Accounting updates are not the only changes coming as a result of the new revenue recognition and leasing standards. The new ASC Topic 606, Revenue from Contracts with Customers and changes to ASC Topic 842, Leases also have tax ramifications. Private equity and venture capital firms and their portfolio companies need to be aware of the potential tax impact, as changes to financial reporting practices could create differences between book and tax accounting.
Many times, financial accounting and income tax accounting standards run parallel, but there are exceptions. Depending on the circumstance, two sets of books may be necessary — one for financial reporting, and one for tax purposes. This will place additional demands on internal resources. Book and tax differences must also be disclosed on a tax filing and supported with sufficient records upon request. When financial conformity is desired or required for tax purposes, a request for change in accounting method for tax purposes may be required, which will also require time and resources. Additionally, tax strategies may need to be readdressed as a result of the new standards.
Private equity and venture capital management firms, together with their portfolio company accounting departments, need to get up to speed — and quickly — on changes that may be needed to their tax reporting processes. Effective dates for the new revenue recognition standard and the updated leasing standard are fast approaching. In the case of public companies, the revenue recognition effective date has already arrived. Public companies must adopt ASC Topic 606 for financial reporting years beginning after Dec. 15, 2017 (calendar year 2018). Private companies must adopt for financial reporting years beginning after Dec. 15, 2018 (calendar year 2019). Leasing changes take effect for years beginning after Dec. 15, 2018 for public companies, and Dec. 15, 2019 for private companies.
The following provide a deeper dive into the specific tax issues that could arise from each of the standards:
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Tax considerations add another layer of complexity to a financial reporting transition that is already expected to be difficult. The revenue recognition and leasing standards both affect a broad swath of business activities, and the required financial reporting updates will not be simple to make.
A tax advisor can help simplify the implementation process by working with you to reconcile the book-tax differences, and to assess the associated tax impact of the new standards. For more information, please contact us.
Published on September 28, 2018