As we noted here, the NYSE proposed, and the SEC approved, a rule change to require NYSE listed companies to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of Exchange trading hours. In its annual guidance memo to listed companies, the NYSE noted the new rule will be effective February 1, 2018.
In a letter to representatives of the Investment Company Institute and the Securities Industry and Financial Markets Association, the SEC staff indicated it would not be receptive to 1940 Act registration of cryptocurrency related funds until significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules. Some of the issues raised by SEC staff include:
The letter concludes with the following note:
“Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them. In addition, we do not believe that such funds should utilize rule 485(a) under the Securities Act, which allows post-effective amendments to previously effective registration statements for registration of a new series to go effective automatically. If a sponsor were to file a post-effective amendment under rule 485(a) to register a fund that invests substantially in cryptocurrency or related products, we would view that action unfavorably and would consider actions necessary or appropriate to protect Main Street investors, including recommending a stop order to the Commission.
I appreciate your assistance in sharing our views on this subject with your members.”
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:
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.
Many know that the Section 162(m) deduction limit for performance-based compensation has been repealed by the recent tax legislation together with implementation of other changes, effective for taxable years beginning after December 31, 2017, subject to transition relief. This leaves the question about what to say about Section 162(m) during the upcoming proxy season. Below are some examples from recent proxy statements:
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The cash bonuses paid and equity-based awards granted to executive officers under the MIP are intended to be fully deductible under section 162(m). In addition, the Company has adopted a policy that equity-based awards granted to its executive officers should generally be made pursuant to plans that are intended to satisfy the requirements of section 162(m). However, the Compensation Committee retains discretion and flexibility in developing appropriate compensation programs and establishing compensation levels and, to the extent consistent with the Company’s compensation philosophy, may approve compensation that is not fully deductible. Also, legislation recently signed into law would expand somewhat the number of individuals covered by section 162(m) and eliminate the exception for performance-based compensation effective for our 2018 tax year.
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The Compensation Committee believes that the use of a strict formula-based program for annual awards could have inadvertent consequences such as encouraging the NEOs to focus on the achievement of one specific metric to the detriment of other metrics. In addition, tying compensation to a strict formula would not allow for adjustments based on issues beyond the control of the NEOs. The Compensation Committee recognizes that each NEO other than the CEO (each, a “Senior Executive”) may be most able to directly influence the business unit for which he or she is responsible and therefore believes it is appropriate to use negative discretion to adjust annual awards for each such Senior Executive to take into account the achievement of objectives that are directly tied to the growth and development of their respective business unit. Furthermore, with respect to our overall executive compensation program, the use of discretion provides the Compensation Committee with the flexibility to compensate our NEOs for truly exceptional performance without paying more than is necessary to incent and retain them while structuring awards to be potentially deductible as performance-based compensation under Section 162(m) of the Code, when appropriate. However, as discussed below under “Tax Considerations,” while the tax law included an exception to the $1 million limit on deductibility for “performance-based” compensation under Section 162(m) of the Code when the Compensation Committee made its fiscal year 2017 compensation decisions, this exception was repealed.
At the beginning of fiscal year 2017, the Compensation Committee approved a maximum KEIP award amount for each NEO, other than Mr. Sethi, who became an NEO at the end of fiscal year 2017. The maximum award that each NEO is eligible to receive, however, is not an expectation of the actual bonus that will be paid to him or her, but a cap on the range ($0 to the maximum amount) that an individual may be paid while maintaining the tax deductibility of the bonus as “performance-based” compensation for purposes of Section 162(m) of the Code. See “Tax Considerations” below for a brief discussion of the “performance-based” compensation exception under Section 162(m) of the Code and its repeal. As described above in our “Compensation Philosophy,” the Compensation Committee has historically exercised negative discretion to pay significantly less than the maximum amount available to the NEOs under the KEIP award pool based on its evaluation of the achievement of business unit, Company-wide and individual performance measures for such NEOs, as described above in this CD&A.
In evaluating compensation program alternatives, the Compensation Committee considered the potential impact on the Company of Section 162(m) of the Code. Section 162(m) limited to $1 million the amount that a publicly traded corporation, such as the Company, may deduct for compensation paid in any year to its chief executive officer and certain other named executive officers (“covered employees”). At the time the Compensation Committee made its compensation decisions, the tax law provided that compensation which qualified as “performance-based” was excluded from the $1 million per covered employee limit if, among other requirements, the compensation was payable only upon attainment of pre-established, objective performance goals under a plan approved by our stockholders. However, this exception was repealed in the tax reform legislation signed into law on December 22, 2017. As a result, it is uncertain whether compensation that the Compensation Committee intended to structure as performance-based compensation under Section 162(m) will be deductible.
As a general matter, in making its previous NEO compensation decisions, the Compensation Committee endeavored to maximize deductibility of compensation under Section 162(m) to the extent practicable while maintaining competitive compensation. The Compensation Committee, however, believes that it is important for it to retain maximum flexibility in designing compensation programs that are in the best interests of the Company and its stockholders.
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Salaries are deductible, except for the portion of the CEO’s salary in excess of $1 million. The Compensation Committee designs the ACIP and equity awards, including RSUs that have a financial performance threshold, to comply with the requirements for tax deductibility under Internal Revenue Code Section 162(m) (Section 162(m)), to the extent practicable. The Compensation Committee considers tax reform enacted under the Internal Revenue Code on an annual basis when designing the compensation programs.
