December 26, 2017

SEC Staff Issues Guidance on the ‘Deferred Tax Assets’ Sleeper”

Everyone is calling it a “holiday gift” (including this Cooley blog). One member wrote: “There are accounting departments throughout America who now know for sure that Santa’s full name is Santa E Claus. I have had clients absolutely freaking out about this – before the SEC’s guidance – because they felt they had no way to get their arms around the deferred tax valuation allowance number in time for an 8-K.”

Following up on my blog about the topic of deferred tax assets being impaired & the need to consider whether an Item 2.06 Form 8-K is required, the SEC issued this statement on Friday – along with a new Staff Accounting Bulletin No. 118 (from OCA & Corp Fin) and CDI 110.02 (from Corp Fin). These provide sorely-needed guidance about the impact of the signed tax legislation on financials – particularly deferred tax assets – including resolving some debated issues about how to handle disclosure (including Item 2.06 8-Ks).

This Steve Quinlivan blog notes some recent disclosures about the new tax law – and here is an example of a company filing a stand-alone Item 2.06 8-K in connection with the new law…

SEC Staff’s Tax Reform Guidance: The Open Issues (& Practical Considerations)

As we post the inevitable flood of memos about this new SEC Staff guidance in our “Regulatory Reform” Practice Area, this Gibson Dunn blog identifies some of the open issues left by the guidance:

Many Tax Act accounting and disclosure issues remain to be addressed over the coming months during companies’ measurement periods, some of which may require guidance or consultations with regulators such as the Commission and the Treasury/Internal Revenue Service. For example, the Staff’s guidance does not expressly address the implications of filing a new Securities Act registration statement or conducting an offering off of an already effective registration statement during a company’s measurement period.

The Gibson Dunn blog also addresses “practical considerations” when it comes to Reg FD, Item 2.02 8-Ks and non-GAAP measures. Here’s their note about that last one:

Non-GAAP Financial Measures. To the extent that a company has not reflected the impact of the Tax Act in its financial statements (either on a provisional basis or as a result of having completed its assessment of such effect), and instead reports its financial results based on the tax laws as in effect immediately before enactment of the Tax Act, such disclosures continue to qualify as GAAP as a result of SAB 118.

However, to the extent that a company has completed or provisionally provided for its assessment of the tax accounting effects of an aspect of the Tax Act and reflected those effects in its financial statements, but then backs out that impact to address period-over-period comparability, the company should be mindful of the non-GAAP rules. For example, if a company has accounted for the impact of a provision of the Tax Act in its year-end financial results, but then states what its results would have been “excluding the impact of the Tax Act,” the company is presenting a non-GAAP financial measure that triggers the GAAP/non-GAAP presentation and reconciliation requirements of Regulation G and Regulation S-K Item 10(e).

In our “Regulatory Reform” Practice Area, we continue to post memos about how the tax legislation implicates a variety of business considerations outside of the SEC Staff’s guidance…

Broc Romanek