Accounting for Income Tax consequences of the United States Tax Cuts

Tags: IFRS

For reporting periods that include 22 December 2017, IAS 12 requires issuers that are affected by changes in US tax legislation introduced by the Act to measure current and deferred taxes based on the newly enacted tax law.

The United States Tax Cuts and Jobs Act (hereinafter ‘the Act’) was signed into law on 22 December 2017 and introduces significant changes in US tax laws taking effect on 1 January 2018. The Act amends the US Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.

ESMA states that some EU issuers and their auditors have expressed concerns with respect to their ability to complete fully the accounting under IAS 12 Income Taxes for the effects of the Act in their 2017 annual financial statements due to the short time available to assess the accounting consequences of the Act and the lack of information on their tax position. Therefore, in order to avoid the risk of inconsistent application of IFRS in the European Union, ESMA decided to publish this Public Statement to provide clarifications on accounting for the income tax consequences of the Act under IFRS.

Measurement of current and deferred tax assets and liabilities

ESMA notes that, according to IAS 12.46 and 47, current and deferred tax assets and liabilities shall be measured based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. ESMA highlights that under IFRS there is no relief from these requirements, even to deal with circumstances in which complex legislation is substantively enacted shortly before the year-end.

ESMA acknowledges that a complete understanding of the implications of the Act may take some time. For example, application questions related to the provisions of the Act to the specific circumstances of the issuer may arise or be answered only in subsequent periods. ESMA expects EU issuers to 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. ESMA acknowledges that these reported amounts may be subject to a higher degree of estimation uncertainty than usually the case and that measurement adjustments may need to be made in subsequent reporting periods as issuers get more accurate information on the impact of the Act and the modalities of its application.


ESMA highlights the need for transparent and informative disclosure both in relation to the amounts reported in the 2017 annual financial statements and on their subsequent re-measurement. ESMA draws attention to the disclosure requirements of IAS 12.80(d) and 81(d), requiring disclosure of the amount of deferred tax expense/(income) relating to changes in tax rates or the imposition of new taxes and the explanation of changes in the applicable tax rate(s) compared to the previous accounting period.

Where material tax assets and/or liabilities are subject to increased estimation uncertainty, issuers is expected to give additional consideration to their entity-specific disclosure on those estimates and the judgements they have made in their determination, as well as the nature and sources of estimation uncertainty in line with IAS 1.122 and 125-129.

ESMA expects that, in line with IAS 8.5, adjustments in subsequent periods as a concequence of new information of the Act to the specific circumstances of the issuer would in most cases constitute a change in accounting estimate where they result from a reassessment of the future expected benefits and obligations associated with the tax assets or liabilities. Issuers should carefully assess whether measurement adjustments are a change in estimates or represent a correction of an error as defined in paragraph 5 of IAS 8 (e.g. mathematical mistake, mistake in applying accounting policy, fraud or oversight or misinterpretation of facts).

Norwegian issuers

Finanstilsynet in Norway has not yet published a clarification on the issue for Norwegian issuers and auditors. We will follow up on this matter and publish updates.

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