Advanced ASC 740 Tax Reform Impact to Process and Controls

Transcription

1 Advanced ASC 740 Tax Reform Impact to Process and Controls May 9,

2 Speakers John Swilling Tax Partner Houston Tiffany Mauldin Tax Partner Houston 2

3 Agenda Tax Reform - Legislative and Authoritative Developments Looking ahead and forward financial reporting considerations Operationalizing Tax Reform 3

4 Timeline of key events Occurring after the December 22, 2017 enactment December January February March April SEC The SEC staff issues Staff Accounting Bulletin No. 118 FASB FASB issues Q&As providing tax accounting guidance for selected issues FASB issues ASU Reclassification of Certain Tax Effects from AOCI Monitoring of annual and interim financial statements to assess if additional changes are necessary Treasury & IRS First Notice on Section 965 issued Second Notice on Section 965 issued IRS issues Q&A on reporting the Section 965 toll tax Third Section 965 Notice, & Notices on Section 163(j), 451(c) and 15(a) issued FERC States Congress FERC issued Notice of proposed rulemaking States have begun to respond to new federal tax law by issuing proposed legislation and guidance Appropriations bill signed that included a change to Section 199A for agricultural co-ops 4

5 Expected future developments May June July August SEC FASB Treasury & IRS FERC States Expect to see comment letters addressing period of enactment accounting, revisions to SAB 118 estimates, and disclosures Continued monitoring of annual and interim financial statements to assess if additional changes are necessary Continued issuance of guidance on the application of the new law Provide new guidance for utility and pipeline companies in response to tax reform States continue to issue new legislation in response to the new federal law Congress Potential for additional technical corrections needed to the new law 5

6 SEC Staff Accounting Bulletin No considerations Interim periods SAB 118 does not apply to items that arose after the period of enactment Current year effects, apply the interim model in ASC 740 Discrete treatment Account for SAB 118 measurement period adjustments discretely in the period adjusted Good faith effort During the measurement period, the SEC staff expects that entities will act in good faith to complete the accounting under ASC 740 The SEC staff believes that in no circumstances should the measurement period extend beyond one year from the enactment date Disclosures SAB 118 requires specific disclosures which should be included for each reporting period until the earlier of (1) the date at which the company s enactment accounting is complete, or (2) the end of the SAB 118 measurement period 6

7 Observations from calendar year-end filings Significant considerations Toll charge liability Impact of existing attributes (e.g., FTCs, E&P, etc.) Significant complexity and uncertainty in applying the tax law (e.g., 2017 loss interaction with Section 965(n), cash and cash equivalent definition) AMT credit carryforwards Amounts expected to be refunded were reduced by the applicable sequestration rate Issues related to the offset of the toll charge liability by the AMT credit carryforwards Indefinite reinvestment assertion Reconsideration of indefinite reinvestment assertions, however companies may have remained provisional under SAB 118 with respect to their assertion Deferred taxes on outside basis differences that are not indefinitely reinvested may include WHT and state taxes Impact of tax rate change Reduction in tax rate impacted regulatory assets and liabilities Also resulted in stranded tax effects being lodged in AOCI ASU was released in response Accounting for GILTI A policy election is required to be made to either account for GILTI as a period cost, or to recognize deferreds for basis differences expected to reverse as GILTI Companies may have remained provisional under SAB 118 with respect to their policy election Valuation Allowances FDII Reevaluation of the realizability of deferred tax assets Impact of carrybacks 7

8 Financial reporting considerations 2018 and forward Potential challenges International tax provisions Toll charge liability Revisions for additional legislative guidance (e.g., Section 965(n)) GILTI FOGEI exception Interaction with other baskets BEAT Identification of related party payments Hedging arrangements and commodities contracts Branch taxes FDII Expense apportionment 8

