Tax Accountants, Are You Ready for a Holiday Break? Not So Fast

It looks like Congress could pass the most significant tax reform in generations in the next few days. If the President signs the bill, it will become a law and it could be officially enacted before the end of the year.

All of the provisions in the bill may not be known at this point, but one thing is certain: A new enacted tax law means a lot of work for tax accountants, especially when the changes are so significant. Even when the changes take effect in the future, financial statements are affected as soon as a tax law is enacted.

For instance, all deferred tax balances will have to be re-cast and deferred tax assets will have to be evaluated for impairment. With a significant change in tax rates, the effect on deferred tax balances itself could be very material. This will have to be recorded in results from continuing operations this year.

In addition, companies have to schedule when their temporary differences reverse. Depending on the final provisions in the bill, this may be trickier than it sounds. What if, for instance, the tax rate is reduced in phases? Remember that deferred tax assets and liabilities are measured using the enacted tax rate expected to be in effect when temporary differences reverse.

The assessment of whether a valuation allowance against deferred taxes is often a long and arduous exercise. A tax bill voted and signed into law in the last couple of weeks of the year will require tax departments to do a lot of work before financial statements can be issued early next year. Tax planning decisions can have significant effects on the financial statements (if nothing else, because they can be the difference between having to report a valuation allowance on deferred tax assets and having an unimpaired asset on the books). Are tax accountants expected to revisit their entire tax strategies before the financial statements are issued?

For companies with operations overseas, this new law will likely require a reassessment of all indefinite reinvestment assertions. The provisions in the tax bill may trigger more a few changes in this area. This is not without potentially very significant financial statement implications. It looks like the final bill will include a deemed repatriation tax that will be applied to all historical, unrepatriated foreign E&P since 1986. For companies that had made a permanent reinvestment assumption, this is a big deal.

There will no doubt be many other provisions introduced in the tax law that may affect companies, so a thorough read of the final bill will be required.

This is already a lot of work to be performed. This does not even consider the difficulty to gather the necessary data and information for disclosure purposes. Analysts will no doubt be very interested in the impact of the tax reform on companies’ bottom lines and financial positions, so tax disclosures are likely to be even more scrutinized than in the previous years.

The SEC has indicated that they are monitoring the tax bill, but companies will have to monitor developments to see if the SEC, and possibly the FASB, provide reporting relief to respond to this situation.

It will be a few busy weeks for tax accountants. Long term, tax strategies may have to change and major restructurations and reorganizations may ensue.