Changes to tax law and revisions to accounting topics, such as lease accounting and revenue recognition standards, could significantly affect income tax reporting on your company’s generally accepted accounting principles (GAAP) financial statements.
That means many businesses will need to consider a number of new items with their tax provisions when preparing financial statements. They’ll also need to address changes introduced by the 2017 tax reform reconciliation act, often referred to as the Tax Cuts and Jobs Act (TCJA). See our Alert for a summary of the provisions.
Here’s a look at revisions your company may need to consider when preparing this year’s financials.
Companies that have relied on the SEC Staff Accounting Bulletin (SAB) 118 and haven’t yet finalized their provisional estimates for the TCJA will need to complete and disclose the results of those estimates within the 12-month measurement period that began in December 2017.
Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, fundamentally changes how many companies recognize revenue.
The tax implications of adopting ASC 606—as well as changes to the tax law enacted as part of the TCJA—may result in new book-tax adjustments, the need to file tax accounting method-change requests, or both. These change requests may or may not be eligible for automatic consent, which could alter the reporting period when they first apply for tax purposes. To reduce future surprises, companies should address both the financial statement and tax implications of changes to revenue recognition early in the process.
For a comprehensive overview of the new standard, see our guide.
- Public entities. The standard is effective for annual reporting periods beginning after December 15, 2017.
- Nonpublic entities. The standard is effective for annual reporting periods beginning after December 15, 2018.
- Gross income. Tax changes to recognition of gross income are applicable for tax years beginning after December 31, 2017.
The introduction of ASC Topic 842, Leases, provides new guidelines for leasing arrangements.
Although revisions don’t affect the 2018 tax provision unless they’re adopted early, business owners should consider the impact of adoption on their opening balance for 2019 as well as the tax effect of the cumulative book-tax basis. See our guide for an analysis of the new standard.
For public companies, the changes are effective for years beginning after December 15, 2018.
Reclassification of Certain Tax Effects
Accounting Standards Update (ASU) 2018-02 allows business owners to reclassify the stranded tax effects of the TCJA’s change in federal tax rates within accumulated other comprehensive income (AOCI) to retained earnings.
The change is effective for annual reporting periods beginning after December 15, 2018.
According to ASU 2016-16, intra-entity asset transfers between related entities within a consolidated group no longer need to be capitalized and amortized—other than inventory transfers.
- Public entities. The change is effective for reporting periods beginning after December 15, 2017.
- Nonpublic entities. The change is effective for annual reporting periods beginning after December 15, 2018.
Auditing Estimates and Using Specialists
The Public Company Accounting Oversight Board (PCAOB) adopted a new standard on December 20, 2018, that changes requirements for auditing accounting estimates. Auditing Standard 2501, Auditing Accounting Estimates, Including Fair Value Measurements, replaces existing standards with a uniform, risk-based approach.
The new standard emphasizes auditors’ responsibility to apply professional skepticism when auditing accounting estimates. It also integrates risk assessment standards to focus on areas with greater risk of material misstatement and reflects a more uniform approach to substantive testing.
The PCOAB also amended existing guidance that changes audit requirements for evaluating the work of specialists a company employs or engages.
Upon approval by the SEC, the new standards and amendments will take effect for audits of financial statements for fiscal years ending on or after December 15, 2020.
We’re Here to Help
For additional information about how these revisions could affect you or your company, contact your Moss Adams professional.