9 Financial reporting considerations 2018 and forward Potential challenges Outside basis differences Valuation allowance assessments Deferred taxes associated with outside basis differences that are not indefinitely reinvested based on expected manner of recovery (e.g., dividend, sale, liquidation) Withholding taxes & state taxes on current year foreign earnings as part of estimated AETR Discrete effects of movement in foreign exchange rates Effects of FX movement on PTI (CTA), State tax effects of FX changes (CTA), FX impact on WHT liabilities (P&L) Effect of changes in the NOL regime: Impact of NOLs with a finite-life and NOLs with indefinite-life 80% limitation and no carryback of NOLs with indefinite-life Broadened interest limitation rules under Section 163(j) and impact on additional DTAs that need to be assessed for realizability AMT credit carryforwards need for sequestration adjustments Interplay with other tax provisions (e.g., BEAT, GILTI) 9

10 Financial reporting considerations 2018 and forward Potential challenges Written binding contract exception for executive compensation Compensation Other compensations areas Exception to the use of an AETR World-wide Annual Effective Tax Rate requirement for interim provisions Additional challenges in calculating the interim tax provision if an exception to use of the world-wide estimated ETR applies and discrete treatment is warranted 10

11 Financial reporting considerations 2018 and forward Regulated operations On March 15, 2018 FERC issued two Notices of Proposed Rulemaking for utility and pipeline companies... Focused on passthrough of the benefits of the reduced corporate income tax rate on to consumers Expectations for new guidance forthcoming Implications on ratemaking process Protected vs. unprotected differences State conformity Unwinding regulatory liabilities Average rate assumption method (ARAM) Reverse South Georgia method (RSG) 11

12 Financial reporting considerations 2018 and forward ASU Reclassification of certain tax effects from AOCI Scope Optional reclassification of stranded tax effects resulting from 2017 tax reform from accumulated other comprehensive income (AOCI) to retained earnings Disclosure Ongoing-- disclose accounting policy for releasing income tax effects from AOCI Period of adoption -- whether a reclass adjustment was recorded; if so, a description of any other income tax effects Transition Effective for periods ending after December 15, can be early adopted Transition options -- full or modified retrospective 12

13 Quarterly Disclosure Samples - Forms 10-Q The Company s effective tax rate for the three months ended March 31, 2018 and 2017 was 20.3% and 33.6%, respectively. The effective tax rate represents a blend of federal, state and foreign taxes and included the impact of certain nondeductible items. The effective tax rate for the three months ended March 31, 2018 also reflects the reduced federal corporate income tax rate as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act ) in December 2017 and the impact of a change in the Company s mix of domestic and foreign earnings. During the three months ended March 31, 2018, the Company recorded increases to provisional amounts for valuation allowances on foreign tax credits of $XX million. The changes in provisional amounts are primarily due to refined estimates of foreign source income and expense apportionment during the credit carryforward period. We have not revised any of our 2017 provisional estimates under SAB No. 118 and ASU No , but we are continuing to gather information and are waiting on further guidance from the IRS, SEC and FASB on the Tax Cuts and Jobs Act of 2017 (the Act ). 13

14 Quarterly Disclosure Samples - Forms 10-Q We are still evaluating whether to change our indefinite reinvestment assertion in light of the 2017 Tax Act and consider that conclusion to be incomplete under guidance issued by the SEC. If we subsequently change our assertion during the measurement period, we will account for the change in assertion as part of the 2017 Tax Act enactment. During the three months ended March 31, 2018, the Company did not make any adjustments to its provisional amounts included in its consolidated financial statements for the year ended December 31, The accounting is expected to be completed when the 2017 U.S. corporate income tax return is filed in We have not made any additional measurement-period adjustments related to these items during the quarter. However, we are continuing to gather additional information to complete our accounting for these items and expect to complete the analysis required to complete our accounting within the prescribed measurement period. During the three-month period ended March 30, 2018, there were no changes made to the provisional amounts recognized in The Company will continue to analyze the effects of the TCJA on its Consolidated Condensed Financial Statements. Additional impacts from the enactment of the TCJA will be recorded as they are identified during the measurement period as provided for in SAB No. 118, which extends up to one year from the enactment date. 14

