QUARTERLY ACCOUNTING UPDATE WEBCAST WINTER January 18, 2018

Transcription

1 QUARTERLY ACCOUNTING UPDATE WEBCAST WINTER 2018 January 18, RSM US RSM LLP. US All LLP. Rights All Rights Reserved. Reserved.

2 Presenters Rick Day Partner, National Director of Accounting, RSM US LLP Brian Marshall Partner, RSM US LLP Richard Stuart Partner, RSM US LLP Christian Wood Principal, Washington National Tax, RSM US LLP

3 Agenda Topic Minutes Current practice issues 20 Recently issued accounting guidance 5 Certain standards effective for nonpublic companies in 15 years ended 12/31/17 Other items 20

4 Objectives By the end of this course, you will have a high level understanding of certain current practice issues, certain recently issued accounting guidance and ongoing FASB projects

5 CURRENT PRACTICE ISSUES

6 Financial statement impacts of Tax Cuts and Jobs Act On December 22, the Tax Cuts and Jobs Act (the Act ) was signed into legislation Most significant change in U.S. tax law since 1986 Significant financial statement impacts on a number of areas as a result of the Act including: Deferred tax assets and liabilities Accumulated Other Comprehensive Income (AOCI) Net operating losses (NOLs) Alternative minimum tax Foreign operations

7 Deferred tax assets and liabilities under the Act ASC 740 requires that the effects of a change in tax law and rates be accounted for in the period of enactment Deferred tax assets and liabilities are required to be adjusted to reflect the effect of a change in tax rates in the period of enactment The Act reduces corporate tax rates from 35% to 21% for tax years beginning after 12/31/17 In financial statements for interim or annual periods after 12/22/17, deferred tax assets and liabilities should be determined based on the new corporate tax rate in effect when they will reverse Changes to deferred taxes would be recorded in continuing operations and would not be subject to the intraperiod allocations

8 Non-calendar year-end public entities Non-calendar year-end public entities must reflect the changes under the Act in the quarter that includes 12/22/17 Estimated annual effective tax rate for the current year should be adjusted in the quarter of enactment Estimated change in the deferred tax items as of the beginning of the year should be treated as a discrete item in the quarter of enactment Scheduling of deferred tax items may be needed to determine the appropriate tax rate for reversal

9 Impact on items reported in AOCI Changes in rates for items included in AOCI go through income taxes from continuing operations This will result in a disproportionate tax effect being recorded in AOCI Historically this disproportionate impact would have been reversed based upon an accounting policy election FASB is proposing a targeted change for the tax impact of the act (more to come)

10 NOLs under the Act NOLs arising in taxable years beginning after 12/31/17 may only offset 80% of current year taxable income NOLs arising in taxable years ending after 12/31/17 may not be carried back but can be carried forward indefinitely The Act does not change the pre-2018 NOL usage, carryover or carryback periods These changes will affect a company s assessment of the ability to utilize NOLs against deferred tax liabilities

11 Corporate alternative minimum tax under the Act Corporate alternative minimum tax is repealed for taxable years beginning after 12/31/17 Existing AMT credits will continue to be allowed to offset regular tax liability after other credits Any AMT credits not used to reduce regular tax will begin to be refunded starting in years beginning after 2017 These changes will result in a release of a valuation allowance against any AMT credits

12 Foreign operations under the Act U.S. companies will be required to include in U.S. taxable income the total amount of unremitted foreign earnings of its controlled foreign subsidiaries Effective for a foreign corporation s final year beginning prior to 2018, which would include years ending 12/31/17 As a result, the concept of permanent reinvestment in a foreign subsidiary would no longer be relevant as it relates to potential U.S. tax on foreign earnings Tax due on deemed repatriation may be paid over an eight-year period An entity that elects to pay the tax related to repatriation over eight years will need to record a portion of the payable as a current liability and a portion as a non-current liability Amount should not be recorded as a deferred tax item as it represents an actual tax liability

