Tax Reform Is in the Books.

• Author: Garcia, Pilar
• Position: PERSPECTIVE

Another interim reporting period is rounding the corner, which means it is time to update the feature story in many of today's Notes to the Financial Statements--the income tax footnote and the effects of the Tax Cuts and Jobs Act (TCJA).

Believe it or not, the Financial Accounting Standards Boards accounting rules in ASC 740, Income Taxes, have just one interim disclosure requirement: to disclose the reasons for significant variations in the customary business relationship between income tax expense and pretax accounting income, if those reasons are not otherwise obvious in the financial statements or in the nature of the entity's business. This seemingly simple requirement is actually challenging to execute. To fulfill the intended disclosure objective, preparers may benefit from a refresher on the interim financial reporting rules for income taxes.

Interim Events: Ordinary Income or Discrete Item?

An entity has two primary objectives when it comes to accounting for income taxes:

* to record current taxes payable or refundable as of the balance sheet date; and

* to record deferred taxes for estimated future tax effects arising from temporary differences, including net operating loss carrybacks and tax credit carryforwards.

To compute the total interim tax provision, the focus shifts to events and transactions that are either included in or excluded from ordinary income. Events and transactions included in ordinary income are used to derive the estimated annual effective tax rate (AETR), whereas events or transactions that are excluded are treated as discrete items. A discrete item is accounted for:

* within the interim period that the event or transaction took place; and

* at the applicable rate or rates (it is not a component of the estimated AETR).

In many cases, entities must apply judgment to determine whether an event (such as a change in valuation allowance) is discrete. In some cases, ASC 740 is clear about what events are discrete (such as unusual or infrequent items, a cumulative effect of a change in accounting principle, and discontinued operations, among others). A change in enacted tax laws or tax rates is defined clearly in ASC 740 as a discrete item. Based on this guidance, all adjustments stemming from the TCJA must be recognized as discrete components of income tax expense and all of it must be attributed to income from continuing operations.

In theory, an entity should have recorded and disclosed the full effects of the...