To maximize tax deductibility, amounts earned under the ACIP are designed to qualify as performance-based compensation under Section 162(m). This design provides that if certain financial objectives are met, our executive officers may receive up to 2x their target amounts, subject to the Compensation Committee’s negative discretion to pay any amount less than the maximum.
RSUs generally vest in equal annual installments over three years. The RSUs also include a requirement that the Company must meet an adjusted GAAP operating income target (over a 6-month period) in order for them to vest, which is intended to qualify the RSUs for tax deductibility under Section 162(m).
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Section 162(m) of the Internal Revenue Code generally places a $1 million limit on the amount of compensation a company can deduct in any one year for certain executive officers. While the Compensation Committee considers the deductibility of awards as one factor in determining executive compensation, the Compensation Committee also looks at other factors in making its decisions, as noted above, and retains the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program even if the awards are not deductible by Apple for tax purposes.
The 2017 annual cash incentive opportunities and performance-based RSU awards granted to our executive officers were designed in a manner intended to be exempt from the deduction limitation of Section 162(m) because they are paid based on the achievement of pre-determined performance goals established by the Compensation Committee pursuant to our shareholder-approved equity incentive plan. In addition, the portion of Mr. Cook’s 2011 RSU Award subject to performance criteria with measurement periods that begin after the June 21, 2013 modification was designed in a manner intended to be exempt from the deduction limitation of Section 162(m).
Base salary and RSU awards with only time-based vesting requirements, which represent a portion of the equity awards granted to our executive officers, are not exempt from Section 162(m), and therefore will not be deductible to the extent the $1 million limit of Section 162(m) is exceeded.
The exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017.
Despite the Compensation Committee’s efforts to structure the executive team annual cash incentives and performance-based RSUs in a manner intended to be exempt from Section 162(m) and therefore not subject to its deduction limits, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, including the uncertain scope of the transition relief under the legislation repealing Section 162(m)’s exemption from the deduction limit, no assurance can be given that compensation intended to satisfy the requirements for exemption from Section 162(m) in fact will. Further, the Compensation Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with Apple’s business needs.
Disclosures regarding the new tax act, often referred to as the Tax Cuts and Jobs Act or TCJA, continue to be prominent in SEC filings. Set forth blow is an explanation of the often obscure GAAP accounting driving many of the disclosures, followed by a compendium of recent disclosures.
Current disclosures included in the compendium have been sorted by the following subject matters:
Explanations
SEC disclosures regarding the TCJA can be roughly divided into two types. One of the effect on a public company going forward in 2018 and thereafter– i.e., rates are going down and therefore company anticipates so will tax expenses. The other type is the effect on existing tax assets and liabilities recorded on a public company balance sheet that will need to be adjusted to reflect the impact of the TCJA. These latter adjustments to tax assets and liabilities appear to be the more frequent subject of SEC disclosures under the TCJA at this time. As time passes however, I expect the “go forward” disclosures will become more prevalent.
For many, it is difficult to understand the content of the disclosures to changes in existing tax assets and liabilities as a result of the TCJA. The reason is the changes are rooted in obscure rules regarding tax accounting under GAAP that often are not material in the ordinary course of business. However, the TCJA deals all corporate taxpayers a new hand, and the resulting changes from past practice can be material.
It’s long been understood that public companies can legally keep two sets of books. One set is for GAAP and the other set is for income tax purposes. The obscure GAAP rules however require companies to attempt to currently match amounts recognized earlier or later for tax accounting purposes on the tax books using a GAAP accrual concept with current financial accounting recognition.
For sake of an (arbitrary) example, assume Company A in 2016 is subject to a 35% corporate tax rate, and as permitted by tax law, took tax depreciation deductions totaling $100,000, but that for GAAP purposes only $40,000 in depreciation expenses was required. Over time, in some point after 2016, book depreciation will exceed tax depreciation and eventually the same aggregate amount will be recorded for both GAAP and tax purposes. GAAP tries to match these timing differences by adjusting tax expense.
The differences between Company A’s GAAP and tax depreciation of $60,000 ($100,000 minus $40,000) requires a deferred tax liability to be recorded under GAAP on Company A’s balance sheet in 2016 in the amount of $21,000 ($60,000 x 35%). In addition, during 2016 GAAP income tax expense is increased by $21,000 over amounts that would otherwise be paid to the IRS in cash.
But along comes the TCJA at the end of 2017. The maximum corporate tax rate is now 21%, not 35%, when the deferred tax liability was recorded. The deferred tax liability that Company A recorded in 2016 of $21,000 needs to be reduced to $12,600 (21% x $60,000) which requires income to be increased (tax expense to be reduced) by $8.400 ($21,000 – $12,600). This is the sort of adjustment most of the SEC filings are currently explaining.
As a result of differences between GAAP and tax accounting, public companies have also recorded deferred tax assets, in addition to deferred tax liabilities which are explained in the foregoing example. One of the reasons many companies are making SEC filings regarding changes in their deferred tax assets is the result of previously recording deferred tax assets associated with net operating losses, or NOLs.
