Global tax accounting services (TAS): Around the world – When is a tax law enacted or substantively enacted?

Keeping track of tax law changes around the world has become an increasing challenge for businesses. Companies are rapidly expanding their geographic footprint at a time when the evolution and developments in jurisdictional tax laws are undergoing nearly constant change. Naturally, changes in tax law have an impact on tax planning, tax return preparation and ultimately tax cash flows. Those consequences, however, are often preceded by the impact of such changes on company financial reporting.

Companies reporting under US Generally Accepted Accounting Principles (US GAAP) or International Financial Reporting Standards (IFRS) need to understand when a change in tax law impacts the measurement of current and deferred income taxes. That is, they must understand in which reporting period the effects of a change in law are to be recorded. Reporting groups should have procedures in place to ensure that the relevant financial accounting standard is properly applied. Failure to properly apply the relevant standard may result in current and deferred income taxes being misstated and reveal a weakness in controls.

Under US GAAP, Accounting Standards Codification (ASC) 740 Accounting for Income Taxes, requires companies to measure current and deferred income taxes based on the tax laws that are enacted as of the balance sheet date of the relevant reporting period. With respect to deferred tax assets and liabilities, that means measurement is based upon enacted law that is expected to apply when the temporary differences are expected to be realized or settled. Thus, even legislation having an effective date considerably in the future will typically cause an immediate financial reporting consequence. Legislation is considered enacted, as required by US GAAP, when any further procedures with respect to the particular legislation being passed at the time are unable to change the outcome.

Under IFRS, International Accounting Standard (IAS) No. 12, Income Taxes, requires companies to measure current and deferred income taxes based on the tax laws that are enacted or substantively enacted, as of the balance sheet date of the relevant reporting period. The International Accounting Standards Board (IASB) has indicated that substantive enactment is achieved when any future steps in the enactment process will not change the outcome. In this context, will not does not mean can not. Rather, it is necessary to assess whether the further steps in the enactment process are steps that historically have affected the outcome and whether there are any other factors that indicate that those steps are substantive.

In some cases, enactment and substantive enactment will occur at the same point in a legislative process. If the respective dates differ, it is naturally possible that they will occur in different reporting periods. Awareness and identification of the relevant milestones in a jurisdiction's legislative process is essential to complying with the applicable financial accounting standard.

Consideration should also be given to possible disclosure of the impact of new legislation, whether enacted, substantively enacted or as yet only proposed. Disclosure may be required under both GAAPs in the first accounting period occurring after a new law has been enacted (US GAAP) or substantively enacted (IFRS). Under US GAAP, the current year’s reconciliation of the effective tax rate should include a reconciling item for the effect of enacted law changes if their effect is considered 'significant'. There is a similar requirement for IFRS accounts once the changes are substantively enacted and if the effect is considered to be a major component of tax expense. Disclosure under IFRS may also be required of the allocation of the effects between the income statement, other comprehensive income and equity.