ASC 606 / IFRS 15 is nearly here!

The deadline to comply the new ASC 606 / IFRS 15 revenue recognition is just around the corner. However, we still see many companies without any proper preparation. For public companies, the new rules start in FY 2018 (or after December 15, 2017) and a year later for private firms, early adoption is permitted. Let us go through i) some background of the new guidance, ii) how this new regulation differs from what we currently have, and iii) how to prepare for this new guidance.

If you’re in accounting field, you would probably know that there are big and small differences between US GAAP and IFRS. These differences have caused difficulties in applying consistent accounting policies for multinational corporations or in comparing companies with similar operations but different accounting standards. The need for a consistent accounting policy has been raised by many parties of interests. In order to meet their needs, FASB and IASB worked together to converge the gap between US GAAP and IFRS. After 12 years of working together, FASB and IFRS jointly issued ASC 606/IFRS 15: Revenue From Contracts With Customers.

Under current guidance, revenue is recognized when rights and obligations are transferred to customer. For example, a company that sells tangible goods would recognize revenue when the goods are delivered. However, when a company builds constructions under a contract, the Company could recognize revenue over a period of time based on percentage of completion, or at once when the construction is complete. Current guidance leave revenue recognition to the management’s decision, but there have been claims that there aren’t enough references to support their decision.

According to the new guidance, an entity is required to determine timing and amount of revenue to be recognized by each contract. For each transaction, a company must i) identify the contract(s) with a customer, ii) identify the performance obligation(s) in the contract, iii) determine the transaction price, iv) allocate the transaction price to the performance obligation(s) in the contract, and v) recognize revenue when (or as) the entity satisfies a performance obligation. In order to apply the new guidance, an entity needs to analyze its contracts, and If needed, the company may need to come up with new operation strategies or amend their contracts with customers.

Revenue recognition is the most important and the most critical accounting policy. However, as mentioned earlier, not so many corporations are implementing or analyzing the impact of the new guidance. It might be because they believe that ASC 606/IFRS 15 is not a big deal. However, according to a survey done by Forbes, Verizon has been working on this for three years. Workday has hired a dedicated team of accountants to pore through 6,000 contracts. GM expects impact to be upwards of $1 billion. So, it is a big deal.

Some may believe that this change would only be reflected on financial statements. However, it would have impact on overall operation. For example, if employees commission is linked to the company’s sales or profit, this new guidance would change their current and/or future commissions. This would impact your income tax expense, so you may need to come up with different tax plans. Also, this might increase your liability ratio, which could adversely affect your relationship with bank.

This type of change requires external help from accountants or lawyers. So don’t wait until the last minute to seek for help. The application of this new guidance needs to be communicated with external auditor. Also note that the application is not a one-time deal. Rather, it is an on-going process to adopt the change which requires close monitoring.

If you are a public company or your parent company is a public, you are running out of time. However, don’t panic! You shouldn’t just ignore the change or make irrational decisions just because you don’t have enough time. Rather, you need to immediately seek for help to make a rational and logical decision and prepare for the change. For the companies that have one more year left, don’t procrastinate! Rather, take this opportunity to fine tune your operation and get ready for the change.

Inbound Distribution Company

 

The IRS Large Business and International Division (“LB&I”) announced the identification and selection of 13 campaigns that will be the focus of the agency’s enforcement efforts.  The campaigns have been implemented to deploy IRS resources to address the most serious tax administration risks, including transfer pricing compliance of US Inbound Distribution Companies.

 

Sharon Porter, director of the Treaty and Transfer Pricing Operation Practice Area, is the lead executive for this campaign.  Its goal is to verify whether inbound distributors receive an arm’s length return rather than the losses or small profits some inbound distributors, especially in the middle market, have been earnings.  IRS believes that there was a widespread practice of not adequately compensating inbound distributors in the middle market and caused a substantial revenue loss for the Government.

 

U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive audit strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue.

 

Take Away:  It is expected that there would be increasing number of audit selections among U.S. distributors of goods sourced from foreign-related parties and the adequacy of these inbound distributors’ intercompany pricing would be scrutinized.  In order to avoid above complexes with the taxing authority and the sever IRC Section 6662 penalties, U.S. inbound distributors with foreign related party sourcing should obtain contemporaneous documentation with respect to its transfer pricing arrangement.

 

A copy of IRS’s Practice Unit is attached for your reference.

