US Corporate Tax Cuts: Companies Concerned about Year-End Time Crunch
Yesterday, Congress passed the tax reform bill that reduces the corporate tax rate from 35% to 21%. Tax law changes will make it into financial statements when they are signed by President Donald Trump. While the changes are not effective until 2018, they significantly impact estimates made in 2017 financial statements once the bill is signed.
Last week, as the calendar year was winding down — and passage seemed probable — companies voiced their apprehension at a meeting of the Financial Accounting Standards Board (FASB)’s Financial Accounting Standards Advisory Council — listen to the discussion at 13 minutes — about how they will integrate the tax bill’s changes into their year-end financials.
There was even discussion about seeking standard-setting by the FASB or delays in filing by the Securities and Exchange Commission (SEC) until firms can better grasp and implement the bill’s provisions and ensure proper controls are in place and documented.
Large companies with extensive resources and government relations departments are better able to track the contents and progress of the bill, but all companies will have to incorporate the changes should the president sign the bill before the end of the year.
The impact of the tax law changes on net deferred tax assets and the undistributed earnings of subsidiaries could be significant. The assessment of the value of deferred taxes at 31 December 2017 includes an assessment of the period in which these deferred items — both assets and liabilities — are expected to reverse. This will take place in the future, when the lower tax rates are in effect. As such, companies can’t complete their assessments until the bill is enacted.
The bigger challenge may be how firms will determine their until-now unrecognized liabilities on undistributed earnings in subsidiaries. Conducting such analysis for all the subsidiaries of a multinational organization is a tall order and will be especially challenging to complete before earnings are released and financial statements are filed with the SEC.
If the bill is signed before the end of the year, finance and accounting staff at most public companies will have a hectic end to 2017. They may get a slight reprieve if President Trump chooses not to sign the bill until 2018.
Even if the bill is not signed until 2018 — and its provisions are not incorporated into the 2017 financial statements — companies should expect that investors will want to know the potential effects when 2017 earnings are released since they may impact valuations.
Whether in 2017 or 2018, investors should closely watch this issue and expect companies to communicate the impact as they release earnings, if material, in early 2018.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photos courtesy Architect of the Capitol