US tax accounting

Tax accounting implications for US companies and subsidiaries subject to US tax rules.

Changes to US tax legislation were signed by the US President on 22 December 2017, therefore becoming enacted prior to 31 December 2017. Accordingly, under both IFRS (IAS 12) and US GAAP (ASC 740), the effect of the new legislation is to be reflected when measuring tax balances for 31 December 2017 year-ends.

These changes (for example, a change in the company tax rate from 35% to 21%) bring very wide ranging implications for corporate tax provisions and, for some companies, it will (for example) require them to go back through many years of historical information in order to determine their current and deferred tax positions.

Because of the complexity of the tax changes, it is very unlikely that the companies affected will be able to gather all of the necessary information in order to report their 31 December 2017 year-end numbers on a timely basis.

SEC relief – US GAAP reporters

As a consequence, the SEC has issued Staff Accounting Bulletin (SAB) 118, which provides relief from applying all aspects of the new legislation in certain circumstances.

The relief in SAB 118 effectively allows companies to make their ‘best estimate’ for the purposes of 2017 year-end reporting, with subsequent adjustments being treated as a change in estimate (rather than an error, which would require a prior year adjustment).

For companies that are unable to come up with a reliable estimate for 31 December 2017 reporting purposes, the tax amounts reported in the financial statements are to be based on the previous tax legislation.

It appears that the SEC has given additional relief to US GAAP reporters, rather than making any changes to US accounting requirements.

Implications for entities reporting in accordance with NZ IFRS (overseas companies 1 and US subsidiaries of NZ companies)

Despite the SEC indicating that it would not object to foreign private issuers that report in accordance with IFRS adopting the relief set out in SAB 118, no equivalent relief exists in IFRS or in NZ IFRS here in New Zealand.


Under IFRS as issued by the International Accounting Standards Board (IASB) or NZ IFRS as issued by the New Zealand Accounting Standards Board (NZASB), is it possible to adopt the approach set out in SAB 118 to measure income tax balances?


The SAB 118 relief is not consistent with the requirements in IAS 12, paragraphs 46 and 47, to measure current and deferred tax assets and liabilities using tax rates and laws enacted or substantively enacted by the end of the reporting period. In our view, it is therefore not possible to claim compliance with IFRS or NZ IFRS while simultaneously applying the relief approach set out in SAB 118.

Our suggested approach to IFRS or NZ IFRS reporters impacted by this new US tax legislation would be to:

  • Firstly, note that the ‘unit of account’ for measuring tax balances is each separate component part of the tax law, because when measuring income tax balances, some assumptions can be made with more certainty than others, and
  • Secondly, using all available information that can reasonably be expected to be obtained before the financial statements are authorised for issue, make an attempt to estimate tax balances for each unit of account (or tax legislation change) and recognise these estimates in tax balances included in December 2017 financial statements.

As part of this process, it is important to note:

  • Even when it is difficult to obtain a reliable estimate, for example, because there is a wide range of potential amounts, if a minimum amount is known, it should be provided for, and
  • Any subsequent remeasurements in future periods are only likely to be considered changes in estimates (recognised in the period of remeasurement) where the entity can demonstrate that the original estimate was based on all information that could reasonably have been expected to be obtained before the financial statements were authorised for issue. Failing this, remeasurements will be treated as errors, with adjustments to prior period financial statements.

Challenges for preparing 31 December 2017 financial reports include:

Action required

All overseas companies1, as well as New Zealand groups with US subsidiaries, need to re-estimate current and deferred tax balances based on these new tax rules. The changes are complex and are likely to require expert US tax advice. We recommend prompt communication with your audit partner if you are experiencing difficulties estimating tax balances applying these new rules.

For more on the above, please contact your local BDO representative.

1 As a reminder large overseas companies carrying out business in New Zealand are required to prepare New Zealand GAAP compliant financial statements under Companies Act 1993 section 200 or section 202. (Certain relief is provided by section 203 and certain exemptions may be applied for under section 207L)