On February 8, 2017, The Statutory Accounting Principles (E) Working Group adopted INT 18-01: Updated Tax Estimates under the Tax Cuts and Jobs Act. The interpretation (“INT”) was initially designed to study a limited-time, limited scope exception to SSAP No. 9 – Subsequent Events (“SSAP No. 9”) pertaining to updated estimates under the Tax Cuts and Jobs Act. In addition, the interpretation is intended to provide additional clarity on the reporting of certain income tax effects of tax reform in the 2017 Statutory and Audited Financial Statements.
The Tax Cuts and Jobs Act (“the Act”) was enacted into law on December 22, 2017 and contains comprehensive changes to existing tax law, including several insurance specific provisions. The numerous tax changes have created the need for additional guidance with respect to both the GAAP and Statutory accounting impacts and reporting protocols.
On Jan. 30, 2018, the Working Group conducted an email vote to expose a Form A and related Interpretation 2018-01: Updated Tax Estimates under the Tax Cuts and Jobs Act (“INT 18-01”) to provide a limited-time, limited-scope exception to SSAP No. 9 pertaining to updated estimates under the Act. The tentative INT 18-01 and Form A were exposed for comment period ending Monday, Feb. 5, 2018.
This interpretation provides guidance regarding three key statutory reporting issues: (1) reporting and updating estimates, (2) reporting changes to deferred tax assets and liabilities, and (3) completion of Note 9C – Significant Components of Income Taxes and Change in DTAs/DTLs.
Issue 1: Reporting & Updating Estimates
The INT provides that year end 2017 financial statements must reflect the income tax effects of the Act and recognize impacts for accounting estimates under the Act that may be considered “incomplete” when a reasonable estimate is determinable. For example, entities will be required to recalculate their DTAs/DTLs using the newly enacted 21 percent corporate tax rate.
However, the Act includes several insurance provisions that may or may not be quantifiable at this time. For example, the deemed repatriation of foreign earnings and loss reserve discounting transition is a known subsequent event, however, the information required to calculate the income tax effect may be unavailable at this time. Thus, the INT provides further clarification on how to report such estimates when reasonable estimates are or are not readily available:
- If a reasonable estimate is available, the estimate will be updated and recognized as a Type I subsequent event to reflect the best estimate available at the time of filing the 2017 statutory financial statements.
- If a reasonable estimate cannot be determined, entities shall not recognize provisional amounts in the 2017 statutory financials, i.e. entities should follow existing law prior to the Act.
- If a reasonable estimate is updated or established after the issuance of the statutory financials but before the audited financials, the estimate shall be disclosed as follows:
- The estimate will be disclosed in accordance with SSAP No. 9, paragraph 13, as a change in accounting estimate pursuant to SSAP No. 3 – Accounting Changes and Corrections of Errors, when the change becomes known. It is important to note that this is a specific exception to SSAP No. 9; historically, these estimates would be reported as a Type I subsequent event which would require amending the statutory financials to agree to the audited financials. However, it would appear the provision is intended to prevent entities from having to amend the statutory financials.
- In addition, the entity shall utilize existing notes for income taxes to identify specific income tax effects under the Act that are incomplete. This disclosure should include information including, but not limited to, the income tax effects for which accounting is incomplete, why the initial accounting is incomplete and the specific information needed in order to complete the accounting for the income tax effects.
The INT provides that all entities should be working diligently to calculate the accounting impacts and all accounting impacts shall be completed within one year of enactment date.
Issue 2: Reporting Changes to Deferred Tax Assets & Liabilities
SSAP No. 101 – Income Taxes (“SSAP No. 101”) provides that changes in DTAs and DTLs, including changes attributable to changes in tax rates and changes in tax status, if any, shall be recognized as a separate component of gains and losses in unassigned funds (surplus). Admitted adjusted gross DTAs and DTLs shall be offset and presented as a single amount on the statement of financial position. The INT provides that reporting entities should continue to follow the NAIC reporting instructions identified above for reporting changes resulting from the Act. In addition, the INT offered several clarifications:
- The tax effects previously reflected in unrealized capital gains (losses) shall be re-measured for the change in the corporate tax rate and reported on the same line.
- The change in net deferred income tax (excluding any change in unrealized capital gains and nonadmitted deferred tax assets) will represent the gross change.
- The change in nonadmitted DTAs will represent the change calculated pursuant to SSAP No. 101, including the tax effect of the change in corporate tax rates.
Issue 3: Completion of Note 9C – Significant Components of Income Taxes and Change in DTAs/DTLs
Current annual statement instructions state entities are required to disclose the significant components of the changes in DTAs and DTLs (exclusive of the effects of enacted changes in tax law or rates). However, interested parties explained that Note 9C is not designed to report the change in DTA/DTL in that manner (i.e. the Note 9C table does not provide a specific line to report the tax rate change as a separate component). Thus, the INT advises the reporting entity to include a narrative disclosure to include information on the approximate change in DTAs and DTLs as a result of the tax rate change. The DTAs and DTLs reported in the Note 9C table will be reported using the enacted tax rate of 21 percent, which will ensure Note 9C agrees to the year end 2017 financial statements.
Leah Lloyd, Senior Associate | DHG Insurance
704.594.8119 | email@example.com
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