DTLs. Accordingly, in the absence of explicit guidance in ASC 740, we believe that ASC 835-30 would need to be considered, and in accordance with our conclusion above regarding the deemed repatriation transition tax, we do not believe that the amount, even if presented as a receivable, should be discounted.

In January 2018, the FASB staff issued a Q&A stating that, in a manner similar to the Board’s conclusion regarding the one-time deemed repatriation transition tax, refundable AMT carryforward credits should not be discounted.

The member should record the tax expense attributable to the various provisions of the Act as if it had not been a member of the U.S. consolidated tax return group. However, depending on the facts and circumstances, it may be appropriate to apply related-party and affiliated group rules that are relevant regardless of whether an entity makes an election to file a consolidated tax return.

For more information on the separate-return approach, see Section 4.49 of Deloitte’s A Roadmap to Accounting for Income Taxes.

Material amounts recorded in the current year related to tax reform would typically be discussed and analyzed as part of a registrant’s MD&A. In addition, SEC Regulation S-K, Item 303,19 requires SEC registrants to disclose in their MD&A any known trends, events, or uncertainties that are reasonably likely to have a material effect on their liquidity, capital resources, or results of operations. Therefore, registrants should consider disclosing in MD&A, to the extent such disclosures are material, the impact of the changes in tax law on future periods in addition to the current period. Such disclosures may include:

• The impact of changes in the effective tax rate on future results of operations.
• The impact of other new provisions (e.g., GILTI, FDII, BEAT) on future results of operations.
• The existence and nature of uncertainties related to those aspects of the Act for which the registrant either (1) recorded provisional amounts or (2) was unable to record a provisional amount because the registrant did not have the necessary information available, prepared, or analyzed to complete its accounting for the change in tax law.
• The implications of paying the required one-time deemed repatriation transition tax on liquidity and capital resources.
• Potential changes in the determination of indefinitely reinvested foreign earnings and the impact of additional cash that may become available for domestic operations.
• The impact that changes in tax rates or other impacts of tax reform could have on contractual agreements, such as debt covenants.

Registrants that provide forward-looking earnings guidance will also need to consider the impact of tax reform on such guidance.

In addition to the disclosures required by ASC 740, SAB 118 requires companies to disclose “information about the material financial reporting impacts of the Act for which the accounting under [ASC 740 as of the reporting date] is incomplete.” These disclosures include:

We would expect items (a) through (e), as well as item (h), to be included in a company’s disclosures in the first financial statements issued that include the period in which the Act was enacted (e.g., financial statements for the year ended December 31, 2017, for calendar-year companies). Items (f) and (g) will be relevant in subsequent periods to the extent that a company records adjustments during the measurement period, and items (a) through (e) and (h) should be updated in each reporting period until the company has completed its accounting for the income tax effects of the Act.

The examples below illustrate elements that may apply to a particular entity’s compliance with the incremental disclosure requirements of SAB 118. However, the examples are not all-inclusive and do not take into account any other disclosure requirements in ASC 740. See Chapter 6 of Deloitte’s A Roadmap to Accounting for Income Taxes for additional information regarding disclosures required by ASC 740.

As indicated in footnote 6 of SAB 118, the SEC will allow a foreign private issuer (FPI) reporting under IFRS Standards to apply the guidance in the SAB when accounting for the effects of the Act.

However, we do not believe that non-FPIs reporting under IFRS Standards may apply the guidance in SAB 118 because SABs are not authoritative guidance under IFRS Standards. Nevertheless, we support the preliminary view of many stakeholders that “SAB 118-like” accounting may be achieved for at least those provisions of the Act for which reliable estimates can be made by applying existing IFRS guidance. For example, although an entity may need to use judgment in accounting for certain aspects of the Act, if a reliable estimate can be made, the entity should recognize such amounts and, if necessary, adjust those estimates over time as more information becomes available and provide accompanying disclosures. It is uncertain at this time, however, whether current IFRS guidance supports accounting similar to that under SAB 118, which permits entities to exclude provisional amounts “for those specific income tax effects for which a reasonable estimate cannot be determined.” In addition, entities should consider providing appropriate disclosures on the basis of their specific situation.

