The potential passage of the new tax bill is giving some finance departments conniptions, according to Bloomberg BNA, and they’re hoping that the SEC will address the problem. The SEC? Yes. While companies are happy to see the tax breaks, some companies, especially large multinational companies, are anxious about whether they will be able to accurately determine the impact of the tax changes on their financial statements in time to file their annual and quarterly reports with the SEC. The obvious concern is that, if the SEC doesn’t extend the filing deadline, companies could risk making material misstatements.
According to this article in the WSJ, the “two most time-consuming accounting tasks for CFOs will be estimating the tax liability related to offshore cash and reassessing the value of their deferred tax items.” And there could be unintended consequences, for example, a reduction in deferred tax assets could affect debt covenants, one commentator cited in the article advised. Longer term, commentators suggested, some companies could entirely reconfigure their operations to obtain the greatest tax benefit.
According to the BNA and WSJ articles, under U.S. accounting rules, companies must reflect the impact of the legislative changes in the quarter they are signed into law, even if they go into effect at a future date. If the changes are enacted by or before year-end, companies would be required to account for all of the changes for the fourth quarter of 2017. Yikes.
BNA reports that the SEC hasn’t yet determined what, if anything, it will do, although “it has been talking with companies and monitoring the tax reform discussion. ‘Our office remains open to those conversations; obviously, it’s moving very fast.…If there are unique situations, we’re open to hearing from folks to understand how it might impact them so we have the best information moving forward,’” said a senior associate chief accountant at the SEC.
And speaking of the potential non-tax consequences of changes resulting from the tax bill, if passed, see the article in the November-December issue of “The Corporate Executive,” about the need to look at revising proxy statement disclosure in light of the elimination of the Section 162(m) exemption for performance-based comp. Clearly, under Item 10 of the proxy rules, in the event a company submits a comp plan or agreement for a vote of shareholders, the company will need to look at revising its standard tax discussion to reflect the absence of the deduction. However, the article observes, elimination of the deduction could also be relevant to CD&A, where existing S-K Item 402(b)(2)(xii) identifies as an example of potentially material information that should be discussed the impact of accounting and tax treatments of the particular form of comp awarded.