2019 Retirement Plan Limit Updates

KELLY MARTINSON, TAX SHAREHOLDER

Narrow Scope Project Reflects Changing Distribution Methods

On October 10, the Financial Accounting Standards Board (FASB) agreed to release for public comment a proposal from its Emerging Issues Task Force (EITF) to align the accounting for the production costs of TV shows with that for the costs of movies. The difference in the accounting for the costs of the two forms of content is based on guidance developed in the 1990s, when television shows primarily made money from being syndicated in reruns. The EITF says that that guidance is less relevant in an era of streaming content on the Internet.

What’s changing?

Under the amendment to U.S. Generally Accepted Accounting Principles (GAAP), TV producers would be allowed to account for production costs the same way filmmakers account for the costs of making movies.

The proposal would alter FASB Accounting Standards Codification (ASC) Topic 926-20, Entertainment — Films — Other Assets — Film Costs. The change would let the guidance for the cost of producing TV shows, which the FASB calls “episodic content,” be the same as the guidance for films.

Why is a change needed?

Established in the 1990s, ASC 926-20 was created based on the assumption that a high percentage of television shows fail. Production companies typically didn’t turn a profit until shows were in syndicated reruns. Therefore, the guidance allows creators of episodic content to capitalize costs only when the production company can establish estimates of so-called “secondary market revenue” (money a show will make in syndication).

“The distinct capitalization guidance for episodic content was established to address the business models and risks that were present in the production of episodic content when the guidance was originally issued,” says EITF research materials. “Since then, the Internet has changed the business environment in which media is produced and distributed by introducing new distribution channels and new industry participants. These industry changes may challenge the continued relevance of the capitalization model for episodic content.”

The EITF’s proposal is a reaction to a rapidly changing television industry. Customers no longer have to wait for a network to air a TV show in a specific time slot. Instead, today’s TV viewers can use Internet streaming services to watch single episodes or binge watch entire seasons at their discretion. The new distribution platforms significantly reduce producers’ risks for losing money on new TV shows.

What about amortization and impairment of capitalized costs?

During its September discussions, the EITF focused on the secondary effects of this decision, including whether a change in the cost capitalization guidance required changes to the amortization, impairment and disclosure requirements in ASC 926-20. EITF members decided to:

• Retain the current amortization model,
• Allow companies with transactions with no direct contracted revenue (such as those that receive subscription fees) to perform the impairment test at a group level, because impairment testing may be impractical at the individual film or TV show level, and
• Add indicators to help production companies determine when an impairment had occurred.

When will the FASB issue a proposed update?

The FASB plans to publish this exposure draft by year end. Once the proposal is released, it will be subject to a 30-day comment period. Based on those comments, the FASB will deliberate and decide on the next steps for this narrow scope project.

©2018 THOMSON REUTERS

Grace Period for “Good Faith” Income Tax Reporting Ends Soon

Interpretive guidance from the Securities and Exchange Commission (SEC) temporarily lets public companies use good faith estimates to adjust for the income tax effects of the Tax Cuts and Jobs Act (TCJA). The Financial Accounting Standards Board (FASB) followed the SEC’s lead and also is allowing private companies to use good faith estimates. But the grace period expires in December. The SEC is advising companies that, once the grace period is over, they should be prepared to comply with the income tax reporting requirements in U.S. Generally Accepted Accounting Principles (GAAP).

Now that the grace period is ending, companies that follow GAAP (whether public or private) may find themselves unprepared if they haven’t yet invested adequate time and resources to understand how the TCJA will affect them.

Tax reporting under GAAP

Under GAAP, companies must adjust deferred tax assets and liabilities for the effect of a change in tax laws or tax rates. On the income statement side, the adjustment is included in income from continuing operations. The guidance applies even in situations in which deferred tax liabilities and assets are related to items presented in other comprehensive income (OCI), such as pension adjustments, gains or losses on cash flow hedges, and foreign currency translation adjustments.

Tax law changes happen frequently, but they usually aren’t as significant as those enacted by the TCJA, which is considered the biggest change to the tax code in 30 years. The effects may be difficult to estimate, especially for companies with global operations and those with significant deferred tax assets and liabilities on their balance sheets.

Customarily, companies that follow GAAP must report the effects of tax law changes when the changes are enacted. The TCJA was signed into law on December 22, 2017, in an atmosphere of unprecedented uncertainty and urgency. Given the scope of the changes, many companies were caught off guard.

SEC and FASB reactions

On the same day that the TCJA was enacted, the SEC issued Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. This guidance has allowed companies to use “reasonable estimates” and “provisional amounts” for some line items for taxes when preparing their fourth-quarter and year-end 2017 financial statements.

Even though SABs apply directly to only public companies, in early 2018 a FASB Staff Q&A, Whether Private Companies and Not-for-Profit Entities Can Apply SAB 118, clarified that a private company or a not-for-profit entity voluntarily applying SAB No. 118 would be deemed in compliance with GAAP, provided that 1) all relevant aspects of SAB No. 118 are applied in their entirety, including the required disclosures, and 2) a statement that SAB No. 118 has been applied is disclosed as an accounting policy.

The SEC and FASB guidance gave public and private businesses a little extra time to digest the tax law changes that would impact them under the TCJA.

Need help?

The grace period instituted in SAB No. 118 ends on the first anniversary of the TCJA’s enactment. In September, SEC Deputy Chief Accountant Sagar Teotia told the Financial Accounting Standards Advisory Council that the SEC isn’t planning to extend the deferral longer than what was outlined in the original SAB. He explained that, over time, as the IRS has issued additional guidance on specific TCJA provisions, public companies have generally supplied more details about the effects of the TCJA.

However, Teotia isn’t focused on private businesses or not-for-profits with limited financial resources and expertise. Many of these entities may not fully understand the effects of the TCJA and, therefore, may need additional help complying with the accounting rules for income taxes in the coming months. Contact your CPA for more information on how the TCJA will affect your company’s financial statements in 2018 and beyond.

©2018 THOMSON REUTERS