Tax Overhaul Expected to Spur More Accounting Changes

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By Steve Burkholder

Accounting rulemakers are tracking congressional tax overhaul efforts, preparing to field queries about the impact of corporate tax changes on financial reporting.

After getting those questions, the Financial Accounting Standards Board will “re-evaluate” its pending draft rules to improve and add to tax-related disclosures in financial statements, Chairman Russell Golden told FASB’s Investor Advisory Committee Nov. 9.

“We need to stand ready to see if there are any questions that companies, auditors, or investors have about the impact of whatever” legislation might result from efforts underway in Congress, Golden said.

FASB wants to provide more insight for investors into companies’ foreign earnings and the impacts on companies of enacted changes in tax law.

Since late spring, major U.S. companies have been seeking clearer signals from FASB on what rulemaking paths it might take in response to a revamping of tax law.

Possible changes to FASB’s disclosure proposal have been in a holding pattern as Congress wrestles with changes to taxes, efforts that the board is monitoring closely, said FASB Vice Chairman James Kroeker. The board doesn’t have a timetable for rulemaking on the proposal it made in 2016.

Proposed changes in tax law could affect many public companies’ balance sheets and reporting on profit and loss.

A deep cut in corporate taxes could affect deferred taxes. Congress is also considering whether to require the repatriation of foreign earnings.

Accounting Effects Could Be Soon

The corporate rate cut to 20 percent from 35 percent in the current House version of the tax legislation would be effective in 2018—or have effects even earlier if a bill is enacted by Dec. 31. The Senate would have the cut occur in 2019.

Any tax policy changes would affect disclosures made in quarterly and annual financial statements, starting in the period in which a bill is signed into law, as would be the case for deferred tax items.

Depending on Congress’s and President Donald Trump’s potential actions, the first quarter of 2018—and even the last weeks of this year, if enactment occurs—could add significantly to the work of investors trying to gauge the impact of tax law changes that companies would have to reflect in their reporting, said Shripad Joshi, senior director at S&P Global Ratings and a member of FASB’s investor advisory committee.

Golden and Kroeker also highlighted a provision currently in the House and Senate versions—the splitting into cash and other liquid assets while requiring illiquid assets to be subject to earnings “deemed repatriated.”

Not reported today is “the amount of unremitted earnings from bricks and mortar” assets versus those from financial assets, Golden said. Under the pending tax legislation, the rates for repatriated earnings from such liquid and illiquid assets would differ.

Kroeker outlined how a change in the corporate tax rate would cause companies to remeasure deferred tax assets—net positions that are on many companies’ balance sheets, according to research provided to Bloomberg Tax by Daniel Lynch, a professor of accounting at the University of Wisconsin-Madison.

The presence of deferred tax assets—and a lessening of the value of the deferred asset if the corporate tax rate drops—might affect companies’ bottom lines. A net deferred tax liability position wouldn’t have adverse impact on the income statement.

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

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

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