While the answer to this FAQ reflects our views at this time, we understand that IFRS stakeholders are continuing to meet with their regulators, auditing firms, and other oversight bodies to determine whether and, if so, how entities that report under IFRS Standards may navigate the challenges associated with applying existing IFRS guidance to the requirements in the Act. Accordingly, our views are subject to change on the basis of possible additional guidance or further developments in practice.

Certain items or events are specifically excluded from the estimated AETR and, therefore, the related tax effects are recognized discretely (i.e., tax effects are excluded from the numerator and underlying pretax book income or expense, if any, is excluded from the denominator).

Items or events excluded from the AETR calculation may include:

• Significant and unusual or infrequently occurring items (see ASC 740-270-30-8).
• Out-of-period adjustments.
• Certain loss jurisdictions (see ASC 740-270-30-36(a)).
• Certain jurisdictions for which an entity is unable to reliably estimate income (or loss) or the related tax (or benefit) (see ASC 740-270-30-36(b)).
• Certain components of pretax income that are not estimable (ASC 740-270-30-17).
• Any item reported net of tax (discontinued operations/OCI/other tax effects in equity).
• Tax effects (excess or deficiency) of exercised or vested share-based payment awards.

All provisions of the Act (e.g., BEAT, GILTI, Section 163(j)) related to ordinary income should be considered and estimated as part of an entity’s estimated AETR. See Section 9.01 of Deloitte’s A Roadmap to Accounting for Income Taxes for more information.

An entity that is unable to reliably estimate the current-year impact of a provision of the Act should apply the guidance in ASC 740-270-25-3, under which such an impact would be reported discretely. For more information, see Section 9.06 of Deloitte’s A Roadmap to Accounting for Income Taxes.

SAB 118 states:

Therefore, if, after the period of enactment, an entity obtains information that allows it to finalize, update, or make an initial reasonable estimate of the tax effects of the Act, an adjustment should be recorded to income tax expense/benefit as a discrete item in that reporting period. In other words, the entity should update its accounting for the tax effects of the Act — on the basis of the best information available at the end of each reporting period — for Act-related matters that were not completed in the period of enactment in each reporting period within the measurement period.

Under ASC 740, an entity would not normally consider new information that is received after the balance sheet date, but that was not available as of the balance sheet date, as discussed in paragraph B38 of Interpretation 48 (not codified in ASC 740), which states, in part:

Given the unique facts and circumstances associated with the Act, however, which result in SAB 118 requiring the recognition of provisional amounts during the measurement period for items that are still open and for which a reasonable estimate can be made, we believe that it would also be acceptable to incorporate such new information into an entity’s provisional amounts.

Notwithstanding the aforementioned exception to the normal rule, new information that constitutes a change in tax law would still be reflected in the period in which the new law is enacted.

In addition to the disclosures required by ASC 740, SAB 118 requires entities to disclose “information about the material financial reporting impacts of the Act for which the accounting under [ASC 740 as of the reporting date] is incomplete.” See FAQ 10.2 for additional discussion and a complete listing of the required disclosures.

While SAB 118 does not explicitly state whether such disclosures pertain to annual financial statements, quarterly financial statements, or both, we note that all registrants were required to provide such disclosures in the period of enactment and, provided that items remain “provisional” or “incomplete” in subsequent filings, we believe that entities will need to refresh their disclosures on a quarterly basis.

Moreover, SEC Regulation S-X, Rule 10-01(a)(5), states:

Accordingly, we believe the following:

1. Items that were disclosed as complete in a prior Form 10-K (or Form 10-Q) do not need to be repeated in subsequent Form 10-Q filings; however, an item reported as complete in a prior Form 10-Q would generally be repeated in the entity’s next Form 10-K filing.
2. Items that were disclosed as provisional or incomplete (Buckets 2 and 3) and, hence, are considered “open” would generally be treated as more akin to “material contingencies.” Accordingly, we believe that the relevant SAB 118 disclosures would need to be updated or refreshed (or both) as necessary in follow-on filings for these items until the accounting for such items is completed. In other words, entities should still, at a minimum, continue to denote those items for which the accounting remains provisional or incomplete in future filings, regardless of whether a significant change in the status of such items has occurred since the prior filing date.