Assume Company B loses $50,000 for tax purposes in 2016. Tax law permits this loss to be carried forward as an NOL and Company B expects to be profitable in future periods when the tax rate will be 35%. So in some future period when permitted by tax law it is anticipated Company B is going to take a deduction of up to $50,000 to reduce taxable income to reflect the benefit of the NOL carry forward.
The 2016 NOL is essentially a timing difference, like depreciation in the foregoing example, because it creates a deduction in a future period, and over time aggregate book and taxable income are the same. Because GAAP attempts to match these timing differences in the current period, Company B in 2016 will record a deferred tax asset in 2016 of $17,500 ($50,000 x 35%) and reduce the book net loss (through a tax benefit from NOL line item) by the same amount. It does so because it expects taxable income during the carry forward period and therefor does not need to adjust the tax asset by a valuation allowance.
But again the TCJA was enacted at the end of 2017. The maximum corporate tax rate is now 21%, not 35%, when the deferred tax asset was recorded. The deferred tax asset that Company B recorded in 2016 as a result of the NOL of $17,500 needs to be reduced to $10,500 (21% x $50,000) which requires income to be decreased (or net loss to be increased) by $7,000 ($17,500 – $10,500).
Examples
Risk Factors
Increases in the after-tax costs of owning a home could prevent potential customers from buying our homes and adversely affect our business or financial results.
Significant expenses of owning a home, including mortgage interest expenses and real estate taxes, generally are, under current tax law, deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to limitations under current tax law and policy. If the federal government or a state government changes its income tax laws to eliminate or substantially limit these income tax deductions, the after-tax cost of owning a new home would increase for many of our potential customers. The “Tax Cuts and Jobs Act” which was recently signed into law includes provisions which would impose significant limitations with respect to these income tax deductions. For instance, under the “Tax Cuts and Jobs Act”, the annual deduction for real estate taxes and state and local income or sales taxes would generally be limited to $10,000. Furthermore, through the end of 2025, the deduction for mortgage interest would generally only be available with respect to acquisition indebtedness that does not exceed $750,000. The loss or reduction of these homeowner tax deductions, if such tax law changes were enacted without any offsetting legislation, would adversely impact demand for and sales prices of new homes, including ours. In addition, increases in property tax rates or fees on developers by local governmental authorities, as experienced in response to reduced federal and state funding or to fund local initiatives, such as funding schools or road improvements, or increases in insurance premiums can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes, and can have an adverse impact on our business and financial results.
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U.S. federal income tax reform could adversely affect us.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” (TCJA) that significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We do not expect tax reform to have a material impact to our projection of minimal cash taxes or to our net operating losses. Our net deferred tax assets and liabilities will be revalued at the newly enacted U.S. corporate rate, and the impact will be recognized in our tax expense in the year of enactment. We continue to examine the impact this tax reform legislation may have on our business. The impact of this tax reform on holders of our common stock is uncertain and could be adverse. This prospectus does not discuss any such tax legislation or the manner in which it might affect purchasers of our common stock. We urge our stockholders, including purchasers of common stock in this offering, to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our common stock.
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The effects of the Tax Cuts and Jobs Act on our business have not yet been fully analyzed and could have an adverse effect on our net income.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. We are in the process of analyzing the Act and its possible effects on the Company and the Bank. The Act reduces the corporate tax rate to 21 percent from 35 percent, among other things. It could also require us to write down our deferred tax assets, which would reduce our net income during the first quarter of fiscal 2018. We cannot determine at this time the amount of any such write down, or the full effects of the Act on our business and financial results.
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Certain U.S. federal income tax deductions currently available with respect to New Talos’s business may be eliminated or significantly changed as a result of recently enacted and future legislation.
On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act, following its passage by the United States Congress. The Tax Cuts and Jobs Act will make significant changes to U.S. federal income tax laws. While past legislative proposals have included changes to certain key U.S. federal income tax provisions currently available to oil and gas companies including (i) the repeal of the percentage depletion allowance for oil and gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, and (iii) an extension of the amortization period for certain geological and geophysical expenditures, these specific changes are not included in the Tax Cuts and Jobs Act. No accurate prediction can be made as to whether any such legislative changes will be proposed or enacted in the future or, if enacted, what the specific provisions or the effective date of any such legislation would be. However, the Tax Cuts and Jobs Act (i) eliminates the deduction for certain domestic production activities, (ii) imposes new limitations on the utilization of net operating losses, and (iii) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense, which may impact the taxation of oil and gas companies. This legislation or any future changes in U.S. federal income tax laws could eliminate or postpone certain tax deductions that currently are available with respect to oil and gas development, or increase costs, and any such changes could have an adverse effect on New Talos’s financial position, results of operations, and cash flows.
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Comprehensive tax reform could adversely affect the combined company’s business and financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law by President Trump. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, limitation of the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including eliminating the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain, and the combined company’s business and financial condition could be adversely affected. This proxy statement/prospectus/information statement does not discuss the Tax Act or the manner in which it might affect holders of the combined company’s common stock. Vaxart and Aviragen urge their stockholders to consult with their legal and tax advisors with respect to the Tax Act and the potential tax consequences of investing in the combined company’s common stock.
MD&A
On December 22, 2017, H.R.1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, also known as the Tax Cuts and Jobs Act, (the “Act”) was enacted. The Company is currently reviewing the components of the Act and evaluating its impact, which could be material on the Company’s fiscal year 2017 consolidated financial statements and related disclosures, including a one-time, non-cash expense related to a decrease in the value of the Company’s net deferred tax assets.
