Tax Reform's Impact on 2017 Year End Reporting | RKL LLP
Posted on: February 22nd, 2018

Tax Reform’s Impact on Your Company’s 2017 Year End Reporting

Tax Reform's Impact on Your Company's 2017 Year End Reporting The Tax Cuts and Jobs Act (TCJA) was enacted into law on December 22, 2017, and took effect on January 1, 2018. Yet companies will still feel tax reform’s impact on their December 31, 2017 financial statements, particularly with regard to accounting for and reporting of income taxes, thanks to the Financial Accounting Standards Board (FASB) requirement that companies recognize changes in the period of enactment.

The reduction of the corporate tax rate to 21 percent and a new provision for 100 percent deduction of dividends received may affect valuation allowances and analysis. These are just some of the many factors at play as businesses seek to manage deferred taxes and accounting for income tax in the wake of tax reform. Below, we round up other key tax reform considerations for financial statements and disclosures.

What does the corporate tax rate reduction mean for deferred tax balances at December 2017 year end?

Companies must remeasure their deferred tax assets and liabilities for the new rate effective January 1, 2018. The effect of the remeasurement is reflected entirely in the interim period that includes the enactment date and allocated directly to income tax expenses (benefit) from continuing operations. The effect on prior year income taxes payable (receivable), if any, is also recognized as of the December 22, 2017 TCJA enactment date.

When should a fiscal year end company adjust its estimated annual effective income tax rate?

Companies will adjust the rate based on the rate in place at the beginning of their fiscal year. For fiscal periods which cross the enactment date, a blended rate will be used. For instance, a September 30, 2018 year end would use a blended rate calculated with nine months at the new 21 percent rate and three months at the previous applicable rate.

How should my company account for and recognize significant residual tax effects in other comprehensive income?

Recognizing the full effect of the change in tax law in income tax expense (benefit) from continuing operations will result in residual tax effects for a company that recognized deferred tax balances through other comprehensive income.

Residual tax effects are released when the item giving rise to the tax effect is disposed, liquidated or terminated or when the entire portfolio of similar items (i.e. liquidation of defined benefit pension plan, available for sale securities liquidation) is liquidated. A company should apply its existing accounting policy for releasing residual tax effects.

On February 14, 2018, FASB unveiled a new requirement for companies to reclassify the residual tax effects arising from the change in the corporate tax rate from accumulated other comprehensive income to retained earnings. This requirement is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption allowed.

There is a specific formula for this reclassification that your RKL advisor can explain in greater detail, but generally speaking, the new approach requirement eliminates the stranded tax effects associated with the corporate tax rate reduction and improves the usefulness of financial statement information.

How will this affect my earnings from foreign subsidiaries?

Earnings that were formerly excluded from repatriation will no longer be indefinitely deferred. This “transition tax” may be paid over eight years, with no interest charged, and will be due over a graded scale for those eight years.

RKL’s Audit Services Group is filled with accounting professionals that can help your company assess the impact of tax reform on financial reporting and ensure financial statements are calculated and compiled accurately. Contact your RKL advisor or one of our local offices today to get started.

Visit RKL’s Tax Reform Resource Center for more information and insights.

Travis A. Bieber, CPA, Manager in RKL's Audit Services GroupContributed by Travis A. Bieber, CPA, Manager in RKL’s Audit Services Group. Travis serves clients in a wide variety of industries, including manufacturing, distribution and food processing, and works with privately held, family owned and private equity backed companies.




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