IFRS preparers need to make their best estimate when applying the provisions of US tax reform.
H.R. 1, originally known as the Tax Cuts and Jobs Act, is having a significant financial reporting impact: new liabilities recorded for legacy earnings now deemed repatriated, deferred tax positions remeasured, deferred tax assets written off or recognized, etc. Many US taxpayers report under IFRS, especially US subsidiaries of foreign global companies that use IFRS for group reporting.
Here we summarize the key financial reporting and accounting considerations that IFRS preparers need to think about when dealing with the tax reform.
Period in which to recognize the effects of tax reform
For companies with a December 31 year-end, there is no relief from recognizing the impact of tax reform in the 2017 annual financial statements.
But for fiscal year-end companies, there is a choice between recognizing the effect of the change in tax rates in the interim period that includes December 22, 2017 (i.e. in Q3 for a company with a March 31 year-end), or spreading the effect over the remainder of the current annual reporting period (i.e. over Q3 and Q4 for a company with a March 31 year-end).
Dealing with estimation uncertainty
Given the close proximity of the enactment of tax reform to calendar year-end, IFRS preparers are dealing with varying degrees of estimation uncertainty when preparing their annual or interim financial information. This is because of the number and magnitude of changes in the tax law that require companies to gather information and perform new calculations.
There is no relief under IFRS that allows a company to avoid making estimates until all analysis is complete and all information is known. Instead, companies are required to make their best estimate of the impact of each applicable provision of the tax reform as of the next reporting date (December 31 for many companies). The company revises those estimates in future periods as a result of new or better information, and clarifications about the application of the tax reform.
Disclosure is key, and will include relevant information about major sources of estimation uncertainty in applying the new tax law. Transparent disclosures will help financial statements users understand the nature and degree of estimation uncertainty. This can only benefit the company as a background for helping to explain changes in estimates in future periods.
Internal control considerations
In addition to assessing the accounting implications, management should evaluate the impact that the implementation of tax reform will have on business and financial reporting processes, IT systems and the internal control environment.
Analysis of key provisions
The following table summarizes the significant accounting issues. For further discussion, see our list of resources after the table.
|Tax reform||IFRS implications|
|Corporate rate||Enacted and substantively enacted on December 22, 2017, the Act reduces the corporate tax rate to 21%, effective January 1, 2018.||Companies must remeasure their deferred tax balances. The effects are presented consistently with the underlying items to which they relate – in profit or loss, other comprehensive income or directly in equity (i.e. backwards-tracing).|
|Tax on deemed mandatory repatriation||A company’s foreign earnings accumulated under legacy tax laws are deemed repatriated. The tax on those deemed repatriated earnings is no longer indefinitely deferred, but may be paid over eight years.||
The resulting liability is classified as current or noncurrent based on the company’s expectation of when it will settle the liability. Although payment may be spread over eight years, discounting is not required.
Companies will still need to analyze temporary differences (outside basis differences) related to investments (subsidiaries in particular) in the usual way. The change in law could also trigger a different intention on the part of the company – making it probable that the related temporary differences will reverse.
|GILTI||The Act introduces a new tax on global intangible low-taxed income (GILTI). GILTI is based on a US shareholder’s controlled foreign corporations’ net income in excess of a return on tangible business property.||
For temporary differences expected to reverse as GILTI, it may be appropriate to either:
|FDII||The Act provides a lower effective tax rate on excess returns earned directly by a US corporation from foreign sales or services. This is achieved by allowing a deduction for a proportion of ‘foreign-derived intangible income’ (FDII).||It may be appropriate to account for FDII deductions in the periods when the foreign sales occur and these deductions reduce taxable profit. However, recognition in measuring deferred taxes is not ruled out if a company is able to make reliable projections.|
|BEAT||The Act creates a base erosion anti-abuse tax (BEAT), which partially disallows deductions for certain related party transactions. BEAT will function like a minimum tax.||
A company should measure deferred taxes based on the regular statutory rate, and should account for the incremental tax owed under the BEAT system as it is incurred.
In addition, a company is not required to consider whether it will be subject to the BEAT when assessing to what extent operating losses brought forward will be realized in the future.
|AMT||The AMT tax regime is repealed under the Act. Existing AMT credit carryforwards will be fully refundable by 2021.||A company should determine whether minimum tax credit carryforwards related to the repeal of AMT represent current or deferred tax based on its expectation of when these carryforwards will be realized.|
||These provisions are likely to affect companies’ assessment of the realizability of deferred tax assets, whether arising from foreign tax credits or operating losses brought forward.|
Other articles in this edition of IFRS Perspectives
To understand the Act itself, KPMG Report on New Tax Law – Analysis and observations
KPMG’s IFRS Q&As, including discussion of the differences between IFRS and US GAAP, Tax reform in the United States – IFRS
KPMG’s US GAAP Q&As, Tax reform – Supplement to KPMG’s Handbook, Accounting for Income Taxes
KPMG’s dedicated website on US tax reform: kpmg.com/us/tax-reform