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8-K — Results of Operation and Financial Condition
GAAP earnings per share exclude any potential income tax effects of the Tax Cuts and Jobs Act. Non-GAAP earnings per share exclude the effect of acquisition-related expenses, amortizations and adjustments, and stock compensation expense.
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8-K — Regulation FD Disclosure
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements, such as the reduction of the federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions.
SVB Financial Group (the “Company”) is currently assessing the extensive changes under the TCJ Act and its overall impact on the Company; however, based on its preliminary assessment of the reduction in the federal corporate tax rate from 35% to 21% to become effective on January 1, 2018, the Company currently expects that its effective tax rate for 2018 will be between 27% and 30%. Such estimated range is based on management’s current assumptions with respect to, among other things, the Company’s earnings, state income tax levels and tax deductions. The Company’s actual effective tax rate in 2018 may differ from management’s estimate. The reduced applicable tax rate is expected to result in overall lower tax expense beginning in 2018, which will provide the Company the opportunity to evaluate the potential utilization of a portion of the tax savings to increase or accelerate investments in its business, growth and employees.
The reduction in the corporate tax rate under the TCJ Act will also require a one-time revaluation of certain tax-related assets to reflect their value at the lower corporate tax rate of 21%. As such, the Company currently expects a reduction in the value of these assets of approximately $32 million to $37 million, which primarily relate to the Company’s net deferred tax assets and investments in low income housing tax credit funds. This estimated range of reduction in value is based on balances as of November 30, 2017, and the actual amount of reduction at the end of the fourth quarter of 2017 may differ, as it is dependent on, among other things, the final net deferred tax assets and low income housing tax credit fund investment balances as of December 31, 2017. Solely based on this estimated reduction in certain tax assets, the Company expects an increase in the provision for income taxes of approximately $32 million to $37 million to be recognized in its income statement for the fourth quarter of 2017.
Additionally, in connection with its ongoing treasury and tax management objectives, the Company sold during the fourth quarter of 2017 approximately $573 million of fixed income investment securities in its available-for-sale securities portfolio, which resulted in a loss on investment securities of approximately $9 million, on a pre-tax basis. The proceeds from these sales of securities were reinvested in higher-yielding investments.
The preliminary expected results for the fourth quarter of 2017 and the estimated 2018 effective tax rate discussed in this report are based on information available at this time and are subject to change due to a variety of factors, including among others: (i) finalization of the Company’s quarterly financial closing and reporting processes, and (ii) management’s further assessment of the TCJ Act and related regulatory guidance. Actual results may differ. The Company is expected to announce and discuss its quarterly and annual results, as well as its 2018 financial outlook, on January 25, 2018, through its quarterly Form 8-K filing and earnings call.
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8-K — Other Events Disclosure
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Legislation) was enacted. The Tax Legislation significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing the territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.
The Goldman Sachs Group, Inc. (together with its consolidated subsidiaries, Goldman Sachs or the firm) estimates, based on currently available information, that the enactment of the Tax Legislation will result in a reduction of approximately $5 billion in the firm’s earnings for the fourth quarter and year ending December 31, 2017, approximately two-thirds of which is due to the repatriation tax. The remainder includes the effects of the implementation of the territorial tax system and the remeasurement of U.S. deferred tax assets at lower enacted corporate tax rates.
The impact of the Tax Legislation may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions the firm has made, guidance that may be issued and actions the firm may take as a result of the Tax Legislation.
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On December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act” was enacted into law. This new tax legislation, among other changes, reduces the Federal corporate income tax rate from 35% to 21% effective January 1, 2018. At September 30, 2017, MB Financial, Inc. (the “Company”) had net deferred tax liabilities of $193 million and expects to remain in a net deferred tax liability position at December 31, 2017.
Under generally accepted accounting principles, these net deferred tax liabilities are required to be revalued during the period in which the new tax legislation is enacted. The Company currently estimates that the revaluation will result in a one-time tax benefit of at least $85 million, or approximately $1.00 per diluted common share, based on September 30, 2017 data. Activity in the Company’s leasing segment during the fourth quarter of 2017 may increase this estimate significantly due to the retroactive application of the 100% bonus depreciation deduction under the new tax legislation, which applies to qualified property placed in service after September 27, 2017 and before January 1, 2023. The one-time tax benefit is expected to further strengthen the Company’s capital position and ratios. It is also estimated that the Company’s effective tax rate beginning in 2018 will be reduced by about 10% to 11% due to this new tax legislation.
As a result of the new tax legislation, the Company plans to contribute $7.5 million in the fourth quarter of 2017 to the MB Financial Charitable Foundation. The MB Financial Charitable Foundation supports nonprofit organizations serving low- and moderate-income communities and households within the Company’s service area. Priority giving areas include affordable housing, community service, economic development, and education.
Also as a result of the new tax legislation, the Company’s bank subsidiary, MB Financial Bank N.A. will raise its minimum wage to $15 per hour effective in January 2018 and pay one-time bonuses to eligible employees earning less than $100,000 annually. The aggregate amount of these bonuses is expected to be approximately $2.7 million.
