4. Will the financial statement impact of COVID-19 cause us to be in a cumulative book loss or otherwise materially alter our historic forecasts used to support our deferred tax assets?
Companies that rely on projections of future income to support the recognition or realization of deferred tax assets that arose during recent economic downturns may face deferred tax charges as a result of adjusting existing deferred tax assets or increasing a valuation allowance (depending on the accounting framework). Projections of future income should be updated to reflect the revised economic outlook. Such projections should be aligned with other projections used elsewhere in the financial statements.
Significant impairments or operating losses may reduce or eliminate the ability to rely on future projections of income. Companies that expect to be in a cumulative loss position based on revised forecasts that reflect the effects of COVID-19 should consider this negative evidence about the realizability of deferred tax assets. Previously recognized deferred tax assets may need to be re-evaluated if underlying projections can no longer be considered or if there are material changes to the historic projections. Companies relying on projections of future income should anticipate the additional time and complexity associated with updating projections in the midst of an uncertain economic environment.
5. What are the tax provision implications associated with an expected financial statement impairment charge?
A financial statement impairment can have a wide range of impacts on the tax provision depending on the nature of the asset being impaired (e.g. goodwill, tangible property and intangible property), the company’s historic accounting policies, and the overall deferred tax position. Given the diversity of the potential tax accounting impacts, each asset impairment will require an independent assessment to determine the requisite tax provision impact. Companies should review any historical tax accounting policies and anticipate incremental time to address the complex tax accounting implications associated with asset impairments.
6. Are there specific tax provision implications associated with the recent decline in our stock price?
Companies with significant stock-based compensation plans may experience deferred tax charges following the recent market declines. The nature and extent of these potential charges will vary based on the underlying accounting framework as well as the specific profile of the individual stock compensation plan.
Calculation of deferred taxes related to stock-based compensation plans can be quite complex and require significant inputs. The remeasurement and/or write-off of historic deferred tax assets may have immediate consequences in the interim financial statements. Companies with significant stock-based compensation-related deferred tax assets should anticipate incremental complexities as part of their interim and annual review of the tax accounts.
7. Are there specific income tax disclosures related to COVID-19 that we should consider?
The required disclosures related to income taxes have not necessarily changed; however, the application of existing disclosure requirements in a post-COVID-19 environment may result in significant additional disclosures. Disclosures related to overall financial condition, capital resources, cash flow, liquidity, asset recovery or uncertainty around accounting estimates may have elements that are related to income tax positions. In addition, changes in the tax profile may require specific disclosures related to deferred tax asset recognition/realization, determination of interim tax provisions, and repatriation of unremitted earnings. Companies should carefully consider the COVID-19 related impact on their tax profile as part of the broader disclosure requirements.
8. Are we able to make a reliable estimate(s) of our effective tax rate(s) based on projected 2020 income?
The interim tax provision is generally measured based on one or more estimated annual tax rates for the year, depending on the accounting framework. The forecasted income for the year is one of the critical inputs into the calculation may present unique challenges in preparing the forecast of income for 2020 and the related tax rate calculation.
Additional complexities may arise when the accounting framework requires estimated tax rate by jurisdiction, particularly when the group includes subsidiaries with losses for which the benefit cannot be recognized. Many of these challenges will be more pronounced for the quarter ending March 31, while others will continue throughout the year. Different or separate calculations may be necessary for each jurisdiction if a company is unable to make a reliable forecast of either its income for the year or its estimated annual tax rate.