SAB 118: Accounting for the Tax Cuts and Jobs Act

The enactment of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, was a significant overhaul of the U.S. tax code. This legislation was passed quickly, leaving public companies with minimal time to assess its extensive impacts before their financial reporting deadlines. The law introduced complex changes, including a reduction in the corporate tax rate to 21 percent, modifications to net operating loss deductions, and new taxes on foreign earnings.

In response to the uncertainty and the challenge of applying existing accounting standards under such tight constraints, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin (SAB) 118. This guidance interpreted how to apply Accounting Standards Codification (ASC) Topic 740 to the TCJA’s effects. SAB 118 provided a practical approach, allowing companies a “measurement period” to analyze and finalize the accounting for the new law.

The Measurement Period Framework

SAB 118 established a measurement period of up to one year from the TCJA’s enactment date, giving companies until December 22, 2018, to finalize their accounting. The bulletin created three categories for reporting the TCJA’s effects based on the completeness of a company’s analysis.

The first category was for “provisional amounts,” used when a company could determine a reasonable estimate of a tax effect, even if the analysis was incomplete. This allowed a preliminary figure to be recorded in the financial statements.

A second category addressed “incomplete” accounting for tax effects where a company could not determine a reasonable estimate. In these instances, the company would continue to account for the item based on the tax law in effect immediately before the TCJA was enacted.

The final category was for “finalized amounts,” which applied to any tax effects where the company had completed its accounting analysis. Once an amount was determined to be final, it could not be adjusted under the SAB 118 guidance.

Adjusting and Finalizing Tax Amounts

During the measurement period, companies were expected to work toward completing their analysis of the TCJA’s impact. As new information became available, such as more detailed data or new regulatory guidance, adjustments to provisional amounts were required.

Any adjustment to a provisional amount was recorded as an adjustment to income tax expense or benefit in the reporting period in which the change was identified. This meant the financial impact of refining these estimates was reflected in current earnings. For instance, a company might adjust its initial estimate for the tax on unremitted foreign earnings after a more detailed analysis.

The process of finalizing the accounting had a firm deadline at the end of the one-year measurement period, by which all provisional amounts had to be finalized. Once the measurement period concluded for a tax item, no further adjustments related to the initial TCJA adoption could be made through this mechanism. Any subsequent changes would be accounted for as changes in estimate or corrections of an error under standard accounting principles.

Required Financial Statement Disclosures

SAB 118 mandated specific disclosures in financial statement footnotes to help investors understand the status of a company’s accounting for the TCJA. These were required in each reporting period until the accounting was complete to provide a clear picture of the progress being made. Companies had to disclose:

• Qualitative information identifying which income tax effects of the TCJA were still being accounted for as provisional amounts.
• An explanation for any items where the accounting was incomplete because a reasonable estimate could not be made.
• The financial impact of any changes made during the period, including the additional income tax expense or benefit recorded as an adjustment to provisional amounts.
• A description of what additional information or analysis was needed to finalize the accounting.
• A statement declaring that the accounting was complete, once a company had finalized its analysis for all impacts of the TCJA.