The following examples illustrate these concepts:

12.6 What interim disclosures should registrants consider related to the impact of the Act in complying with ASC 740-270 interim disclosure requirements? [Added March 20, 2018]

The Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35 percent to 21 percent. The reduction in the U.S. federal corporate rate may significantly affect the customary relationship between income tax expense and pretax accounting income. ASC 740-270-50-1 states:

The examples below illustrate an entity’s compliance with the interim disclosure requirements of ASC 740-270-50-1 in interim periods following the first annual period after the Act. However, the examples are not all-inclusive and do not take into account any other interim presentation requirements in ASC 740. See Chapter 9 of Deloitte’s A Roadmap to Accounting for Income Taxes for additional considerations related to interim presentation and disclosures.

We believe that there are two acceptable views.

Under one view, both the loss from the foreign subsidiary and the corresponding U.S. tax benefit related to the reduction in the GILTI inclusion would be contemplated in the estimation of the AETR. ASC 740-270-30-36(b) states, in part:

Accordingly, because there is a benefit in the U.S. jurisdiction, ordinary losses and the related U.S. benefit derived by reduced GILTI inclusion would be included in the overall AETR.

Under the alternative view, however, the U.S. tax benefit related to the reduction in GILTI inclusion would be included in the estimation of the AETR, but the ordinary loss from the foreign subsidiary would not. ASC 740-270-30-36(a) states:

Under this second view, because the guidance in ASC 740-270-30-36 appears to suggest application on a jurisdiction-by-jurisdiction basis, the ordinary loss from the loss jurisdiction and the related tax (or benefit) in that separate jurisdiction would be excluded. However, the U.S. tax benefit related to the reduction in GILTI inclusion would be included in the estimation of the AETR unless the U.S. jurisdiction is also a loss jurisdiction.

None. The adjustment for the tax effects of changes in tax laws or rates is still allocated to income from continuing operations, even after the issuance of ASU 2018-02. However, the ASU allows an entity to elect a one-time reclassification from AOCI to retained earnings of “stranded” tax effects resulting from the Act. The amount of the reclassification includes (1) the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, on the date of enactment of the Act related to items remaining in AOCI and (2) other income tax effects of the Act on items remaining in AOCI that an entity elects to reclassify. The effects of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations are not included.

For example, assume that before the enactment date of the Act, an entity recognized a $1,000 loss in OCI in connection with a derivative used in cash flow hedging activities. No further changes in the fair value of the hedge occur after that date. The forecasted transactions will not occur until after the enactment date. Because there was no tax basis in the derivative, the entity also recognized a $350 DTA and recorded a corresponding entry to OCI. On the enactment date of the Act, the entity reduced the DTA by $140 and recognized a corresponding increase in income tax expense, equal to the temporary difference of $1,000 multiplied by 14 percent. Upon adopting the ASU and electing to make the reclassification, the entity would then recognize a one-time reclassification to move the effect of the rate reduction from AOCI to retained earnings. The entries are summarized in the table below.

Note that while the first three entries would have been recorded on or before the enactment date and are not affected by the adoption of the ASU, the reclassification entry would only be recorded upon the adoption of ASU 2018-02 if the entity elects to make the reclassification. The reclassification entry would be recorded directly in the statement of changes in stockholders’ equity and is not included in the statement of changes in OCI.

No. All companies are required to adopt ASU 2018-02. However, upon the adoption of the ASU, certain provisions in the ASU are required and others are elective.

