By: George M. Wilson, SEC Institute
Amidst all the activity and uncertainty about tax reform is the additional, potentially complex question: “How will this affect financial reporting?”
It is not too early to begin preparing to answer this question!
The starting point in this assessment is this part of ASC 740-10:
Changes in Laws or Rates
25-47 The effect of a change in tax laws or rates shall be recognized at the date of enactment.
25-48 The tax effect of a retroactive change in enacted tax rates on current and deferred tax assets and liabilities shall be determined at the date of enactment using temporary differences and currently taxable income existing as of the date of enactment.
For existing deferred tax assets and liabilities this change may have a significant impact because of this requirement in ASC 740-10-30-2:
30-2
The following basic requirements are applied to the measurement of current and deferred income taxes at the date of the financial statements:
- The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.
In other words, what this means is that at the date of enactment of the new tax law all deferred tax accounts will be remeasured to the new rates. The impact of this remeasurement will flow through current period tax expense. This impact on current period tax expense will even include remeasurment of deferred taxes related to items classified on OCI. As a result, it is likely that deferred tax assets will be reduced, resulting in higher tax expense, and deferred tax liabilities will also be reduced, resulting in lower tax expense.
Other areas that could be affected include:
How much disclosure will be appropriate at year end, especially in this uncertain environment?
How will the potential movement to a territorial system affect existing tax accounts and valuation allowances?
Will these changes result in repatriation of cash and if so what should be disclosed?
The legal profession is also focusing on this issue. In this post from TheCorporateCounsel.net there is mention of the potential write down of deferred tax assets and even discussion about whether this event may trigger in Item 2.05 Impairment 8-K.
We should all stay tuned to how the legislative process proceeds, and be ready with appropriate disclosures when it concludes.
As always, your thoughts and comments are welcome!