United States: Current Practice Issue - Impact Of Fiscal Cliff Legislation: The American Taxpayer Relief Act Of 2012

President Obama signed into law a last-minute compromise on January 2 that settles many unresolved fiscal cliff tax issues, extending some of the 2001 and 2003 tax cuts and making others permanent. Among the provisions extended through 2013 by the American Taxpayer Relief Act of 2012 are

• The research tax credit, including retroactive extension of the credit to 2012
• A variety of other general business credits, including the Work Opportunity Tax Credit and New Markets Tax Credit
• Bonus depreciation for qualified property
• Certain international provisions and exceptions, including the Subpart F exception for active financing income and the look-through rule for related controlled foreign corporation payments, potentially impacting an entity's position on permanent reinvestment foreign earnings

Accounting for tax law changes

To account for the new tax law changes, entities would apply the guidance in FASB Accounting Standards Codification® (ASC) 740-10-45-15, Income Taxes. Under this guidance, an entity records the effects of an enacted tax law or rate change on deferred tax accounts in the period that includes the enactment date, which is the date a tax bill becomes law. Do not confuse the enactment date with the effective date, as many tax rate changes do not take effect immediately, but at either a future date (a prospective change) or a past date (a retroactive change).

In addition, the guidance in ASC 740-10-30-8 through 30-9 requires an entity to measure a deferred tax liability or asset using the enacted tax rate(s) that will apply to taxable income in the periods the deferred tax item is expected to be settled or realized.

Financial statement impact

Because the act was not signed into law until 2013, for calendar-year taxpayers, the provisions that expired, such as the research tax credit, will not be considered in calendar-year 2012 financial accounting for income taxes. Instead, the 2012 and 2013 impact of these extended provisions will be reflected in tax accounts for the period that includes January 2, 2013. In other words, income taxes included in periods ending on or before January 1, 2013 would be determined as if the act had not been enacted.

Entities should consider enhancing financial statement disclosures to include additional discussion of the impact of the act on income tax accounts.

FASB

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

FASB issues proposed ASU on credit losses

The FASB recently issued proposed Accounting Standards Update (ASU), Financial Instruments – Credit Losses, to require more timely recognition of credit losses as well as additional transparency regarding credit risk. The proposed model for recognizing credit losses would incorporate "expected credit loss," a single measurement objective for recognition, rather than the multiple existing impairment models currently in U.S. GAAP, which generally trigger recognition of a credit loss after it is incurred.

Any entity holding financial assets not accounted for at fair value through net income that are exposed to credit risk would be affected by the proposal. These assets generally include loans, debt securities, trade and lease receivables, and any other receivables representing the contractual right to receive cash.

Under the proposed guidance, at each reporting date management would utilize all available information, including historical experience, current conditions, and reasonable and supportable forecasts, in estimating cash flows not expected to be collected. In addition to borrower-specific factors, an entity would consider general economic conditions and the forecasted direction of the economic cycle. The balance sheet would reflect the current estimate of expected credit losses (that is, the allowance for credit losses), with changes for the period reflected in the income statement as the provision (or credit) for bad debts.

The FASB has not proposed an effective date. Entities would apply the proposed amendments through a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is effective.

Comments on the proposed ASU are due by April 30, 2013.

Boards discuss revenue recognition at December 17 joint meeting

On December 17, the FASB and IASB met to continue redeliberations of the proposed model in the 2011 Exposure Draft (ED), Revenue from Contracts with Customers. Highlights of the Boards' discussion are summarized below.

Allocating the transaction price

The Boards reached a tentative decision to retain the residual approach as a technique in Step 4 of the proposed revenue model to estimate the stand-alone selling price of a good or service when the stand-alone price is highly variable or uncertain.

The Boards also tentatively clarified that the residual approach may be used for two or more goods or services with highly variable or uncertain stand-alone selling prices if one or more other goods or services in the contract do not have highly variable or uncertain stand-alone selling prices. In addition, a combination of techniques could be used when estimating stand-alone selling prices of two or more goods or services with highly variable or uncertain stand-alone selling prices, as follows:

• First, an entity would apply the residual approach to estimate the aggregate stand-alone selling prices of all goods and services with highly variable or uncertain selling prices.
• Then, it would utilize another technique to allocate that aggregate stand-alone selling price to those individual goods and services.

The Boards tentatively clarified that an entity would allocate a discount according to paragraph 75 of the 2011 ED before using a residual approach to estimate a stand-alone selling price for a good or service with a highly variable or uncertain stand-alone selling price. Also, contingent consideration could be allocated to more than one distinct good or service.