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On December 22, 2017, H.R.1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, also known as the Tax Cuts and Jobs Act, (the “Act”) was enacted. The Company is currently reviewing the components of the Act and evaluating its impact, which could be material on the Company’s fiscal year 2017 consolidated financial statements and related disclosures, including a one-time, non-cash expense related to a decrease in the value of the Company’s net deferred tax assets.
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On December 28, 2017, the Company announced that it expects to record an after-tax benefit of approximately $25 million during the fourth quarter of 2017 based on a re-valuation of its net deferred tax liability, which was necessitated by the recent passage of the Tax Cuts and Jobs Act. In addition, the Company announced that it expects an effective tax rate of about 27% during full-year 2018.
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Lamar Advertising Company (Nasdaq: LAMR), a leading owner and operator of outdoor advertising and logo sign displays, announces that as a result of changes in the tax code due to the recent passage of the Tax Cuts and Jobs Act of 2017, its board of directors approved changing the payment date of its fourth-quarter dividend on its Class A common stock and Class B common stock to January 2, 2018. The dividend was previously scheduled to be paid on December 29, 2017. Management and the board determined that, as a result of such changes to the tax code, it was prudent to delay payment of the dividend until calendar year 2018.
The record date of December 18, 2017 is unchanged. The dividend remains $0.83 per share on the Class A common stock and Class B common stock.
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On December 22, 2017, United States President Donald Trump signed into law “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, National Bank Holdings Corporation (the “Company” or “NBHC”) will revalue its deferred tax asset. The Company performed an analysis to determine the impact of the revaluation of the deferred tax asset using the September 30, 2017 balance of $50.7 million. It is estimated that the value of the deferred tax asset will be reduced by a range of approximately $17.0 – $18.5 million and will be shown as an increase in fourth quarter income tax expense. This non-cash, one-time charge is expected to decrease fourth quarter’s earnings per share by $0.61 to $0.65, with a corresponding decrease to tangible book value per share of $0.63 to $0.67, based on estimated fourth quarter weighted average diluted shares and total shares outstanding.
On December 27, 2017, the Company issued a press release announcing that it plans to deliver a $1,000 bonus to all of its non-commissioned associates who earn a base salary of less than $50,000 annually as a result of the recently enacted tax legislation, totaling approximately $525,000, which will be accrued by the Company in the fourth quarter. The press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
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On December 22, 2017, President Donald Trump signed into law “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, TriCo Bancshares (the “Company”) has concluded that this will cause the Company’s deferred tax assets to be revalued. The Company’s deferred tax assets represent a decrease in corporate taxes expected to be paid in the future. The Company performed a preliminary analysis to determine the impact of the revaluation of the deferred tax asset. Using the information available at this time, the Company estimated that the value of the deferred tax asset would be reduced by approximately $7.7 million. Under this methodology, the estimated fourth quarter earnings impact would be approximately ($0.33) per share and the estimated tangible book value impact would be approximately ($0.34) per share based on estimated fourth quarter weighted average diluted shares of approximately 23,290,000 and total shares outstanding of approximately 22,956,000 at year end.
The Company’s revaluation of its deferred tax asset is subject to further clarifications of the new law that cannot be estimated at this time, and the determination of certain accounting valuation adjustments, such as, valuation adjustments related to unrealized gain or loss on investment securities available for sale, mortgage servicing rights, pension liabilities, and allowance for loan losses that are in the process of being finalized at this time. As such, the Company is unable to make a final determination of the impact on the quarterly and year to date earnings for the period ending December 31, 2017 at this time. The Company does not anticipate future cash expenditures as a result of the reduction to the deferred tax asset.
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On December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. Among other things, the Tax Cuts and Jobs Act permanently lowers the corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, U.S. generally accepted accounting principles require companies to re-value their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment.
As of September 30, 2017, WesBanco, Inc. (the “Company”) had net deferred tax assets of $47.1 million, and the Company is expected to remain in a net deferred tax asset position as of December 31, 2017. WesBanco will record a re-valuation of its deferred tax assets and liabilities as of December 31, 2017, at the new rate of 21%, based upon balances in existence at date of enactment. Based upon preliminary estimates, it is currently expected that the Company’s net deferred tax assets will be written down by approximately $12 to $15 million in the fourth quarter of 2017. This estimate is based upon a review and analysis of the Company’s net deferred tax assets at September 30, 2017, as well as expected adjustments to various deferred tax assets and liabilities in the fourth quarter, including those accounted for in accumulated other comprehensive income. WesBanco’s actual write-down may vary materially from the estimated range due to a number of uncertainties and factors, including the completion of WesBanco’s consolidated financial statements as of and for the year ending December 31, 2017, and is subject to further clarification of the new law that cannot be reasonably estimated at this time.
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Kforce Inc. (NASDAQ: KFRC) today announced that it expects to record a one-time, non-cash charge in the fourth quarter of 2017 as a result of the recently enacted Tax Cuts and Jobs Act (TCJA). This charge results solely from the revaluation of our net deferred income tax assets as of December 31, 2017 and was not anticipated in our previously announced guidance of $0.41 to $0.43 per share. The negative impact to net income from the revaluation is estimated to be between $6 million to $7 million, or approximately $0.24 to $0.28 per share.
