United States

Accounting for US tax reform under IFRS

Feb 28, 2018
From the IFRS Institute

IFRS Perspectives: Accounting for US tax reform under IFRS

The Act is having a significant impact on companies’ accounting for and reporting of income tax in their financial statements, and the related processes and controls. For IFRS preparers, this begins with understanding what accounting is required for the various elements of the US tax reform. Despite a high degree of uncertainty in estimating some numbers, best estimates are required under IFRS – increasing the need for transparent disclosures.

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:

  • record deferred tax – e.g. if a company expects to be subject to GILTI on a continuous basis; or
  • account for GILTI as a current charge in the periods the company is subject to GILTI.
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.
 
Other provisions 
  • Foreign earnings subject to tax under the mandatory deemed repatriation provisions is a source of foreign source income to support deferred tax assets that may not have been recognized previously.
  • The 100% dividends received deduction that may affect the realizability of foreign tax credits.
  • Cost recovery provisions that accelerate depreciation on depreciable and real property.
  • Interest expense provisions that limit annual interest deductions and the use of disallowed interest carryforwards.
  • Annual limitation on the use of net operating loss carryforwards (and the extension of their carryforward periods).
  • Expansion of the executive compensation that is subject to the excessive executive compensation limit.  
 
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.

More resources

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, 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

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.