British oil major BP has revealed that the tax reforms carried out in the United States will lead to a $1.5 billion write down. However in the long term the tax reforms will benefit the oil giant’s business in the United States. Other large firms have made similar disclosures in the recent past following the largest overhaul of the tax legislation in the United States in three decades.
For BP, while the reduction in the rate of corporate tax to 21% from 35% will positively impact future earnings, the Q4 results which are set to be announced next month will be negatively impacted. This is mostly due to the fact that the ability of the company to have past losses deducted against future tax expenses would be reduced. Consequently BP’s deferred tax liabilities and assets in the United States would have to be revalued. BP’s UK rival, Royal Dutch Shell, also disclosed last week that its earnings in the fourth quarter would fall by between $2 billion and $2.5 billion due to the tax reforms.
Just an estimate
Like has been the case with other firms BP indicated that the non-cash charge of $1.5 billion was an estimate with the final figure expected to be revised once its accountants and lawyers have finished their work of reviewing the tax legislation. According to BP cash flow would not be impacted by the accounting charge. Following the partial recovery of oil prices BP’s cash flow has improved just like has been the case in the rest of the sector.
While the tax reforms carried out in the United States are expected to be a boon for corporations due to the reduction in the tax rate, a number of changes to the tax code require companies that are publicly traded to account for the period when signing of the bill took place.
“Companies will need to carefully evaluate the impact that the changes will have on their existing financial statement positions, assertions, and disclosures, in order to appropriately account for changes in the period of enactment,” wrote accountants at Price Waterhouse Coopers in a report.
Besides oil majors some financial institutions have also indicated that they take a one-time charge following the changes in the tax code. This includes UK bank Barclays which has revealed it estimates a charge of one billion sterling pounds in the fourth quarter report. Goldman Sachs on the other hand expects a one-time charge of $5 billion in Q4.