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ESMA Publishes Guidance on IFRS Accounting for Effects of New US Tax

31 January 2018

The European Securities and Markets Authority (ESMA) has released the public statement, Accounting for Income Tax consequences of the United States Tax Cuts and Jobs Act under IFRS (Public Statement).

European Union (EU) issuers, which include those who are foreign private issuers in the United States or any issuers having material subsidiaries in the United States, have expressed concerns to ESMA about accounting for the effects of the Tax Cuts and Jobs Act (Tax Act) in their statements prepared under International Financial Reporting Standards (IFRS).

The Tax Act is effective as of 1 January 2018. International Accounting Standards (IAS) 12, Income Taxes, requires issuers to measure current and deferred tax assets and liabilities based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. EU issuers are concerned that they will not be able to complete fully the accounting for the effects of the Tax Act in their 2017 IFRS annual financial statements given the short time period ‘to assess the accounting consequences of the Act and the lack of information on their tax position’.

In the Public Statement, ESMA advises that IAS 12 provides no relief from these provisions, even when a taxing authority substantially adopts complex legislation shortly before year-end. ESMA advises that IAS 12 requires issuers affected by the Tax Act to measure current and deferred taxes based on the newly enacted tax law. The Public Statement notes that ‘IAS 12 requires recognition of current and deferred tax outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss (backward tracing)’.

ESMA believes that even though a complete understanding of the effects of the Tax Act will take some time, issuers should be able to ‘make a reasonable estimate of the impact of the material aspects of the Act on their current and deferred tax assets and/or liabilities in their 2017 annual financial statements in line with the [applicable] deadlines’. ESMA also notes that there may be an increased degree of uncertainty in reported amounts, and discusses how issuers may make adjustments in later periods.

The Public Statement is available on the ESMA site on this link.


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