What about your financial statements? 6 tax reform considerations for global companies

The enactment of US tax reform – one of the most significant policy developments in many years for global companies doing business in the United States – will have complex, wide-ranging implications for financial reporting. While the effect will vary significantly among companies, implementing and accounting for reform will be a challenging exercise. Notwithstanding the difficulty, accounting guidance requires recognition of the tax effects of tax law changes in the period in which the law is enacted. Companies should be prepared to account for these changes.

Why should you care? Companies doing business in the United States must account for changes in the tax law in the period of enactment. Since tax reform was enacted on December 22, 2017, this means many businesses will need to assess and record the impact of tax reform in their 2017 financial statements. Some specific areas of concern include:

• Rate change: You will need to recognize the impact of the change in tax rate on existing deferred tax assets and liabilities in 2017.
• Base erosion and anti-abuse tax (BEAT): Tax reform is expected to increase the compliance burden for global companies – it will be complex both to implement and account for tax law changes relating to BEAT.
• Valuation allowance assessment: You will need to consider the impact of US tax reform upon various US tax attributes and examine valuation allowance decisions.
• Deferred taxes: You will need to revalue existing deferred tax balances to the new rate, as well as quantify the impact of the one-time mandatory repatriation tax. Some software systems may have limited capabilities to account properly for deferred taxes.
• Disclosures: You will need to consider all required financial statement disclosures, both within and outside the tax footnote, paying special attention to effective dates and year-end dates. This may be particularly important for companies with a fiscal year-end.
• IFRS/GAAP: You will need to consider how to treat US tax reform under IFRS. It is possible that certain tax reform provisions may be evaluated differently under US GAAP versus IFRS. IFRS-specific requirements include, for example, the need for backwards tracing of the deferred tax impact of the tax rate reduction.

Does SEC and FASB guidance apply? Although the SEC has provided guidance on how to address US tax reform’s impact for upcoming financial statements, non-US government bodies are not expected to do the same in the near future. The SEC’s guidance in Staff Accounting Bulletin 118 only applies to non-US companies to the extent that they are regulated by the SEC; it does not apply to filings, including financial statements, required by non-US securities regulators.

Similarly, although the FASB recently met and reached conclusions on the US GAAP accounting required for certain aspects of tax reform, these conclusions cannot be applied directly by IFRS reporters. The FASB’s deliberations may be helpful to the extent that the International Accounting Standard 12 (IAS 12) and Accounting Standards Codification 740 frameworks overlap, but they cannot replace an assessment of the application of IAS 12 to the new law and your circumstances.

What should you do? There is extensive ongoing discussion on the IFRS reporting implications of the new US tax reform law. It is imperative to have a good understanding of the impact of tax reform on your financial reporting, and to pay special attention to effective dates. You should act now to assess the implications on your financial reporting and to prepare to account for these changes in the period of enactment.