Both the House and Senate have passed separate tax reform proposals. If enacted before the end of the year, the financial reporting impact of the changes will need to be assessed and accounted for in the 2017 financial statements for calendar year companies, regardless of any effective dates.
PwC partners Len Combs and Jennifer Spang discuss the audit considerations associated with the proposals in our video below. Additional PwC insights, information and videos on the various reform proposals can be found on Inside Tax Policy.
Hi, I’m Len Combs, PwC’s US Chief Auditor and I’m here with Jennifer Spang, a Tax Partner in our National Quality Organization.
Both the House and Senate Republicans have been moving quickly in an effort to reform the current US tax system and both bodies have passed separate proposals that could be enacted as early as this year.
If U.S. tax reform is enacted before the end of the year, the financial reporting impact of the changes will need to be assessed and accounted for in the 2017 financial statements for calendar year companies, regardless of any effective dates.
If enacted, the changes to US tax law will have pervasive financial reporting implications.
These changes will be recorded discretely and through continuing operations.
Jenn, what are some of the considerations we should be thinking about right now?
Let’s focus on a couple of the changes that will likely have the most significant impact on the financial statements at the date of enactment.
First, both the House and Senate bills propose to lower the corporate tax rate to 20%, but with different phase in dates.
This is important since deferred tax assets and liabilities are required to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled.
So, if the legislation is enacted before year end, companies will need to schedule reversals of existing temporary differences to remeasure their deferred tax assets and liabilities. The Senate bill proposes a delayed effective date of one year which, if enacted, could add complexity to scheduling the reversals.
Remeasuring deferred taxes will take some effort by companies. In addition, auditors will need to understand how companies are documenting and accounting for the remeasurement, as well as the controls over data and management’s assumptions.
Jenn, what other potential changes that we should highlight?
Both bills would change the current US international tax system to a ‘territorial’ system where generally only earnings in the US are taxed in the US.
Both bills also require a deemed repatriation of undistributed foreign earnings that will result in a liability regardless of whether the company has cash in foreign subsidiaries.
In the period of enactment, companies would need to record a tax liability for the deemed repatriation tax or “toll charge” to be levied on all historical tax earning and profit, or “E&P”. Since E&P is a culmination of activity from inception, the enactment of this toll charge could be significant for many companies.
In light of that, it is important that auditors discuss with management their work plan for gathering data and calculating the liability, as well as what information will be needed to conduct the audit.
US GAAP does not allow for a grace period to estimate the impact of a change in tax law. Therefore, auditors’ and companies should mutually agree on expectations for the implementation of new processes, controls, and necessary documentation.
For example, it’s likely company will need to implement more precise controls over historical E&P calculations.
As you can imagine, both bills introduce many other provisions that will have pervasive impacts on companies - we’ve tried to highlight just a couple that will likely be the most immediately challenging when accounting for tax reform in the period of enactment.
Thanks Jennifer, for that.
As tax reform moves through the legislative process, companies should be evaluating the effects of proposed provisions and developing action plans, including the impact on processes and controls.
In addition to discussing potential financial statement implications and changes to controls and planned audit procedures, auditors should consider discussing with their clients how the proposed tax laws will also impact financial statement disclosures.
As we mentioned, there is no grace period for recording the effects of a change in tax law at the date of enactment under GAAP; however, the SEC has stated that they are closely monitoring developments and will respond if/when there is a final bill.
This will be another important development to monitor for preparers and auditors alike. Additional PwC insights, information and videos on the various reform proposals can be found on Inside Tax Policy.
Thanks for your attention today.