[Reference: Inbound Resale Price Method Routine Distributor.pdf]

Substantial Change to Landscape of Individual Taxation

 

The House Ways and Means Committee unveiled its tax reform legislation and it contains many provisions that may substantially change the landscape of individual taxation, if enacted.  To be signed into law, the House bill must be collaborated with the Senate bill (soon to be released), pass through both Congress of House and Senate, and signed by the president.  Here are some notable provisions, generally effective for the tax year 2018, included in the House bill which may require your advance notices:

 

Tax Rate Change

Under the House bill, the current seven brackets would be consolidated and simplified into four brackets.  The rates under the bill would be as below:

 

Single Taxpayer		Married Filing Jointly
Taxable income	Tax rate	Taxable income	Tax rate
$0 to $45,000	12%	$0 to $90,000	12%
$45,000 to $200,000	25%	$90,000 to $260,000	25%
$200,000 to $500,000	35%	$260,000 to $1,000,000	35%
$500,000 or more	39.6%	$1,000,000 or more	39.6%

 

Standard Deductions

Under the House bill, the standard deductions would be increased to $24,000 from $12,700 for joint filers and $12,000 from $6,350 for single individual.  These amounts would be adjusted for inflation based on CPI.

 

Personal Exemptions

Under the provision, the deduction for personal exemptions would be repealed.  Currently, the personal exemption amount is $4,050 per person (including tax filers and any dependents).

 

Principal Residence Gain Exclusion

Under current law, a taxpayer may exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) of gain on the sale of a principal residence, if the property has been owned and used as the taxpayer’s principal residence for two out of the previous five years.  However, under the House bill, the taxpayer would have to own and use a home as the taxpayer’s principal residence for five out of the previous eight years to qualify for the exclusion.  In addition, the taxpayers can use the exclusion only once every five years.

 

Personal Deductions

The overall limitation of itemized deductions would be repealed, however, following deductions would be repealed at the same time:

• Medical expense deduction
• Casualty and theft loss deduction
• Tax preparation fee deduction
• Moving expense deduction

 

Alimony

Under the House bill, alimony payments would not be deductible by the payor or includible in the income of the payee.  The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017.

 

Mortgage Interest Deduction

The mortgage interest deduction on existing mortgages would remain the same.  However, for principal residence acquired after November 2, 2017, the limit on the aggregate amount of acquisition indebtedness would be reduced to $500,000 from the current $1.1 million.  Additionally, interest would be deductible only on a taxpayer’s principal residence.

 

State and Local Tax Deduction

Under the House bill, individuals would not be allowed an itemized deduction for state and local income or sales taxes.  Additionally, real property tax deduction would be limited to $10,000.

 

S-corps and Partnerships (“Passthrough Entity”)

Passive activity income from a passthrough entity would be taxed at the 25% tax rate.  Generally, nonpassvie activity income from a passthrough entity would be taxed at ordinary income rate.  This provision is expected to give a large tax break for real estate investors (including Donald Trump himself).

 

1031 Like-Kind Exchange Applies to Real Estate Only

The bill limits tax deferral provision under Section 1031 (known as “Like-Kind Exchange”) to real estate.  Currently, business owners were able to defer taxation on gain disposing a business by investing in a similar business.  However, this tax deferral provision would be allowed for real estate transactions.

Some of these provisions contained in the House bill would have a direct impact to many of us.  Although we are expecting mark-ups by the Senate in the coming weeks before the bill gets enacted, however ones should continually monitor the legislation development specially if you are contemplating a transaction.

2018년 중요 개인 세법 개정안

 

하원의 세입 세출 위원회가 최근 세제 개혁 법률을 공개했다. 공개된 세제 개혁 법률은 여러 조항의 규정들을 포함하고 있으며 법규화 된다면 개인 세법에 중대한 영향을 끼칠 것으로 보여진다. 법률화 되기 위해서는, 의회 법안과 곧 공개될 예정인 상원의 법안이 합의 절차를 통과하여 대통령의 승인을 받아야 한다. 공개된 법안에 나와 있는 규정들 중 2018 과세 연도 부터 실행될, 사전에 주목할 만한 규정들을 소개한다.

 

세율 변경

법안에 따르면, 기존의 7개의 세율 등급이 간소화 되어 4개의 등급으로 통합 될 것이다. 법안에 공개된 세율은 아래와 같다.

