New revenue recognition standard: Effectively manage tax impacts

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Changes to revenue recognition accounting (ASC 606) could impact a company’s taxes, from tax accounting method changes, cash taxes, book-tax differences, deferred taxes, state income taxes, sales & use tax, indirect taxes, transfer pricing documentation and strategies, and international tax planning and reporting. As a result, tax departments should help analyze the new standard to identify the tax implications of any financial accounting changes.

 

How do the changes impact your industry?

Aerospace & defense

Changes in the recognition of long-term contracts could significantly change the timing of revenue.

Automotive

Accounting for pre-production activities and marketing incentives could change the timing of revenue.

Communications

More revenue might be recorded upfront in bundled sales of hardware and services.

Engineering & construction

The elimination of industry guidance could result in earlier revenue.

Entertainment & media

A new model for license fees could significantly change the timing of revenue.

Pharmaceuticals & life sciences

Recognition of contingent consideration could significantly accelerate revenue.

Retail & consumer

A new model for customer incentives and loyalty programs could significantly change the timing of revenue.

Technology

Revenue is no longer deferred due to lack of vendor specific objective evidence of value.

 

How PwC can help

PwC has a dedicated team of industry and technical specialists that are available to assist with identifying and evaluating the tax implications of any revenue changes, and assist with implementing any necessary changes. Examples include:

Tax accounting methods

Evaluate impact of book changes on tax accounting methods, assess effect of changes on the company’s cash tax position, Identify any new book/tax differences (e.g., unbilled contingent consideration), Identify any required tax accounting method changes (e.g., new deferred revenue), Prepare or review any Forms 3115 (Application for Change in Accounting Method), and Calculate or review any required Section 481 adjustments.

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ASC 740 (Accounting for Income Taxes)

Identify adjustments to existing deferred tax balances (e.g., recognition of advance payments deferred to extent of new book deferral), Evaluate any changes in current/non-current deferred classification, Consider impacts on any valuation allowances, uncertain tax positions, Consider effect on intraperiod allocations.

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Transfer pricing

Evaluate impact of transfer pricing policies calculated by reference to impacted revenues or costs, including on future cash flow, filing positions, and financial statement disclosures. Consider potential need for changes to policies or documentation.

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International tax

Evaluate effect of any book and/or tax method changes on E&P, Consider potential impacts on determination of foreign source income. Determine whether there is an effect to controlled foreign corporation debt netting calculation, Identify any impacts to allocation of interest expense under fair market value apportionment method.

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State and local tax

Evaluate sales and use tax implications, including potential impact on the amount subject to tax and possible system needs, Evaluate income and net worth implications, including potential impact on tax base and apportionment.

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Value added taxes

Identify any VAT implications (e.g., as whether principal or agent for VAT reporting).

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Tax deductions/revenue impacts

Quantify impact of change in taxable income on Section 199 deduction, Consider potential effects on credits (e.g., R&E).

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Contact us

Ken Kuykendall

Tax Managing Partner, PwC US

Christine Turgeon

Partner, Federal Tax Services Leader, PwC US

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