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Billion-Dollar Writedowns Pile Up as Companies Analyze Tax Bill

Billion-Dollar Writedowns Pile Up as Companies Analyze Tax Bill

Saturday, 23 December 2017 12:28 PM

President Donald Trump has signed a tax overhaul and companies are rejoicing. But the most immediate effect of the new law could be a one-time accounting headache.

Hours after the bill signing, announcements started to roll in from some of the world’s biggest companies -- with some spectacular numbers. While the bill benefits most companies through a lower rate, it also requires them to recalculate some of the tax positions they may have been holding on their books for years.

Biotechnology company Amgen Inc. said it would take a $6 billion to $6.5 billion charge. Bank of America Corp. plans to take a $3 billion hit, and Credit Suisse Group AG will take a writedown of 2.3 billion Swiss francs ($2.32 billion).

The one-time changes are related mostly to what are known as deferred tax assets that accumulate on balance sheets when companies overpay taxes or take tax losses. On the other side of the ledger, deferred tax liabilities pile up when they’ve underpaid taxes on depreciated assets.

The tax law lowers the corporate rate from 35 percent to 21 percent and in the long run, most companies will benefit. But with that sharp cut, the Republican tax makeover scrambles the math around the tax instruments, meaning some companies will post significant one-time gains or losses as they bring their books into harmony with the new code by year-end.

It’s Been a While

Experts said investors are largely aware of the rule, but it could cause some confusion in the stock market as the numbers drop or when earnings reports emerge. For one thing, institutional memory may be lacking -- the rule only has real impact when corporate rates are cut sharply, and the last time that happened was three decades ago.

“People might be confused, but the sophisticated people will say ‘don’t worry about it, it’s a one-time thing,’ ” said Marty Sullivan, chief economist at Tax Analysts.

Among the companies that could see the biggest changes are banks that suffered steep losses during and after the 2008 financial crisis. Citigroup Inc. executives, for example, said in a call this month that the lender expects to take a noncash charge to fourth-quarter earnings of about $20 billion, mostly as a result of writing down its tax assets.

“All the sudden, the jerk in accounting says you have to drop a billion-dollar loss, so you have to report a negative to shareholders,” Sullivan said. “In any other situation, that would be cataclysmic.”

More to Come

Credit-card company American Express Co. has net deferred tax assets of $2.3 billion. Chief Executive Officer Ken Chenault said this month that while the company will take a one-time hit, “the long-term benefits, for the economy, for our company, for our shareholders, over the years, will be very substantial.”

For companies with net deferred tax liabilities, things look different. With the cut in rates, any unpaid tax bills won’t be as large -- and that means a boost to the bottom line.

“Let’s say you have credit card debt,” said Robert Willens, a tax adviser to hedge-fund managers. “It’d be the same if someone said you didn’t have to pay that debt.”

Airplane maker Boeing Co., for example, has net liabilities of $1 billion and will see a one-time gain of about $400 million, according to a Bloomberg analysis.

Boeing declined to comment on the estimate and hadn’t issued an estimate of any charge or benefit as of Friday afternoon.

Indeed, many of the largest companies in the U.S. stand to get a nice bump. A Bloomberg analysis of the 30 companies listed on the Dow Jones Industrial Average found that two-thirds will likely report a one-time earnings gain in the fourth quarter, while the other third will likely report a one-time charge. 

Because companies don’t report which tax assets and liabilities are foreign and which are domestic, it’s hard to say what the exact gain or loss companies will face unless they report it. But executives have alluded to the writedowns on conference calls.

Another factor that will play out will be the tax law’s levy on profits held overseas. Companies stand to lose from part of the bill which requires them to bring back their foreign earnings and pay a one-time tax -- 15.5 percent for cash and 8 percent for noncash assets -- in exchange for a 100 percent exemption on most foreign dividends. 

That means JPMorgan Chase & Co., which would gain from writing down its deferred tax liabilities, will instead take a one-time hit when it brings its earnings back to the U.S. Chief Financial Officer Marianne Lake said in a conference call this month that the financial-services giant could lose as much as $2 billion.

Companies have to account for the tax bill’s changes in the period it was enacted, which means the pressure is on for corporate accounting departments.

“It’s like going to the airport to go to China in five minutes, and you haven’t packed yet,” he said. “You might be able to pack a few things, but you’re not going to make it. They’re going to be screwed.”

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Eye-popping numbers are related to required accounting changes; A third of companies to take one-time hit: Bloomberg analysis
writedowns, companies, tax, bill
Saturday, 23 December 2017 12:28 PM
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