독신자 (Single taxpayer)		부부 공동 신고자 (Married Filing Jointly)
과세 대상 소득 (Taxable income)	세율 (Tax rate)	과세 대상 소득 (Taxable income)	세율 (Tax rate)
$0 to $45,000	12%	$0 to $90,000	12%
$45,000 to $200,000	25%	$90,000 to $260,000	25%
$200,000 to $500,000	35%	$260,000 to $1,000,000	35%
$500,000 or more	39.6%	$1,000,000 or more	39.6%

 

표준 공제 (Standard Deduction)

법안에 따르면, 공동 신고자의 경우 표준 공제가  $12,700에서 $24,000로 인상되며 독신자의 경우 $6,350 에서 $12,000으로 인상 될 예정이다. 이 금액은 소비자 물가 지수 (Consumer Price Index)를 토대로 인플레이션에 맞게 조정될 예정이다.

 

인적 공제 (Personal Exemption)

법안에 따르면, 인적 공제가 폐지 될 예정이다. 현재 인적 공제 금액은 세금 신고자와 부양가족을 포함하여 한 사람당 $4,050 이다.

 

주 거주지 소득 배제 (Principal Residence Gain Exclusion)

현행 법에 따르면, 납세자는 최근 5년 중 2년 이상 소유하고 주 주거지로 사용한 주택을 판매 할 경우 그를 통해 얻은 이익 중 일부를 총 소득(gross income)에서 배제 할 수 있다. 공동 신고자는 $500,000 까지  배제 할 수 있으며 다른 납세자의 경우 $250,000 까지 배제할 수 있다. 하지만, 새로 발표 된 법안에 따르면, 최근 8년 중 5년 이상 소유한 거주자에 한해서5년에 한번 씩 소득 배제가 가능하다.

 

개인 소득 공제 (personal Deductions)

항목별 공제 (itemized deduction)에 적용 되어온 소득에 따른 공제 제한은 폐지 될 예정이다. 하지만 하단에 나오는 공제 항목들은 없어질 예정이다.

• 의료 비용 공제
• 재해 또는 도난으로 인한 재산 손실액 공제
• 세무 보고 준비 비용 공제
• 이사 비용 공제

 

이혼 위자료 (Alimony)

법안에 따르면, 부양 금액은 더이상 지급인에게서 공제될 수 없으며 피지급인의 소득에도 포함 되지 않는다. 이 조항은 2017년 이후 집행되거나 수정된 이혼 판결 또는 별거 합의에 적용된다.

 

주택 융자 공제 (Mortgage Interest Deduction)

현존하는 주택 담보에 적용되는 주택 융자 공제에는 변동이 없다. 하지만, 2017 년 11월 2일 이후 주 주거지로 취득한 주택의 경우, 주택 취득 (acquisition indebtedness) 총액에 적용되는 제한이 $1.1 million에서 $500,000로 인하 될 것이다. 또한, 이자액 공제 역시 납세자의 주 주거지에만 적용 될 예정이다. 이 법안은 앞으로의 주택 매매에 많은 영향을 끼칠 것으로 예상된다.

 

주세와 지방세 공제 (State and Local Tax Deduction)

법안에 따르면, 개인은 주 소득(state income), 지방 소득 (local income), 판매세 (sales tax)에 항목별 공제를 적용할 수 없게 되며 부동산 재산세에 적용되는 공제액은 $10,000로 제한 될 예정이다.

 

S-Corps and Partnerships (“Passthrough Entity”)

도관 회사 (Passthrough entity)의 수동적 활동 소득 (Passive activity income)에 25%의 세율이 적용 될 것이다. 보통 도관 회사의 비수동적 활동 소득 (non-passive activity income)의 경우에는 일반적인 세율이 적용된다. 이 조항은 도널트 트럼프를 포함한 부동산 투자자들에게 막대한 세금 우대를 제공할 것으로 보여진다.

 

1031 부동산 교환법 (1031 Like-Kind Exchange)

법안은  Section 1031 (“Like-Kind Exchange”)에 명시된 과세 유예 조항이 부동산에만 적용 되도록 제한한다. 현재, 사업주들은 비슷한 사업에 투자를 함으로써 사업을 처분하는데 생기는 이익에 대한 과세를 유예해 왔다. 하지만, 새로 공개된 이 과세 유예 조항에 따르면 앞으로의 과세 유예는 부동산 거래에만 국한 될 것이다.

이 법안에 포함된 조항들 중 몇가지는 우리에게 직접적인 영향을 안겨줄 것이다. 물론 법안이 통과되고 입법화 되기 전 상원에서 자세한 발표를 하겠지만, 현재 여러가지 거래로 고민하고 있는 사람이라면 계속해서 입법 과정을 주시하며 지켜볼 것을 권한다.