Companies Scramble to Adapt Financial Statements to New Tax Law

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By Steve Burkholder

Many U.S. companies will have to scramble to make potentially difficult adjustments to income tax amounts they put on their year-end and fourth-quarter reports because President Trump signed the tax overhaul bill prior to the new year.

Financial reporting changes could include big write-downs or write-ups in deferred tax assets and deferred tax liabilities, which could affect corporate earnings.

Companies on a calendar-year reporting schedule would have had the luxury of about three months more to book—and carry out some daunting work—new amounts compared to what would have been in order if the president had waited until at least Jan. 1 to enact the measure, accountants told Bloomberg Tax Dec. 22.

“There certainly would have been a lot less pressure if it had been enacted in January,” Ashby Corum, KPMG LLP’s chief partner for income tax accounting, said in an interview.

The quick signing of the law means more financial reporting work produced more quickly for companies and their external auditors, said Daniel Lynch, a professor of accounting at the University of Wisconsin.

Financial reporting rules for public companies require that corporate reporting effects from law changes, such as tax laws, have to be reflected in the report covering the period of the law’s enactment.

For some companies, the new law means the effect will be shown as early as early to mid-January, depending on a company’s financial reporting timetables on earnings releases.

Calendar-year companies and companies with December quarter-ends “would have had another quarter” before the impact of the new law “would have been shown up in the body of the financial statements,” Corum said.

Substantial Earnings Reduction

The reporting tasks carry double weight for companies, such as banking giant Citigroup Inc. These companies have reported net deferred tax asset positions and might have to take substantial reduction to earnings, depending on their deferred tax amounts.

Companies that have deferred tax assets would see the benefits of that net position lessen considerably when the tax rate is reduced. The law calls for a shift from previous calculations of deferred taxes based on a general 35 percent corporate tax rate to the new 21 percent rate.

The Securities and Exchange Commission might respond in coming days to corporate representatives seeking relief or clarity on what some companies view as copious near-term financial reporting expectations. Some had sought guidance on how to fulfill current expectations in light of the new tax law.

New Liability From Repatriated Earnings

The new law also presents what promises to be a more time-consuming and more challenging task: figuring a new tax liability for foreign earnings “deemed repatriated” under the new law.

Amounts accumulated overseas over many years and not previously taxed “are going to be subject to tax all at once, at reduced rates, depending on how much is in cash and other liquid assets versus non-liquid assets,” said KPMG’s Corum.

It can be “quite an undertaking to go through and scrub those books and records for the past 30 years to confirm that the amounts of earnings over those years have been properly computed and tracked,” he told Bloomberg Tax.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at sburkholder@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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