For example, a company can elect to reclassify the income tax effects of the Act on items in AOCI to retained earnings as described in FAQ 13.1 above. Under ASC 220-10-45-12A, if an entity elects to reclassify the income tax effects of the Act, the amount of the reclassification includes: Accordingly, if a company elects to make a reclassification entry, it would be required to reclassify amounts prescribed in (a) but would not be required to reclassify amounts prescribed in (b).

Regardless of whether an election is made to reclassify income tax effects of the Act, however, all companies are required to disclose the following upon adoption of the ASU:

• The company’s accounting policy related to releasing income tax effects from AOCI (e.g., the portfolio approach or the security-by-security approach).21
• Whether the company has elected to reclassify, to retained earnings in the statement of stockholders’ equity, the stranded tax effects in AOCI related to the Act.
• If the company has elected to reclassify to retained earnings the stranded tax effects in AOCI related to the Act, what the reclassification encompasses (whether it only includes the change in the federal corporate tax rate or whether it also includes other changes resulting from the Act that affect AOCI).

The ASU is effective for all entities for fiscal years beginning after December 15, 2018, including interim periods therein. Earlier application is permitted in financial statements that have not yet been issued or made available for issuance. Upon adoption, an entity would apply this guidance to each period in which the effect of the Act (or portion thereof) is recorded and may apply it either (1) retrospectively as of the date of enactment22 or (2) as of the beginning of the period of adoption.

13.3 What is an example of “[o]ther income tax effects of the Tax Cuts and Jobs Act” within the meaning of ASC 220-10-45-12A(b) for an entity that has elected to reclassify income tax effects of the Act from AOCI to retained earnings in accordance with ASU 2018-02? [Added June 20, 2018]

Items classified as other income tax effects of the Act might include, for example, the effect of certain international tax provisions. In some cases, an entity may not have been indefinitely reinvested in the outside basis difference in its foreign subsidiary and, accordingly, recorded a DTL related to the outside basis difference measured in a manner consistent with laws in effect before the deemed repatriation transition tax. When the DTL was initially recorded, a portion may have been recorded through OCI as the tax effects related to the translation of the underlying assets and liabilities of the foreign subsidiary. Because of tax reform, the measurement of the tax effects related to the outside basis difference may have changed as a result, in whole or in part, of the deemed inclusion of previously untaxed post-1986 foreign E&P, offset by a deduction designed to generally result in an effective U.S. federal income tax rate on such E&P of either 15.5 percent or 8 percent depending on the SFC’s aggregate foreign cash position. The remeasurement of the portion of the DTL that remains in AOCI would be an example of other income tax effects of the Act on items remaining in AOCI that an entity may elect to reclassify in accordance with ASC 220-10-45-12A(b).

The disclosure requirements in ASC 220-10-50-1 are applicable only to stranded taxes. Stranded tax commonly results from changes in valuation allowances or changes in tax laws, tax rates, or tax status. See Section 7.18 of Deloitte’s A Roadmap to Accounting for Income Taxes for more information about the release of stranded income tax effects from AOCI.

Subsequent changes to provisional amounts will not affect the entity's initial-adoption entries; rather, the entity would need to record additional adjustments to the reclassification in subsequent periods. The FASB acknowledged in paragraph BC23 of ASU 2018-02 that if an entity recorded provisional estimates for an item under SAB 118, and additional information related to facts or circumstances that existed as of the date of enactment is obtained during the measurement period, adjustments to those provisional estimates could result in the recording of the reclassification adjustment contemplated by ASU 2018-02 in multiple reporting periods.

The amount of the reclassification adjustment is based on the amount that remains at the time of adoption. For example, assume that before enactment, an entity holds an AFS security for which an unrealized loss of $1,000 has been recorded in AOCI, resulting in a corresponding tax effect of $350 that is also recorded in AOCI. Upon enactment, the entity records an entry in the amount of $140 ($1,000 × (35% – 21%)) to reduce the DTA related to the unrealized loss with a corresponding debit to tax expense to reflect the difference between the pre-enactment corporate tax rate of 35 percent and the new corporate tax rate of 21 percent.

