FASB received unsolicited input from banks and insurance companies and related trade groups on the accounting for what is referred to as the Tax Cuts and Jobs Act. Based on the input, FASB has tentatively decided to revise GAAP on a fast-track basis. The proposed new standard will have a comment period of only 15 days.
The new GAAP rules will require a reclassification from accumulated other comprehensive income to retained earnings for the “stranded tax effects” resulting from the newly enacted corporate tax rate in the Tax Cuts and Jobs Act. “Stranded tax effects” are the tax effects of items within accumulated other comprehensive income that do not reflect the appropriate tax rate.
FASB decided to require the application of the reclassification to each period in which the effect of the Tax Cuts and Jobs Act (or portion thereof) is recorded. That requirement would be applied retrospectively to the date of enactment if the forthcoming accounting guidance is not adopted early.
The Board decided to require the following transition disclosures:
- The nature and reason for the change in accounting principle
- A description of the prior-period information that has been retrospectively adjusted
- The effect of the reclassification on affected financial statement line items.
Public companies should be cautious in describing the financial statement impact of the Tax Cuts and Jobs Act in earnings releases and SEC filings until the FASB proposal is finalized. Perhaps cautionary language that GAAP is in the process of being modified would go a long way.