Statutory reporting impacts of federal tax reform
Published February 15, 2018
The Statutory Accounting Principles Working Group recently issued INT 18-01: Updated Tax Estimates under the Tax Cuts and Jobs Act to provide clarification around the statutory financial reporting in annual statements of the effects of the Tax Cuts and Jobs Act (“TCJA”) that was enacted in late December 2017. There have been various questions arising from reporting entities related to inconsistent annual statement instructions and the timing of completing accounting estimates effected by the TCJA. The three primary areas addressed by this interpretation include:
- Annual statement and audited financial statement reporting and updating of accounting estimates impacted by the TCJA
- Annual statement reporting of changes in deferred tax assets and liabilities
- Annual statement footnote requirements impacted by the TCJA
The first issue addressed by the interpretation surrounds the fact that there are some changes to insurance entities’ tax reporting as a result of the TCJA that may require complex calculations that may not be finalized yet or where the new IRS regulations may not be final yet. Therefore, the resulting accounting estimates may not be fully completed prior to filing 2017 annual statements. As additional information on the TCJA becomes available and accounting estimates are able to be updated after filing of the 2017 annual statements, but before issuance of the 2017 audited financial statements, current statutory reporting guidance would require the audited financial statements to reflect the updated accounting estimates and states may require amended annual statements to be filed to match the final audited financial statements. As a result, INT 18-01 is providing a one-time, limited-scope exception to this requirement for 2017 financial reporting only, as well as additional guidance on reporting and disclosures (which are very consistent with SEC Staff Accounting Bulletin 118 (“SAB 118”)). The requirements for year-end 2017 financial statements are detailed below:
- 2017 statutory financial statements must reflect income tax effects of the TCJA in which the accounting estimates are “complete” (primarily the recalculation of DTA/DTLs from a 35% tax rate to the new 21% rate).
- Consistent with SAB 118, reporting entities must recognize provisional amounts for accounting estimates that are considered “incomplete” but that can be reasonably estimated at the time of filing annual statements.
- Consistent with SAB 118, reporting entities shall continue to apply existing tax law prior to the TCJA in determining accounting estimates where the effects of the TCJA cannot be reasonably determined.
- Tax reporting estimates updated after issuance of the 2017 annual statement but before the issuance of the 2017 audited financial statements will not be required to be recognized in the audited financial statements. However, consistent with the disclosure requirements of SAB 118, the audited financial statements will include qualitative disclosures around the specific income tax effects that are incomplete estimates (i.e. provisional amounts, why they are incomplete, etc.).
- Consistent with SAB 118, all accounting impacts of the TCJA should be completed within one year and reflected as final for 2018 year end statutory reporting.
The second issue addressed some questions from reporting entities about possible changes to the annual statement reporting of changes in deferred tax assets and liabilities as a result of the impacts of the TCJA. The interpretation guides entities to continue to follow existing reporting instructions in this area with some additional clarifications as it relates to the impact of the TCJA as follows:
- Change in Net Unrealized Capital Gains (Losses) Less Capital Gains Tax – Tax effects reflected in unrealized capital gains (to present unrealized gains “net of tax”) shall be re-measured for the change in the corporate tax rate from 35% to 21% and remain in the same reporting line.
- No change to reporting of Change in Net Deferred Income Tax, which represents the gross change in net deferred tax, excluding any changes in unrealized capital gains and non-admitted DTAs.
- Change in Non-admitted – will include the effect of the change in the corporate tax rate on non-admitted DTAs (computed by comparing beginning of year non-admitted at old rate to end of year non-admitted at new rate).
The third issue addressed involves guidance in SSAP No. 101 and the annual statement instructions around the completion of annual statement Note 9C “Significant Components of Income Taxes and Changes in DTAs/DTLS.” Although current guidance instructs reporting entities to separately report the change in DTAs/DTLS related to the change in enacted tax results and the change related to normal activity. The interpretation has now clarified that reporting entities shall use the existing data table provided whereby the 2016 information will be unchanged from prior year and the 2017 information will reflect the new tax rate enacted by the TCJA and match the financial statements. Additionally, the reporting entities will be required to provide a narrative disclosure along with the data table to provide the amount of the change in DTAs/DTLs caused by the change in tax rate.
Given the very late timing of passage of the federal tax reform in 2017 and the resulting accounting and reporting guidance that continues to come out related to 2017 reporting of annual statements and audited financial statements, it is very important to stay abreast of these changes on a frequent basis during the 2017 reporting and filing season.