In the first quarter of 2018, after the enactment date, the entity sells the AFS security, resulting in the reversal of the remaining $210 DTA balance and, before application of either the security-by-security approach or portfolio approach, reversal of $210 of tax benefit recorded in OCI. During the second quarter of 2018 and after the sale of the AFS security, the entity adopts ASU 2018-02 and elects to prospectively reclassify stranded tax effects from AOCI to retained earnings.

If the entity had made an accounting policy election to use the security-by-security approach to account for deferred taxes associated with unrealized gains and losses recorded in OCI, the amount of the reclassification under ASU 2108-02 recorded in the second quarter of 2018 would be $0 because the entire tax effect associated with the AFS security would have been removed from AOCI when the security was sold.

Alternatively, if the entity had made an accounting policy election to use the portfolio approach to account for deferred taxes associated with unrealized gains and losses recorded in OCI, $140 would be reclassified from AOCI to retained earnings upon adoption of ASU 2018-02. This is because under the portfolio approach, tax effects associated with an individual security in a portfolio are not removed from AOCI until the disposal of the last security in the portfolio.

If a DTA for which the offsetting amount would otherwise be recorded to AOCI requires a valuation allowance at the time it is recorded, there is no net amount recorded in AOCI because the valuation allowance is also recorded as an entry to AOCI. Consequently, upon enactment there would be no stranded tax effect in AOCI related to the item that gave rise to the DTA. The following examples illustrate the impact of valuation allowances on the reclassification of stranded tax effects under ASU 2018-02:

Yes, the adoptions of ASU 2018-02 and ASU 2016-01 affect each other.

ASU 2016-01 requires entities to remeasure equity securities with readily determinable fair values (and those without readily determinable fair values upon the occurrence of certain events) to fair value each period and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods therein. Upon adoption, an entity is required to record a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Consequently, entities with equity securities that were classified as AFS before adoption will reclassify amounts from AOCI to retained earnings by means of the cumulative-effect adjustment recorded upon adoption.

As noted previously, ASU 2018-02 allows entities to reclassify certain stranded tax effects related to the Act and is effective for annual periods beginning after December 15, 2018, and interim periods therein, with early adoption permitted. Upon adoption, an entity may elect to reclassify stranded tax effects from AOCI to retained earnings. This reclassification may be performed prospectively (as of the beginning of the period of adoption) or retrospectively (to each period in which the effect of the change in tax rates is recognized).

Because both ASU 2018-02 and ASU 2016-01 may affect amounts previously recorded in AOCI, the impact that the adoption of one ASU has on the adoption of the other will depend on (1) the order in which the ASUs are adopted, (2) the entity’s existing policies for releasing stranded tax effects, and (3) the entity’s choice of adoption with respect to ASU 2018-02.

For example, if ASU 2016-01 is adopted before ASU 2018-02 and the entity elects to adopt ASU 2018-02 prospectively, certain stranded tax effects may have already been reclassified into retained earnings because the entity’s existing policy was to release stranded tax effects by using a security-by-security approach (i.e., those specific effects will not remain in AOCI when ASU 2018-02 is adopted and, accordingly, will not be affected by ASU 2018-02). However, an entity may still elect to reclassify other tax effects of the Act in accordance with ASC 220-10-45-12A(a) (e.g., effect of rate change on deferred tax amounts related to debt securities) or ASC 220-10-45-12A(b) in addition to those previously reclassified by means of the cumulative-effect adjustment recorded upon adoption of ASU 2016-01.

Alternatively, if ASU 2018-02 is adopted before ASU 2016-01 (or is adopted after ASU 2016-01, but the entity elects to adopt ASU 2018-02 on a retrospective basis) and the entity has elected to reclassify stranded tax effects from AOCI, the tax effects remaining in AOCI that would be reclassified upon adoption of ASU 2016-01 would generally be limited to the tax effect of the pretax gain or loss on the equity security at the new 21 percent statutory tax rate.

If the two ASUs are adopted simultaneously, companies should decide on which ASU was adopted first since that determination will affect the resulting disclosures.