If the proposed changes to U.S. tax law currently under consideration by Congress were passed before the end of this year, calendar-year companies may need to consider the impact to their 2017 financial statements under financial accounting rules.

Proposed legislation has recently passed the U.S. House of Representatives and is pending in the U.S. Senate (“Proposed Tax Legislation”). The Proposed Tax Legislation would make significant changes to the current U.S. tax code including a reduction in the corporate tax rate from 35% to 20%, required inclusion in taxable income of deferred foreign earnings (at a reduced taxable rate) and modification or changes to a number of other provisions applicable to both corporations and individuals.

In general, under applicable financial accounting rules a company’s financial statements must take into account the impact of legislative changes that are enacted on or prior to relevant reporting date of the financial statements, e.g. December 31, 2017 for calendar year companies. Further, legislation enacted subsequent to the relevant reporting date, but prior to the issuance of the financial statements, is considered a non-recognized subsequent event and the impact would not need to be accounted for in the financial statements, but would likely need to be disclosed within the financial statements.

In accordance with financial accounting rules, if the Proposed Tax Legislation were enacted a reporting entity would be required to consider the impact of the legislation on its financial statements and in particular its measurement of any deferred tax assets or liabilities as of the date of enactment as well as the financial impact of any foreign earnings that were considered permanently reinvested and not subject to U.S. income tax. The effect of the Proposed Legislative Changes if enacted would be reflected in the applicable financial statements with appropriate disclosure. For example, a significant reduction in corporate tax rates could have a material impact on reported earnings, to the extent companies are carrying sizeable deferred tax assets or liabilities.