Kforce anticipates subsequent regulations and interpretations to be released associated with TCJA that will provide additional guidance on the application of the law; however, we currently estimate that Kforce’s effective income tax rate will be in the range of 25.5% to 27.5% for 2018 compared to approximately 38.0% for 2017.
Financial Statements – Subsequent Events
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (H.R. 1) (the “Act”). The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 34% to 21%. The rate reduction would take effect on January 1, 2018.
As of September 30, 2017, the Bank had net deferred tax assets totaling $540,000. Under U.S. generally accepted accounting principles, the Bank uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Bank’s net deferred tax asset as of September 30, 2017 was determined based on the current enacted federal tax rate of 34% prior to the passage of the Act. As a result of the reduction in the corporate income tax rate to 21% from 34% under the Act, the Bank will need to revalue its net deferred tax asset as of December 31, 2017. The Bank estimates that this will result in a reduction in the value of its net deferred tax asset of approximately $203,000, which would be recorded as additional income tax expense in the Bank’s statement of operations in the fourth quarter of 2017.
The Bank’s revaluation of its deferred tax assets is subject to further clarification of the new law that cannot be estimated at this time. As such, the Bank is unable to make a final determination of the effect on quarterly and annual earnings for the period ending December 31, 2017, at this time. Additionally, the Bank is evaluating the other provisions of the Act and is unable to assess the effect on the Bank at this time.
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The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017 by President Donald J. Trump. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. We are in the process of analyzing the final legislation and determining an estimate of the financial impact.
Proxy Statements/Compensation Disclosures
[Provision in description of new plan submitted for shareholder approval]
The Tax Cuts and Jobs Act eliminates the performance-based compensation exception beginning January 1, 2018. However, the Act provides a transition rule with respect to remuneration which is provided pursuant to a written binding contract which was in effect on November 2, 2017 and which was not materially modified after that date. The Compensation Committee shall administer any awards granted prior to November 2, 2017 which qualify as “performance-based compensation” under § 162(m) of the Code, as amended by the Act, in accordance with the transition rules applicable to binding contracts in effect on November 2, 2017, and shall have the sole discretion to revise the A&R Plan to conform with such Law Changes and the Compensation Committee’s administrative practices, all without obtaining further stockholder approval.
[Plan Provisions]
2.7 Committee—means the Compensation Committee of the Board or a subcommittee of such Compensation Committee, which committee or subcommittee shall have at least 2 members, each of whom shall be appointed by and shall serve at the pleasure of the Board and shall come within the definition of a “non-employee director” under Rule 16b-3 and, with respect to Stock Grants granted prior to November 2, 2017 which were intended to qualify as “performance-based compensation” under § 162(m) of the Code, as amended by the Tax Cuts and Jobs Act, an “outside director” under § 162(m) of the Code.
(d) Changes in Law. The Committee shall administer any Stock Grants granted prior to November 2, 2017 which qualify as “performance-based compensation” under § 162(m) of the Code, as amended by the Tax Cuts and Jobs Act (the “Law Changes”), in accordance with the transition rules applicable to binding contracts on November 2, 2017, and shall have the sole discretion to revise this § 9.5 to conform with such Law Changes and the Committee’s administrative practices, all without obtaining further shareholder approval.
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The Compensation Committee has adopted, for fiscal year 2018, Company and individual performance goals, pursuant to which the Company’s executive officers may receive cash bonuses following the completion of fiscal year 2018 based on the extent to which such performance goals are achieved during the course of the fiscal year. The Compensation Committee adopted performance goals so that awards made pursuant to such goals that contributed to a named executive officer earning more than $1 million in annual compensation would qualify as tax deductible to the Company for U.S. federal income tax purposes under Section 162(m) of the U.S. Internal Revenue Code. However, on December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act, which substantially modifies the U.S. Internal Revenue Code and, among other things, eliminates the performance-based compensation exception under Section 162(m). As a result, the Company currently expects that, in respect of fiscal 2018 and beyond, any compensation amounts over $1 million paid to any named executive officer will no longer be deductible. See “—Tax Considerations Relating to Executive Compensation”. The Company’s expectation is that this change will not have a material effect on its operating results or financial condition.
Calculating pay ratios for public companies can be a difficult and time-consuming project. While recent interpretative guidance from the Commission has provided additional flexibility in this process, public companies still need to consider appropriate disclosures regarding pay ratio calculations in addition to the disclosure of the pay ratio. Our checklist of essential disclosure items to consider when drafting pay ratio disclosures is set forth blow.
