Effects of the New Tax Law on Financial Statements

Article Excerpt:

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, enacted significant U.S. tax reform that is expected to have major implications on the financial reporting of most U.S. corporations. Many provisions of the new law will also surely affect the cash management policies and strategies of most U.S. corporations. To some extent, certain provisions will also affect financial ratios on account of the recognition [or, in certain cases, the de-recognition] of additional current and deferred tax balances.

The provisions of the FASB Accounting Standards Codification (“ASC 740”), Income Taxes, require the taxpayer to recognize the effect of a change in tax laws or rates at the date of enactment. Therefore, the effects must be recognized in the December 31, 2017 financial statements of U.S. corporations, even though the effective date of the law for most provisions starts January 1, 2018. Critical items that U.S. corporations should address on their December 31, 2017 financial statements include the:

  • effects on their deferred tax assets and liabilities from the reduction of federal tax rates,
  • evaluation of future utilization of its net operating loss carryforwards and alternative minimum tax credit carryforwards, and
  • provision for the one-time deemed repatriation of undistributed earnings held in certain foreign corporations.

This article summarizes several of the key items to be considered in evaluating the financial statement effects of the new tax law categorized by:

  • Temporary Timing Differences
  • Permanent Book-Tax Differences
  • International Book-Tax Differences