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US tax changes and tax accounting

15 February 2018

The US ‘Tax Cuts and Jobs Act’ signed into law (as H.R. 1) on the 22nd December – see Business Edge January 2018.

Both FRS 102 (UK GAAP) and IAS 12 (IFRS) require current and deferred tax assets and liabilities to be measured using tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Consequently, the effects of the new tax legislation are required to be reflected in financial statements for the year ended 31 December 2017.

A number of US banks have already reported losses for Q4 as a result of decreases in deferred tax assets arising from the reduced US tax rate enacted in the Act. Citigroup Inc. posted an $18-billion quarterly loss which included an estimated one-time, non-cash charge of $22 billion related to the new law. This charge comprised of $19 billion related to the re-measurement of Citi's deferred tax assets (arising from a lower U.S. corporate tax rate and shift to a territorial tax regime), and $3 billion related to the deemed repatriation of unremitted earnings of foreign subsidiaries.

Of course, adjustments will not always go through the P&L, they will be traced back to where the original deferred tax adjustment was recognised which can include equity or other comprehensive income.


What has changed?

The changes include:

  • A tax rate reduction from 35% to 21% for tax years after 31 December 2017. This seems to be the source of some the large charges being reported as deferred tax assets for losses are reduced to reflect the 40% reduction in the tax rate at which those losses will be utilised.
  • A one off mandatory repatriation tax on certain accumulated earnings and profits of investments in specified foreign corporations. This will apply to earnings and profits as at 2 November 2017 or 31 December 2017, whichever is the greater.
  •  Changes in utilisation of net operating loss deductions generated in tax years beginning after 31 December 2017. There is also a prohibition of carry back and an indefinite extension of carry forward for the same losses.
  • Limitation on net interest expense (i.e. after interest income) of 30% of adjusted taxable income.
  • Certain capital expenditure placed in service after 27 September 2017 and before 1 January 2023 may be written off immediately for tax purposes.
  • The introduction of special anti-base erosion tax measures (BEAT) where US firms make substantial payments to overseas group members
  • A new anti-avoidance measure on intellectual property and intangible income paid to CFCs (GILTI).

These changes are discussed in more detail in our Business Edge January 2018 article.


Consider your disclosures of judgments and estimates

As many requirements of the US tax reform are new it is likely that, for the purposes of their financial statements for the year ended 31 December 2017, companies will need to make certain assumptions about the appropriate interpretation and application of those requirements. It is also possible that the IRS will issue clarifications on certain points in future.

Companies should make appropriate disclosure of the judgments and estimates made in accordance with the requirements of IAS 1 or FRS 102.

Disclosures around judgments and estimates remain a key area of focus for the Financial Reporting Council (FRC) being one of the topic areas identified for its 2018 thematic review on Smaller listed and AIM-quoted company reporting . The FRC also noted in its Annual Review of Corporate Reporting 2016/2017 that properly explaining and quantifying key judgments and estimates was a key area where it expects to see improvements. It produced specific guidance on judgements and estimates with the results of its Thematic Reviews in December 2017.

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