1. All registrants required to present a pay ratio should provide a brief description regarding general methodology used to calculate the ratio without technical analyses or formulas including:
2. If the registrant relies on excluding employees because of privacy laws or regulations under S-K Item 402(u)(4)(i) disclose the following:
3. If a registrant excludes non-U.S. employees under the de minimis exemption (i.e. less than 5%) under S-K Item 402(u)(4)(ii), it must disclose the following:
4. Disclosures regarding the date chosen for identifying the median employee (Instruction 1 to Item 402(u)):
5. Disclosures for registrants that choose to identify a median employee once every three years (Instruction 2 to Item 402(u)):
6. Disclosures for registrants that use a compensation measure other than annual total compensation to identify the median employee (Instruction 4 to Item 402(u)):
7. Disclosures for registrants that use cost-of-living adjustments (Instruction 4 to Item 402(u)):
8. Disclosures for registrants that include personal benefits that aggregate less than $10,000 and compensation under non-discriminatory benefit plans in calculating the annual total compensation of the median employee (Instruction 4 to Item 402(u)):
9. Disclosures for registrants where PEO pay is not yet calculable and omitted from summary compensation table pursuant to Instruction 1 to Regulation S-K Item 402(c)(2)(iii) and (iv) (Instruction 6 to Item 402(u)):
10. Disclosures for registrants that omit employees as the result of the business combination or acquisition of a business for the fiscal year in which the transaction becomes effective (Instruction 7 to Item 402(u)):
11. Disclosures for registrants that present additional information, including additional ratios, to supplement the required ratio (Instruction 9 to Item 402(u)):
12. Disclosures for registrants with multiple PEOs during the year (Instruction 10 to Item 402(u)):
13. Disclosures regarding employees’ personally identifiable information (Instruction 11 to Item 402(u)):
Apple sought to exclude a shareholder proposal regarding the establishment of a Human Rights Committee on the basis that it involved the company’s ordinary business operations under Rule 14a-8(i)(7). Apple relied on newly issued Staff Legal Bulleting 14I. Among other things SLB 14I provides that whether a policy issue is of sufficient significance to a particular company to warrant exclusion of a proposal that touches upon that issue may involve a “difficult judgment call” which the company’s board of directors “is generally in a better position to determine,” at least in the first instance.
The SEC denied Apple’s request to exclude the proposal. The SEC noted:
We are unable to conclude, based on the information presented in your correspondence, including the discussion of the board’s analysis on this matter, that this particular proposal is not sufficiently significant to the Company’s business operations such that exclusion would be appropriate. As your letter states, “the Board and management firmly believe that human rights are an integral component of the Company’s business operations.” Further, the board’s analysis does not explain why this particular proposal would not raise a significant issue for the Company.
As Christmas Eve approached with vacations and holiday shopping in full swing, President Trump signed the Tax Cut and Jobs Act and the SEC promptly issued guidance to public companies on related accounting matters. Perhaps most important to corporate lawyers, the SEC guidance in Compliance and Disclosure Interpretation No. 110.02 noted that the re-measurement of a deferred tax asset (“DTA”) to incorporate the effects of newly enacted tax rates or other provisions of the Tax Cuts and Jobs Act (“Act”) does NOT trigger an obligation to file an 8-K under Item 2.06. The SEC reasoned as follows:
The re-measurement of a DTA to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC Topic 740. However, the enactment of new tax rates or tax laws could have implications for a registrant’s financial statements, including whether it is more likely than not that the DTA will be realized. As discussed in Staff Accounting Bulletin No. 118 (Dec. 22, 2017), a registrant that has not yet completed its accounting for certain income tax effects of the Act by the time the registrant issues its financial statements for the period that includes December 22, 2017 (the date of the Act’s enactment) may apply a “measurement period” approach to complying with ASC Topic 740. Registrants employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the Act may rely on the Instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report.
As indicated by the C&DI, the SEC has also issued Staff Accounting Bulletin No. 118 on the topic of the Tax Cuts and Jobs Act. Essentially, SAB 118 addresses the issue where registrants encounter a situation in which the accounting for certain income tax effects of the Act will be incomplete by the time financial statements are issued for the reporting period that includes the enactment date of December 22, 2017. The guidance is centered around the following question and answer (footnotes omitted):
Question 1: If the accounting for certain income tax effects of the Act is not completed by the time Company A issues its financial statements that include the reporting period in which the Act was enacted, what amounts should Company A include in its financial statements for those income tax effects for which the accounting under ASC Topic 740 is incomplete?
Interpretive Response: To the extent that Company A’s accounting for certain income tax effects of the Act is incomplete, but Company A can determine a reasonable estimate for those effects, the staff would not object to Company A including in its financial statements the reasonable estimate that it had determined. Conversely, the staff does not believe it would be appropriate for Company A to exclude a reasonable estimate from its financial statements to the extent a reasonable estimate had been determined. The reasonable estimate should be included in Company A’s financial statements in the first reporting period in which Company A was able to determine the reasonable estimate. The reasonable estimate would be reported as a provisional amount in Company A’s financial statements during a “measurement period.” The measurement period is described in further detail below.
The staff believes reporting provisional amounts for certain income tax effects of the Act will address circumstances in which an entity does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740.
An entity may not have the necessary information available, prepared, or analyzed (including computations) for certain income tax effects of the Act in order to determine a reasonable estimate to be included as provisional amounts. The staff would expect no related provisional amounts would be included in an entity’s financial statements for those specific income tax effects for which a reasonable estimate cannot be determined. In circumstances in which provisional amounts cannot be prepared, the staff believes an entity 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 that were in effect immediately prior to the Act being enacted. That is, the staff does not believe an entity should adjust its current or deferred taxes for those tax effects of the Act until a reasonable estimate can be determined.