13 SEC guidance In late December, the SEC issued SAB 118 (codified in SAB Topic 5.EE) which addresses the application of ASC 740 in the reporting period that includes the date on which the Act was signed into law While ASC 740 provides accounting and disclosure guidance on accounting for income taxes, it does not address the treatment when the accounting for certain income tax effects of the Act is incomplete at the time financial statements are issued SAB 118 provides that in cases in which the accounting for certain income tax effects of the Act is incomplete but companies can make a reasonable estimate of the effects of the tax law change, that estimate should be recorded with appropriate disclosures The estimate would be reported as a provisional amount in the company s financial statements during the one-year measurement period Any adjustments during the measurement period should be included in income from continuing operations as a tax expense/benefit in the reporting period the adjustments are determined

14 SEC guidance (cont.) If a company does not have the necessary information available, prepared, or analyzed regarding certain income tax effects of the Act to determine a reasonable estimate to be included as provisional amounts: No related amounts should be included in an entity s financial statements for those specific income tax effects for which a reasonable estimate cannot be determined A company should continue to apply ASC Topic 740 (e.g., when recognizing and measuring current and deferred taxes) based on the provisions of the tax laws in effect immediately prior to the Act being enacted

15 Tax reform resource center Additional information on how legislation can affect your business and tax planning visit - rsmus.com/taxreform

16 RECENTLY ISSUED ACCOUNTING GUIDANCE

17 Final standards recently issued ASU , Codification Improvements to Topic 995, U.S. Steamship Entities: Elimination of Topic 995 ASU , Income Statement Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606) (SEC Update) ASU , Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (SEC Update)

18 CERTAIN STANDARDS EFFECTIVE FOR NONPUBLIC COMPANIES IN YEARS ENDED 12/31/17

19 ASU Amendments to the consolidation analysis Affects the following areas: Consolidation of limited partnerships (LP) and similar legal entities Evaluation of fees paid to a decision maker or a service provider as a variable interest Determination of the primary beneficiary of a VIE when fee arrangements exist Treatment of related parties in the VIE consolidation model Consolidation of certain investment funds

20 ASU Simplifying the measurement of inventory Measurement of Inventory - Existing Lower of: Cost or Market Measurement of Inventory - Amended Lower of: Cost or Net realizable value or or Net realizable value (ceiling) Replacement cost Net realizable value less an approximately normal profit margin (floor) Estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation FASB ASC Master Glossary

21 ASU Simplifying the Accounting for Measurement-Period Adjustments Eliminates the requirement to retrospectively account for adjustments Requires an acquirer to recognize measurement period adjustments in the reporting period in which the adjustments are determined Must separately present in the income statement or disclose the portion of the amount recorded in current earnings by line item that would have been recorded in previous periods if the adjustment had been recognized at the acquisition date

22 ASU Simplifying the transition to the equity method of accounting Eliminates the requirement to adopt the equity method of accounting retroactively Instead, the investor must add the cost to acquire the additional investee interest to the current basis of its previously held interest and adopt the equity method prospectively If an available-for-sale equity security becomes qualified for the equity method of accounting, the investor must recognize the unrealized holding gain or loss in AOCI through earnings

23 OTHER ITEMS

24 Other items REVENUE RECOGNITION UNDER ASC 606

25 SAB 74 disclosure requirements reminders SEC has issued comment letters to some companies requesting more detailed SAB 74 disclosures of the status of implementation of the revenue recognition guidance, among other things Companies should carefully consider updates to their SAB 74 disclosures in upcoming filings with the SEC, particularly those entities with calendar year-ends

26 Tax considerations of ASC 606 Direct impacts Federal current tax State current tax Indirect impacts Sales tax Excise taxes Transfer pricing

27 Practical tax considerations ASC 606 Day 1 impact Tracking of existing revenue differences through change Systems, processes, and people impact

28 General tax revenue recognition rules (accrual method) Under an accrual method of accounting, income is includable when all the events to fix the right to receive the income and the amount can be determined with reasonable accuracy All the events that fix the right to receive income generally occur when (1) the payment is earned through performance, (2) payment is due to the taxpayer, or (3) payment is received by the taxpayer, whichever happens earliest