15 Systems, processes, and controls Operationalizing Tax Reform PwC 15

16 Tax reporting and compliance tax post-tax reform: A month roadmap Identify data sources & evaluate what will be readily accessible for financial reporting timing, as well as document the basis for reliance on the data. Develop high-level estimates using best available data Reassess Q1 estimates and refine calculations based on better information. Update effective rate. Identify data sources for year-end calculations TY 2018 Federal Return Develop processes to incorporate GILTI & BEAT into federal return Regular communication with stakeholders on potential business implications, process changes, and resource needs is critical to managing a company s risk. Identify population of tax impacts from reform & develop execution plan. Consider current and deferred tax implications. Q (10-Q) Q (10-Q) Evaluate and implement internal controls and governance to execute legislation changes. Update workpapers (calculations, attribute tracking, other) Update/configure provision software and/or link offline models Plan for disclosures Update tax forecasting models Deploy analytics for accuracy and reporting to stakeholders Q (10-Q) 2018 YE (10-K) YE Annual reporting Discuss approach with financial auditors Calculate SAB 118 true-ups Execute calculations and internal controls Analyze projections vs. actuals 2018 Federal Return 2018 Return to provision true ups and revisions to 2019 estimates 2019 YE 16

17 Operationalizing financial reporting changes An approach to incorporating complex calculations Data needs Calculation logic Review process and internal controls Feed to ETR / Tax provision Many new requirements, with new or expanded data sources Critical to begin discussions with Finance & IT stakeholders to set expectations Most organizations focused on interpreting tax reform, running targeted calculations, and planning Forecasting process will increase focus on projecting legal entity income Companies will need to have ongoing focus on internal controls Planning / org changes will increase complexity New calculation requirements fed into overall provision Manual processes will be significantly stressed Individual calculations should be incorporated into E2E process 17

18 Modifying and updating internal controls The potential changes in data sources, systems and processes may result in changes to internal controls. Companies should revisit the controls they have in place and make appropriate modifications and updates. People Are appropriate internal/ external tax resources available to identify tax law and accounting developments, understand the technical rules under tax reform and apply them to the business tax profile? Process Have changes to interim and year-end processes been adequately documented? Data Have all new data sources been mapped into tax reporting, is the quality reliable and are estimates reasonable? Is data at the legal entity level available and reasonably reliable? Technology Has end-to-end technology (data gathering & consolidation, calculation and reporting) been adequately tested for reliability? AETR or discrete calculations BEAT, GILTI, FDII, interest limitations, etc. Deferred tax assets/(liabilities) Attributes & valuation allowances Toll Charge, repatriation and E&P Impact from state tax conformity rules Required disclosures and tax positions assessments 18

19 GILTI & BEAT Tax reform Current internal control environment Most businesses have improvised temporary solutions to meet interim tax reporting requirements under tax reform. How should businesses address internal controls during a rapid period of change? ERP Tax Compl. & Prov. Fixed Assets System Legal Entity Book Income Legal Entity PTBI, Book-Tax Diffs, PP&E. TBBS, etc. Depreciation Reports Tax Compl. Tools Product Sales - U.S. to Foreign U.S. Basis in PP&E, Global Book Income, etc. Foreign Source Income Tax Provision Tools Tax Reform Calculations ERP Tax Compl. & Prov. ERP 19

20 Tax reform operationalization challenges Tax reform has started broad-based changes... How should Tax modify operations to meet new requirements with so many changes underfoot and maintain appropriate internal controls? Key impacts What is the impact to the business, organization, and project? Success factors Technology to reliably calculate GILTI, BEAT, FDII, and interest deduction limitations Modified and updated processes and controls Success is data dependent, and legal entity data is more important than ever Tax Reform has a very broad impact to the business and how it structures its legal entities, deploys its cash, designs its supply chain, etc. There will be a need for new process and controls in multiple areas and it will take the broader organization to get it done. Technology options exist, but to date few implementations are complete. Team outcomes: Alignment Project outcomes: Costs control Keeping up with changes to legal entity structures, supply chain, cash deployment transfer pricing, etc. New data sources require testing for reliability Success requires engagement beyond Finance Data capture is more important than ever, with sources dispersed across the organization with companies focused on completeness, accuracy and auditability of the data The use of a proven, cohesive plan is significantly reducing the amount of effort and impact needed to achieve adoption Engagement Enablement Integrated solution Comprehensive tools Underlying process and data will feed varied reporting (US GAAP, IFRS, Tax, statutory, etc.) Readiness for M&A and future organic growth of the business Empowerment Accountability 20

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