December 28, 2017

Tax Reform: How to Cover in Your MD&A

Brink Dickerson of Troutman Sanders sent in these thoughts about tax reform & MD&A: The corporate tax rate change will have three primary impacts on MD&A drafting:

– Prospectively, the impact of the lower rate. This is a “known trend or uncertainty” that needs to be discussed even where a company does not typically address future tax rates in its SEC filings.

– Historically, the impact of the change in the tax rate change on tax assets and liabilities, which will show up in the year-end financial statements.

– Prospectively, changes in repatriation plans, which again is “known trend or uncertainty.”

Brink expects non-GAAP disclosure regarding both. And he also expects that the amounts likely will be self-reconciling. For example, he would expect to see statements such as:

Our tax expense for 2017 was $ _million. This amount reflects a reduction in our Deferred Tax Asset of $_million as a result of a decrease in the value of our U.S. federal net operating loss carryforwards due to the rate decrease included in the Tax Cuts and Jobs Act, offset by a $_million decrease in our Taxes Payable, similarly resulting from the rate decrease. In the absence of the changes in the Act, our tax expense for 2017 would have been $_million.

For 2018 we expect an overall tax rate (including federal, state and foreign taxes) of _%, but in the absence of the Act would have expected an overall tax rate of _%. Historically, we have considered substantially all foreign profits as being permanently invested in our foreign operations, and we had no intent to repatriate those funds. We currently are reconsidering that policy in light of the changes contained in the Act.

Brink also expects a more granular discussion of future tax rates in earnings calls – and he suggests that since the analysts certainly will ask about it, many companies will want to include a slide on taxes & tax rates and probably a few sentences in their earnings release as well.

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Broc Romanek