Written by: Daniel F. Morrill, CPA
On February 14, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address the accounting issue pertaining to the deferred tax amounts that are “stranded” in accumulated other comprehensive income (AOCI) as a result of the Tax Cuts and Jobs Act (the Act).
This new guidance provides companies with the option to reclassify amounts “stranded” in AOCI, and specifically related to the Act, to retained earnings. In the initial proposal, this reclassification was required, however, based on feedback during the proposal process, the FASB decided to make it optional in the final ASU. The guidance is effective for all companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is allowed, including for financial statements that have not yet been issued (public companies) or are not yet available to be issued (non-public companies). A company shall apply the FASB ASU either at the beginning of the period (annual or interim) of adoption or retrospectively to each period in which the income tax effects of the Act related to items remaining in AOCI are recognized.
In addition, a company that elects to reclassify is required to disclose that an election was made to reclassify the income tax effects of the ACT from AOCI to retained earnings. They are also required to provide a description of other income tax effects related to the application of the Act that are reclassified from accumulated other comprehensive income to retained earnings, if any. A company that does not elect to reclassify is required to disclose that an election was not made to reclassify the income tax effects of the Act from AOCI to retained earnings. In either case, in the period of adoption, a company is required to disclose a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income, if material.
If the reclassification election is made, the accounting complexities of the “day 2” accounting for the “stranded” amounts in AOCI are alleviated. These amounts arise from items such as market value adjustments for available-for-sale securities, the effects of pension plan accounting, and market value adjustments to cash flow hedges. The FASB will be monitoring the number of companies that do not elect to reclassify amounts “stranded” in AOCI to retained earnings to determine if guidance is needed on the “day 2” accounting.