Therefore, to summarize the above and for the avoidance of doubt, in Company A’s financial statements that include the reporting period in which the Act was enacted, Company A must first reflect the income tax effects of the Act in which the accounting under ASC Topic 740 is complete. These completed amounts would not be provisional amounts. Company A would then also report provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 will be incomplete but a reasonable estimate can be determined. For any specific income tax effects of the Act for which a reasonable estimate cannot be determined, Company A would not report provisional amounts and would continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately prior to the Act being enacted. For those income tax effects for which Company A was not able to determine a reasonable estimate (such that no related provisional amount was reported for the reporting period in which the Act was enacted), Company A would report provisional amounts in the first reporting period in which a reasonable estimate can be determined.
Some of the discussion following the above analysis in SAB No. 118 has been omitted.
The second question deals with disclosure:
Question 2: If an entity accounts for certain income tax effects of the Act under a measurement period approach, what disclosures should be provided?
Interpretive Response: The staff believes an entity should include financial statement disclosures to provide information about the material financial reporting impacts of the Act for which the accounting under ASC Topic 740 is incomplete, including:
1.(a) Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete;
2.(b) Disclosures of items reported as provisional amounts;
3.(c) Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
4.(d) The reason why the initial accounting is incomplete;
5.(e) The additional information that is needed to be obtained, prepared, or analyzed in order to complete the accounting requirements under ASC Topic 740;
6.(f) The nature and amount of any measurement period adjustments recognized during the reporting period;
7.(g) The effect of measurement period adjustments on the effective tax rate; and
8.(h) When the accounting for the income tax effects of the Act has been completed.
According to the SEC in an order settling an enforcement action, Alan Shortall was CEO and Chairman of Unilife Corporation, a Nasdaq listed issuer. According to the SEC, Shortall arranged for Unilife to make personal payments on his behalf aggregating approximately $340,000 over four years. The advances were outstanding for five to 36 days. According to the SEC, this violated provisions of the Sarbanes-Oxley Act which prohibits public companies from making loans to directors and executive officers, as codified in Section 13(k) of the Exchange Act.
In addition, an unnamed director of Unilife was going default on loans secured by a pledge of Unilife shares. Shortall agreed to arrange for Unilife to cover the loans. As Shortall understood Unilife could not loan money to the director, Shortall told the Chief Accounting Officer the loan was for the benefit of an external consultant. The SEC also found these transactions violated Section 13(k) of the Exchange Act.
The SEC order also describes events in which:
The SEC noted that Shortall signed and certified Unilife’s Form 10-K which the SEC found falsely stated the director was independent under applicable Nasdaq rules. The statement was false, according to the SEC, because Shortall and the director assisted each other with financial transactions.
Shortall did not admit or deny the SEC’s finding in the order.
The new tax bill awaiting President Trump’s signature has unleashed a flood of disclosures in SEC filings. The new bill was unartfully renamed “To provide for reconciliation to titles II and V of the concurrent resolution on the budget for fiscal year 2018” in the final legislation. SEC filings appear to be sticking, at least for now, with the prior name “Tax Cuts and Jobs Act” and perhaps the White House moniker “Tax Cuts Act” will catch on. Some examples include:
As of the date of this filing, Congress has passed and the President is expected to sign the Tax Cuts and Jobs Act of 2017 into law. If enacted, we estimate a tax benefit between $1.2 billion and $1.5 billion for 2018, primarily due to the revaluation of our net deferred tax liabilities as well as a lower tax rate on 2018 earnings.
Our capital expenditures are expected to be approximately $5.9 billion in 2018 and include spending for aircraft and aircraft-related equipment at FedEx Express, sort facility expansion, primarily at FedEx Ground, and new and replacement vehicles at all of our transportation segments. We expect to invest an additional $1.2 billion for aircraft and aircraft-related equipment during the remainder of 2018. However, we may increase our capital expenditures in 2018 if the Tax Cuts and Jobs Act of 2017 is enacted.
U.S. Congress has passed the Tax Cuts and Jobs Act tax reform legislation, which is under consideration by the White House. While the Company continues to assess the impact of the tax reform legislation on its business and consolidated financial statements, if the legislation is enacted, the U.S. corporate tax rate would be reduced to 21% from a current rate of 35%. At November 25, 2017, the Company had a deferred tax liability of approximately $29.6 million based on a U.S. federal tax rate of 35%. If the U.S. federal tax corporate statutory tax rate is reduced to 21%, this liability will be revalued at the lower rate, resulting in a benefit to income tax expense in continuing operations and a corresponding reduction in the deferred tax liability. The impact would be recognized in the period in which the tax legislation is enacted. Consequently, the Company’s effective tax rate for the thirteen and thirty-nine weeks ended November 25, 2017 does not include the impact of any potential tax reform, as it was not enacted before November 25, 2017. The Company expects a slight reduction to its effective tax rate for the fourteen and fifty-three weeks ending March 3, 2018, if the legislation is enacted during the fourteen weeks ending March 3, 2018.
Federal Home Loan Mortgage Corporation Form 8-K
On December 20, 2017, Congress passed the Tax Cuts and Jobs Act. This bill includes, among other things, a reduction of the U.S. corporate tax rate from 35% to 21%. Because of this reduction in the corporate tax rate, Freddie Mac is required to measure its net deferred tax asset using the new rate in the period in which the bill containing the rate change is signed by the President and enacted into law. This will result in an estimated one-time charge through the tax provision of approximately $5.3 billion in that period. This charge will likely result in Freddie Mac being required to draw from Treasury under the Senior Preferred Stock Purchase Agreement at the end of the next subsequent period.