Contract costs

The Boards tentatively decided to retain the proposed guidance that calls for recognizing the incremental costs of obtaining a contract as an asset if an entity expects those costs to be recoverable. They also tentatively agreed to retain the practical expedient allowing an entity to expense, rather than capitalize, those costs when incurred if the asset's amortization period would be one year or less.

Bundled arrangements

The Boards discussed possible amendments, but tentatively decided not to change the proposed model for bundled arrangements, which include the transfer to customers of both services and a distinct good related to those services, as is commonly encountered in telecommunications and satellite television contracts. Further, the Boards also tentatively decided to clarify that the portfolio approach described in paragraph 6 of the 2011 ED could be utilized for bundled arrangements (that is, for a portfolio of contracts with similar characteristics, if the entity reasonably expects that the results would not materially differ from applying the proposed guidance to each of the contracts or performance obligations).

Constraining revenue – licenses

The Boards tentatively decided to delete paragraph 85 of the 2011 ED, which would have precluded revenue recognition for intellectual property licensed to a customer if consideration paid to the licensor varies based on the customer's subsequent sales (for example, a sales-based royalty). Instead, the Boards tentatively agreed that these licenses would be subject to the same proposed general principles of revenue constraint applicable to all other licenses.

One proposed indicator in those general principles describes factors outside an entity's influence that may constrain revenue recognized. The Boards tentatively decided to refine this indicator to include the actions of third parties (for example, the customer's subsequent sales) as a factor that might constrain revenue. Accordingly, when a license arrangement begins and the licensor estimates the minimum amount of revenue to which it expects to be entitled, in some cases the entity may conclude its best estimate is zero.

FASB meeting held December 19

At its December 19 meeting, the Board discussed proposed ASU, Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income, and added a technical project to its agenda to clarify whether nonpublic entities are subject to a certain disclosure requirement in ASC 825, Financial Instruments.

Presentation of items reclassified out of OCI

In clarifying certain tentative decisions reached at its November 14, 2012 meeting on disclosing the effect of significant reclassifications out of other comprehensive income (OCI), the Board tentatively decided that an entity would not be required to present on the face of the financial statements an aggregate total of all reclassified amounts, including insignificant items. An entity would be required, however, to present parenthetically the aggregate tax impact of significant reclassifications where total income tax is presented.

The Board affirmed a previous decision that the amendments would be effective for public entities for reporting periods beginning after December 15, 2012 and for nonpublic entities for periods beginning after December 15, 2013.

Nonpublic entities – clarification of fair value disclosure requirement

The Board added a project to its agenda to amend ASC 825, Financial Instruments, to clarify that a nonpublic entity would not be required to provide fair value hierarchy level disclosures specified in ASC 825-10-50-10(d) for items the entity discloses at fair value but does not present at fair value in the statement of financial position. On January 7, the FASB issued the proposed ASU, Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities, with a 15-day comment period ending January 22.

XBRL taxonomy released

The FASB has released the http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=11761605824322013 U.S. GAAP Financial Reporting Taxonomy, subject to final acceptance by the SEC, which is expected shortly. This annual update includes modifications resulting from ASUs and recommended improvements to the 2012 taxonomy.

The financial reporting taxonomy is used by SEC registrants for filing online eXtensible Business Reporting Language (XBRL) reports. The FASB has ongoing responsibility for the taxonomy's development and maintenance.

SEC

SEC approves PCAOB audit committee communications standard

On December 17, the SEC approved PCAOB Auditing Standard (AS) 16, Communications with Audit Committees, and conforming amendments to PCAOB standards.

AS 16 was issued by the PCAOB in August 2012 and is effective for audits and quarterly reviews of fiscal years beginning on or after December 15, 2012 (that is, calendar-year 2013 audits and quarterly reviews for most issuers, including emerging growth companies, as defined in the Jumpstart our Business Startups Act). The objective of the new standard is to enhance the relevance and timeliness of auditor and audit committee communications and to foster dialogue on significant matters.

For audits of brokers and dealers, a transitional amendment will make the communication requirements in the PCAOB's interim standard (AU 380) effective for audits of fiscal periods that become subject to PCAOB standards (upon the SEC's adoption of amendments to SEC Rule 17a-5), if such fiscal periods precede the effective date of AS 16.

EDGAR filing of Iran Threat Reduction and Syria Human Rights Act notices

An issuer is required to concurrently file a notice with the SEC when it includes disclosures in a periodic filing of certain activities specified by the Iran Threat Reduction and Syria Human Rights Act of 2012. The SEC's Division of Corporation Finance recently announced that these notices should be filed through EDGAR using a new form type called IRANNOTICE, which is expected to be available for use by January 14.

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