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Tax Reform Could Mean Hectic Year End for Companies, Auditors

As Republican lawmakers get ready to make significant changes to the tax system, companies and auditors need to stand ready to report the effect of tax rate changes, among other changes, under the FASB’s income tax accounting guidance. If President Donald Trump signs a bill by year end, companies must apply the effect of the tax law changes to their fourth-quarter financial statements.

With Congress poised to vote on major changes to the tax system, U.S. companies expect to have to hustle to make corresponding changes to their financial statements.

The FASB’s Topic 740, Income Taxes, requires companies to reflect the effect of new laws in the quarter they are enacted. President Donald Trump has indicated he wants to sign a bill by the end of the year, meaning companies could be scrambling to determine the effect of the changes for their fourth-quarter financial statements.

Some of these concerns came to light at a meeting of the FASB’s Financial Accounting Standards Advisory Council (FASAC) on December 14, 2017. PepsiCo, Inc. senior vice president Marie Gallagher told an SEC official at the meeting that multinational companies in particular would be faced with the daunting task of calculating how a corporate income tax rate change would affect their income tax estimates.

“I think it’s very important we get what we had back in 2004-5, like a one-year [delay] or some time period so that if something does pop, we don’t have to restate and it’s not a material SOX deficiency,” she said.

FASAC Chairman Andrew McMaster also said the SEC needed to consider some kind of relief to make the implementation of tax changes on financial statements “practical.”

“It could create significant implications for preparers, auditors, and others,” said McMaster, who is retired from Deloitte & Touche LLP, where he was deputy CEO and vice chairman.

SEC Senior Associate Chief Accountant Kevin Vaughn said the agency had a team closely monitoring developments on Capitol Hill, but made no promises.

“We’re certainly ready to act,” Vaughn said.

Two provisions in the expected final tax law — reducing the top corporate tax rate and a requirement to book final tax on accumulated foreign income — will result in a many finance professionals “basically working around the clock to get their 2017 financial statements out,” BDO USA LLP national assurance partner Yosef Barbut told Accounting & Compliance Alert.

One major implication of the potential reduction in the corporate tax rate from 35 percent to 21 percent would be that companies have to reevaluate their deferred tax assets. While that sounds like a relatively simple undertaking, there are certain temporary differences and there are also provisions such that certain credits do not have to be remeasured, such as research and development tax credits or Alternative Minimum Tax (AMT) credits.

The other significant change to the tax law introduces a one-time tax on overseas earnings and profits. Under current law, foreign income is subject to U.S. tax when it is brought back to the U.S. The GOP plan calls for companies to pay a one-time tax even if the income is not repatriated.

“The bottom line is they’ve got to quantify this final tax liability,” Barbut said. “This tax is so complex, and the reason it’s so complex is that just estimating the tax is so complex. It’s going to require countless calculations and iterations and there are multiple factors that go into that number.”

To ease the burden of quickly applying tax law changes to fourth-quarter financial statements, the SEC potentially could say it acknowledges the significance of the undertaking and could provide companies with the option to do a best estimate in the quarter of the law’s enactment and continue to refine the number in subsequent periods as the company collects more information, Barbut said.

The FASB has offered similar relief in the past. When President George W. Bush in October 2004 signed the American Jobs Creation Act into law, part of the law allowed U.S. companies to repatriate foreign profits at a reduced tax rate for one year. Two months after the president signed the bill, the FASB’s staff issued FASB Staff Position (FSP) FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The staff position included guidance on disclosing a range of reasonably possible amounts of unremitted earnings that is still being considered for repatriation as a result of the law and a potential range of income tax effects on such a move. In addition, if the effect could not be reasonably estimated by the time financial statements were filed, a company would have to disclose this.

“If you ask me, I think it’s going to be potentially something like, ‘OK, if you do your best estimate — really do your best estimate; don’t just pluck numbers from the sky do your best estimate  — it’s OK to refine that within a reasonable period of time — whether one or more quarters — as more information becomes available,” Barbut said. “That would be nice.”

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