The tax effects of changes in tax laws or rates are accounted for in the balance sheet in the period when the US President signs the final bill into law. Nevertheless, disclosure of the impact of the reform may be required in 2017 financial statements under both IFRS and US GAAP, notably in relation to the proposed significant income tax rate reduction.

Under US GAAP, ASC 740 provides that the tax effect of a change in the tax law or tax rate is recorded in the period in which the change is “enacted”. Under IFRS, IAS 12 requires  such tax effect to be recorded in the period in which the change is enacted or “substantively enacted". Under the US legislative process, the date for recording the tax effect of a change in tax law or rate under both US GAAP and IFRS is the date the US President signs the final bill into law.

• Disclosure

Nevertheless, disclosures relating to tax law or rate changes may be required to be included in financial statements with balance sheet dates before this date, as follows:

• Under US GAAP, if the change in the tax law or rate is enacted subsequent to the balance sheet date, but before the financial statements are issued, companies will need to determine whether the financial statements must disclose the change and an estimate of its effect.
• Under IFRS, where a change that is enacted/substantively enacted or announced after the financial statement reporting period, but before the financial statements are issued, has a significant effect on current and deferred tax assets and liabilities, a disclosure of the facts, together with an estimate of the financial effect of the change (or a statement that such an estimate cannot be made), should be included in the financial statements.

Under the current proposed US tax reform legislation, some of the impacts on a company’s financial statements would include the following:

• Re-measurement of deferred taxes

Deferred tax assets and liabilities would need to be remeasured for the impact of the proposed corporate tax rate reduction. Companies would be required to schedule the reversal of temporary differences to determine amounts that would reverse before and after the effective date of the rate reduction. 

• Investment in foreign corporations

An entity may no longer be able to assert that it is indefinitely reinvested in a foreign subsidiary or foreign corporate joint venture if the deemed repatriation of foreign earnings and profits provision is enacted, and a current liability may be required to be recognised. In addition, existing deferred tax liabilities recognized for investments in foreign corporations need to be remeasured. If an election is made to pay the related tax liability over an 8-year period, a portion of the liability may be classified as non-current.

• Base erosion measures

Under the proposed provisions relating to “foreign high returns”, “global intangible low-taxed income”, and/or payments to a related foreign entity, a US entity would be required to include in its taxable income some portion of the earnings of foreign related parties and be taxed on or effectively lose the benefit of deductions for certain related party payments. These provisions, therefore, could impact a company’s effective tax rate. Companies also would need to consider whether US deferred taxes related to such foreign entities should be recorded.

• Limits on deductions and tax credits

Several provisions in the House bill and the Senate proposal would eliminate or limit deductions and tax credits (e.g. those related to interest expense limitations and modifications to net operating losses), which could unfavorably impact a company’s effective tax rate and, therefore, negatively impact earnings. In addition, the effect on deferred taxes would need to be considered. For example, a deferred tax asset would need to be recorded for any interest amounts disallowed but carried forward. Companies also should consider whether the proposed changes would impact the availability of their existing interest carryforwards under US Internal Revenue Code section 163(j ).

Where is the deferred tax impact of the change in tax law recorded?

Pursuant to ASC 740-10-45-15, when deferred tax accounts are adjusted for the effect of a change in tax laws or rates, the effect is included in income from continuing operations for the period that includes the enactment date. 

Under IAS12:60, a change to a deferred tax item resulting from a change in tax laws or rates is recognised in the profit and loss account, except to the extent that the change relates to an item that previously was recognised outside of the profit and loss account.  

David McNeil - Partner, Tax Management Consulting

David leads our tax accounting and tax management consulting teams in Switzerland. In his 20 years with Deloitte, David has advised on tax transformation projects, assisting in the assessment of the tax risks associated with the international business of multinational clients, the mapping of their processes and controls relating to tax and the organisational models to more effectively manage the tax functions of these organisations.

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Sarah Drye - Director, Tax Management Consulting

Sarah started her career in Deloitte London where she spent 8 years working on corporate tax audit, tax accounting and tax compliance projects as well as tax process and risk management projects. She then spent 2 years in Deloitte France (Paris office) and moved to Geneva at the start of 2010 with continued focus on the same core activities.

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Elise Gouin - Manager, Tax Management Consulting

Elise is a Manager within the Corporate Tax team of Deloitte in Geneva since March 2015. She is involved in various corporate tax audit under IFRS and US GAAP. She is also working on tax accounting and tax process projects. She started her career as International Corporate Tax specialist in Luxembourg where she spent 9 years.

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