Accounting Standard Updates, Tax

Accounting Standards Update No. 2018-02

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Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

On December 22, 2017, the Tax Cuts and Jobs Act was enacted, reducing the federal income tax rate on corporations to 21%. Current guidance requires deferred tax assets and liabilities be adjusted for changes in enacted tax rates, which are to be included in income from continuing operations. This also applies to income tax effects of items in accumulated other comprehensive income (AOCI) that were previously recognized in other comprehensive income.

ASU 2018-02, Income Statement-Reporting Comprehensive Income, updates guidance to allow a reclassification for stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. In the period of adoption, entities are required to disclose whether it elects to reclassify stranded tax effects from accumulated other comprehensive income to retained earnings and a description of the accounting policy for releasing income tax effects from AOCI related to the application of the Tax Cuts and Jobs Act.

This guidance shall be effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application of this ASU is permitted for periods which financial statements have not yet been issued.

This guidance is generally a welcome relief to insurance companies that typically hold a substantial amount of available-for-sale securities. The Tax Cuts and Jobs Act decrease in the federal tax rates would typically require a reduction to deferred credits which would reduce earnings. With this ASU, the tax effects can be reclassified into retained earnings and therefore, not impact earnings or distort financial performance.