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By Denise Lugo
Tax and accounting financial statement preparers worry that tax reform will be so significant that it will prove difficult to evaluate and quantify if enacted quickly and it applies to 2017 financial statements.
“The worst thing that could happen is if it gets approved in first quarter ’18 and effective for the 2017 tax year—that incremental work would be horrific,” Peter Vinci, a consultant at Resources Global Professionals, the operating subsidiary of multinational company Resources Connection Inc., told Bloomberg Tax.
“If this tax proposal becomes a reality, you’re talking about a lot of disclosures,” Vinci said.
Tax practitioners told Bloomberg Tax, however, that signing a tax bill before New Year’s would be a challenge because of the hurdles that need to be overcome.
“We’re talking just about the tax reform timeline,” BDO Tax Partner Todd Simmens said. “The process in the Senate can be very cumbersome, especially with what we’re hearing and the numbers that they have and the amount of legislative days we have left, so these are all—it’s possible, but I think these are challenges.”
House Republicans passed their version of a tax bill (H.R. 1) Nov. 16. The package has been touted as the first significant overhaul of the federal tax code in decades. It introduces sweeping business tax reforms, including a reduction of the corporate tax rate from 35 to 20 percent in 2018 and revisions to the foreign earnings tax.
The Senate is expected to vote on its own version of tax reform after Thanksgiving.
If passed, tax reform would have broad ranging material implications, including to corporate earnings, which could drive the stock market, practitioners said.
Under existing accounting rules, companies are required to account for legislative changes in the quarter of enactment. That means if the changes are enacted by year-end, companies would be required to account for all of the changes the fourth quarter 2017.
“And if you think about it, that would be a monumental undertaking,” Yosef Barbut, BDO national assurance partner, told Bloomberg Tax.
Tax overhaul is arriving when public companies must apply new revenue recognition accounting rules that take effect Jan. 1. Some companies are still not yet up to speed with them, practitioners said.
Practitioners said the SEC should consider providing a measurement period where companies could devise their best estimated tax impacts when filing their annual reports, allowing them to have 12 months to finalize that estimate without being penalized for errors in financial reporting.
Among other rules, companies are also preparing to adopt new leases rules, ASC 842, that take effect in 2019—another far reaching accounting rule change.
“Whether you’re going to be accounting for new legislation if you’re a calendar year company in the first quarter of 2018 or even potentially in the fourth quarter of 2017, you don’t have a lot of time to digest the law, gather all of your facts and data and records to do all the computations necessary to account for this,” Joan Schumaker, EY partner and Americas codirector of Tax Accounting and Risk Advisory Services, told Bloomberg Tax.
For some businesses, tax reform will have significant financial statement consequences that must be correctly evaluated to prevent misstatements.
If the corporate tax rate goes from 35 to 20 percent, for example, almost every U.S. business entity or corporation must write down or re-measure the deferred taxes on the balance sheet from the current federal rate to 20 percent.
“For companies that are in a net deferred tax asset position, that will mean they will have a hit to their income statement because they will have to write those assets down,” Al Cappelloni, partner at RSM, told Bloomberg Tax.
Companies with net deferred tax liabilities are going to have a windfall because the future liabilities they currently carry at 35 percent will come down to 20 percent.
“A company will have to adjust its deferred liabilities or deferred tax assets to take into account the fact that those items are now expected to reverse at lower rates,” Cappelloni said.
Added to that is the potential for a final tax on accumulated foreign income—14 percent tax on accumulated cash and 7 percent on earnings that were invested in other assets, as passed by the House.
“That tax will become an obligation, will be a liability for U.S. multinationals as of the specified effective date when the law is enacted,” Barbut said. “Now they have to put that liability on the balance sheet.
“Think about the sheer magnitude of income that multinationals have accumulated out there—it’s just going to be a massive amount of ‘what is that liability that I need to recognize on the balance sheet by the time we release the 2017 financial statement?’”
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Copyright © 2017 Tax Management Inc. All Rights Reserved.
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