Financial Reporting Implications of U.S. Tax Reform

• Date: 01 July 2018
• Published date: 01 July 2018
• DOI: http://doi.org/10.1002/jcaf.22350
• Author: Paul Munter

FSAB

Financial Reporting Implications of

U.S. Tax Reform

Paul Munter

On December 22, 2017, the

President signed into law the

most significant changes to the

U.S. tax law in more than

30 years. Most, but not all, of

the provisions of the Act are

effective as of January 1, 2018.

ASC paragraph 740-10-25-47

states “the effect of a change in

tax laws or rates shall be recog-

nized at the date of enactment”

(ASC paragraph 740-10-25-47).

This requirement would mean

that, in general, calendar-year

companies should recognize the

effect of the U.S. tax reform in

December 2017 financial state-

ments. Furthermore, off-calen-

dar-year companies would

need to recognize the effect of

the tax reform in the interim

period (i.e., quarter) that

includes December 22, 2017.

The SEC has a tri-part mis-

sion of: (1) investor protection,

(2) facilitating capital forma-

tion, and (3) maintaining fair,

orderly, and efficient markets

(SEC, What We Do). In balan-

cing its responsibilities, the SEC

staff concluded that the poten-

tial for disruption in the

U.S. capital markets if compa-

nies were required to complete

all their calculations under ASC

740 while also balancing their

other financial reporting respon-

sibilities, including adopting the

new revenue recognition

requirements (FASB ASC

Topic 606), required that relief

from the requirements of ASC

740 were needed to avoid mar-

ket disruption that could occur

if a number of registrants had

to delay their filings or were

otherwise unable to complete

their financial reporting process

in accordance with US GAAP

requirements.

In that regard, the SEC staff

has the ability to act more

quickly than does the FASB,

given its due process require-

ments. Accordingly, the SEC

staff issued SAB 118 (SEC Staff,

Staff Accounting Bulletin

No. 118) which provides relief to

registrants by employing a mea-

surement period concept for reg-

istrants to finalize the accounting

for the effects of the Act on their

financial statements.

TAX REFORM OVERVIEW

The U.S. tax reform con-

tains several key provisions

that may have significant finan-

cial statement effects. These

effects include remeasurement

of deferred taxes to reflect the

new 21% corporate tax rate,

recognition of liabilities for

taxes on mandatory deemed

repatriation of foreign earn-

ings, certain other foreign

income tax consequences, and

reassessment of the realizability

of deferred tax assets.

The Act reduces the corpo-

rate tax rate from 35% to 21%.

The rate reduction, generally,

is effective on January 1, 2018.

Entities that have non-calendar

year periods will need to use

the existing tax requirements to

apply a “blended”rate for their

first tax year that includes

January 1, 2018.

Additionally, a company’s

foreign earnings and profits

(E&P) accumulated abroad

from 1986 through 2017 are

deemed repatriated and there-

fore subject to U.S. tax. The

rate applicable to the deemed

repatriation depends on

whether the amounts are held

in cash—which is subject to a

higher rate—or reinvested in

the foreign business. The tax

on those deemed repatriated

earnings may be paid over

eight years with no interest

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22350

104