29 The Act New law changes the discussion on tax impacts of revenue recognition New tax revenue recognition rules for entities with applicable financial statements (AFS) Significant changes Revenue is fixed for tax when (1) the payment is earned through performance, (2) payment is due to the taxpayer, (3) payment is received by the taxpayer, or (4) the item of gross income, or any portion thereof, is taken into account as revenue in the AFS, whichever happens earliest Tax will also follow the allocation of the transaction price Does not apply to special methods of accounting (e.g., percentage-of-completion, installment sales)

30 The Act Replacement of advance payment deferral provisions Historically taxpayers relied upon Treas. Reg. section and/or Rev. Proc Both provided for deferral of goods and integral services; Rev. Proc was more expansive in items eligible for deferral than section Allowed deferral for advance payments for goods, non-integral services, and various other items The Act codifies advance payment provisions Similar to Rev. Proc. 2004, but Only allows 1 tax year deferral for goods, services, or such other items to be later identified

31 Example - Deferral provisions Taxpayer, is in the business of providing dancing lessons and receives an advance payment for a 1-year contract commencing on that date and providing for up to 48 individual 1- hour lessons Taxpayer provides eight lessons in Year 1 and 35 lessons in Year 2. In its AFS, taxpayer recognizes 1/6 of payment in revenues for Year 1 and 5/6 of payment in Year 2.

32 Example - Deferral provisions General tax rules Taxpayer recognizes 100% of advance payment on date of receipt (earlier of due, paid, earned, or AFS) Deferral provisions Taxpayer follows book for Year 1 (1/6) and recognizes remainder in Year 2 (5/6) Note this is not strict follow book. Tax could have circumstances that creates short tax Year 2, causing recognition.

33 Simplification? Not really Entities will still need to assess whether tax has a contract where financial statements may not Determination of the transaction price is still in question Congress, IRS, and Treasury have not commented whether change to all-events test is to include GAAP revenue on a gross or net basis Thus, variable consideration will still need to be analyzed and tracked for tax Could create even greater book/tax tracking differences as allocation of transaction price will be followed, but total transaction price may be different

34 Challenges? Since enacted date of Act is tax years beginning after 12/31/17, tax acceleration for ASC 605/various other GAAP guidance in 2017 (private companies) Then additional potential change in 2018/2019 as ASC 606 is fully implemented across all required entities IRS has not yet commented on how to effect any of these changes

35 Initial thoughts The Act was signed into law on December 22, 2017 with a general effective date of January 1, 2018 Very little time for changes to systems, planning, etc. Revenue recognition rules will generally cause an acceleration of income for tax due to additional earlier of in all-events test Book/tax timing tracking is critical don t want to double count Service providers could be heavily impacted and may wish to implement advance payment/progress billing provisions in contracts to ensure collection of funds on amounts due for tax

36 Other thoughts The Act does not address cost side of transaction equation Always a potential for book/tax differences on cost amounts (e.g., New right of return asset, rebate obligations, future discount obligation) There may be book/tax differences for costs required to be capitalized to enter into a contract (e.g., salesperson commissions)

37 ASC 606 assessment of tax impact Define scope Reflects company s industry, complexity and internal resources Financial reporting assessment Work collaboratively with financial reporting team to identify potential tax issues and opportunities Determine tax process Addresses level of analysis, specific action steps, and implementation needs Review data and calculate adjustments Involves determining proper tax methods and calculating adjustments Prepare deliverables Provides summary of analysis and implementation recommendations Implement Includes assistance with forms and ASC 740 taxrelated items

38 Other items CLARIFYING THE DEFINITION OF A BUSINESS

39 Business combinations: Clarifying the definition of a business Our whitepaper provides information about the provisions of ASU , its effective date and transition, along with some examples. It is expected that the ASU s guidance will result in fewer transactions being treated as business combinations, particularly in the real estate industry. Entities may wish to early adopt the ASU. If early adoption is not elected: Public business entities must apply the guidance in the ASU to annual periods beginning after December 15, 2017, including interim periods therein, and All other entities must apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019

40 Apr 5 Save the date! Next quarterly accounting update Questions and closing remarks

41 RSM thought leadership visit - rsmus.com/frrc

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43 Contact information Rick Day Brian Marshall Richard Stuart Christian Wood

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