Financial Reporting Implications of the Tax Cuts and Jobs Act: Taxpayers need to deal with new realities quickly.

AuthorLevin, Rick
PositionCover story

U.S. tax reform became a reality on December 22, 2017, when President Donald Trump signed the 2017 tax reform reconciliation act (the Act) into law. The Act represents a fundamental and dramatic shift in U.S. corporate taxation, particularly concerning the taxation of foreign earnings. Since late December, companies have focused intensely on understanding the inherent complexities within the Act and gathering the necessary data to determine their impact. Assessing the financial reporting implications of tax reform has been and continues to be a priority for many organizations.

With limited exceptions, the U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) require recognizing the current and future (or deferred) tax consequences of all events that have been reported in financial statements. When tax law changes, relevant accounting guidance requires any impact on how current and deferred taxes are recognized and measured to be accounted for during the period in which the law is enacted, regardless of its effective date. As a result, accounting for the effects of a change in law is often required well before such effects are reflected in tax returns. In many instances, the need to understand the impact of a change in tax law in a very compressed period and to account promptly for the effects results in added complexity.

The combination of the comprehensive nature of the Act, the speed at which Congress worked to pass it, and the proximity of its enactment date to the end of the 2017 calendar year created significant challenges for many companies trying to close their books. Although tax reform was top-of-mind for most of 2017, draft legislation did not emerge until November, which made preparing for tax reform difficult. As a result, many tax professionals were confronted with analyzing hundreds of pages of the most significant tax law change in three decades, often without needed guidance from Treasury or the Internal Revenue Service. To add to the complexity, as the law was analyzed in greater detail, numerous questions emerged about how it should apply in particular circumstances. Although the issuance of Treasury and IRS guidance has provided some clarity, many of these developments came late in the reporting period. Furthermore, many soon discovered that certain aspects of the Act required voluminous data, much of which companies did not routinely maintain. The best example is the significant historical information (including all post-1986 undistributed foreign earnings and profits and tax pools) required to calculate tax liability resulting from the mandatory deemed repatriation of foreign earnings (the toll tax). All this has been required at a time when most organizations are already resource-constrained and have little capacity to handle additional work.

Importantly, most of the complex changes upon which the business community's attention has centered since tax reform was enacted--for example, the tax on global intangible low-taxed income, or GILTI, the base erosion and anti-abuse tax, or BEAT, and the deduction for foreign-derived intangible income, or FDII--impact financial reporting only on a prospective basis, starting in 2018. However, several provisions of the Act immediately affected financial statements and thus needed to be recorded in the enactment period. Remeasuring deferred tax assets and liabilities to reflect the decrease in the corporate tax rate to twenty-one percent, estimating the toll tax liability, and assessing the impact of several other rule changes on deferred taxes, such as the repeal of the corporate alternative minimum tax (AMT), changes associated with the executive compensation deduction, the full-expensing provisions, and the impact of the various international provisions on outside basis differences are all examples of...

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