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January 10, 2018

During its January 10, 2018 board meeting, the Financial Accounting Standards Board (FASB) discussed the application of tax reform as it relates to ASC 740, Accounting for Income Taxes. Included in the discussion were items such as tax effects of accumulated other comprehensive income, discounting of taxes associated with deemed repatriation and refunds of AMT credit carryforwards, and accounting for global intangible low-taxed income and base-erosion anti-abuse tax. Final guidance is expected in the coming months, as the FASB will issue an exposure draft with a comment period of 15 days to follow.

Why did FASB act so quickly in its commentary? Just in time for the new year — and the new wave of reporting obligations under the Tax Cuts and Jobs Act of 2017 — the Securities and Exchange Commission (SEC) issued guidance that will give companies some flexibility as they prepare their annual and quarterly financial statements.

While this guidance applies to all aspects of the new tax law, it will be of particular use for U.S.-based multinational companies in computing the taxes arising from the one-time deemed repatriation of their historical foreign earnings accumulated offshore (the toll charge). This analysis will often require extensive evaluations and computations for each specified foreign corporation’s earnings and profits (E&P) and tax pools — a task that could prove challenging on such short notice. 

Acknowledging the tight timeline, the SEC has issued Staff Accounting Bulletin No. 118 (SAB 118), which advises on the application of U.S. GAAP in circumstances where a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. In such cases, SAB 118 provides an expanded timeline for companies that, for example, have previously not calculated their foreign E&P to make the necessary reviews and computations to comply with the new tax law and make accurate financial disclosures.


On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017. Among other changes, the new tax law requires a one-time deemed repatriation of a U.S. company’s unremitted foreign earnings, known as the toll charge. Earnings will be taxed at a 15.5% rate for earnings held in cash and cash equivalents and at an 8% rate for earnings held in non-cash assets. This transition tax, which is necessary to transition to the new tax system, is due on April 16, 2018, but a taxpayer can elect to pay this transition tax in installments over an eight-year period.

For financial accounting purposes under ASC 740, companies must calculate their foreign E&P and record the related tax payable (or reduction to tax attribute deferred tax assets). The issue is that most companies do not readily have the necessary information prepared or analyzed to make accurate statements regarding this impact. Particularly in cases where companies have previously asserted a “permanent reinvestment” of foreign earnings, those companies will generally not have calculated their foreign E&P pools. To comply with the new law, companies may need to review and calculate their foreign E&P year by year, foreign subsidiary by foreign subsidiary, in order to determine the amount that is to be brought back and to record an accurate tax liability in their financial statements. This could entail a massive review that may be infeasible to complete on such short notice.

To further complicate the calculation, the new law contains modifications that now apply to U.S. shareholders of certain foreign corporations that are not controlled foreign corporations (CFCs). It also contains modified attribution rules that could expand the applicability of transition tax to entities with minority U.S. owners. If these are significant, corporations will need to calculate their foreign tax credit pools with new multi-year limitation calculations, an analysis that many have ignored in the past.     

These are only a few elements of the Tax Cuts and Jobs Act. Other changes include the impact on state income taxes, dividends-received deductions, reduced corporate tax rate and revaluation of deferred tax assets (DTAs) and removal of expired provisions for certain DTAs — all of which could impact year-end tax expense and other footnote disclosures. These items and others could entail a massive review that may not be feasible to complete on such short notice.

SEC Bulletin 118 Provides Relief

ASC 740 requires that public companies recognize the effects of changes in tax laws in their financial statements for the period in which such changes are enacted. Therefore, the new tax act, which was signed into law in December 2017, will require calendar-year-end reporting companies to account for the impacts of the new rules in their annual financial statements in early 2018.

Acknowledging that companies might be forced to analyze the effects of the new tax law on a short timeline, and with potentially insufficient information, SAB 118 provides companies with an extended “measurement period” during which they may complete the accounting for certain income tax effects of the new law, including the toll charge.

SAB 118 provides the following guidance for companies issuing financial statements during the extended measurement period:

  • The company’s accounting for certain effects of the Tax Cuts and Jobs Act is incomplete, but a reasonable estimate can be made. In this case, the company should include the reasonable estimate in its financial statements as a provisional amount during the measurement period. The guidance is clear that it would not be appropriate for a company to exclude a reasonable estimate from its financial statements to the extent that it had been determined.
  • The company does not have the necessary information available, prepared or analyzed (including computations) for certain effects of the Tax Cuts and Jobs Act. The SEC does not expect a provisional amount to be included in a company’s financial statements for specific income tax effects for which reasonable estimates cannot be determined. In such cases, the guidance provides that the company should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the Tax Cuts and Jobs Act being enacted. The company should not adjust its current or deferred taxes for those effects until a reasonable estimate can be determined. The company would instead report provisional amounts in the first reporting period during which a reasonable estimate can be determined.
  • The company’s measurement of certain income tax effects under the Tax Cuts and Jobs Act is complete. In this case, the company must reflect the tax effects in the period of enactment. These completed amounts would not be considered provisional amounts.

A company may find itself applying all three scenarios, as it may be able to complete the accounting for some of the income tax effects of the new law ahead of others.

Measurement Period

The measurement period begins in the reporting period that includes the Tax Cuts and Jobs Act’s enactment date (December 22, 2017) and ends when a company has obtained, prepared and analyzed the information needed to complete the accounting requirements under ASC 740. The measurement period should not extend beyond one year from the enactment date, or December 22, 2018.

The SEC expects that companies will act in good faith to complete their accounting under ASC 740 during the measurement period.

Required Disclosures

SAB 118 advises that when a company’s accounting is incomplete and it accounts for certain income tax effects of the new law using the measurement period approach, the company should include the following disclosures in its financial statements:

  • Qualitative disclosures of the income tax effects of the Tax Cuts and Jobs Act for which the accounting is incomplete;
  • Disclosures of items reported as provisional amounts;
  • Disclosures of existing current or deferred tax amounts for which the income tax effects of the Tax Cuts and Jobs Act have not been completed;
  • The reason why the initial accounting is incomplete;
  • The additional information that is needed to be obtained, prepared or analyzed to complete the accounting requirements under ASC 740;
  • The nature and amount of any measurement period adjustments recognized during the reporting period;
  • The effect of measurement-period adjustments on the effective tax rate; and
  • When the accounting for the income tax effects of the Tax Cuts and Jobs Act has been completed.

Alvarez & Marsal Taxand Says:

The much-debated Tax Cuts and Jobs Act was signed into law on December 22, 2017, ushering in the new year with a host of new tax rules and a tight timeframe for computing and analyzing the tax effects of the new law. Acknowledging the difficulties that companies may face in preparing accurate financial statements in this compressed timeframe, the SEC has provided relief in the form of SAB 118, which allows companies an extended measurement period during which they can make reasonable estimates as to tax effects and refine those estimates as they complete their analyses.

However, we nonetheless recommend that companies make a best effort to complete these analyses during the first applicable reporting period to provide timely information to investor inquiries and avoid the extensive disclosures required by SAB 118. In addition, in the case of calendar-year companies, extension payments due April 16, 2018, will need to include payment on the first toll charge installment. Early communication with financial auditors on a proposed approach is recommended to most efficiently comply with the ASC 740 requirements of the new tax law.


The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisers who are free from audit-based conflicts of interest and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the United States and serves the United Kingdom from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisers in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

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