Financial reporting in the time of CREATE

On Nov. 26, 2020, the Senate approved on third and final reading Senate Bill 1357, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, which seeks to reduce the corporate income tax rate and rationalize the current fiscal incentives by making them time-bound, targeted and performance-based. This was done in an attempt to revitalize the slowing economy, as it is predicted that the measure will bring in more foreign investments like never before.

The House of Representatives, which already passed their counterpart measure in September 2019, informed the Senate on Dec. 15, 2020 that the former have designated members for the Bicameral Conference Committee. This means that a bicameral conference will be held to reconcile disagreeing provisions on the two versions of the bill.

The proposed law will be submitted to the President of the Philippines for his approval into law only after the reconciled version of the measure is ratified by both houses of Congress in plenary.

The Bicameral Conference Committee only approved the reconciled version of the CREATE on Feb. 1, 2021 and was subsequently ratified by both houses of Congress on that same week. It now only needs the signature of the President for it to become a law.

Raising questions

Since the passing of the CREATE bill into law did not happen before Dec. 31, 2020, some questions regarding its provisions in connection to financial reporting arise. In Philippine Interpretations Committee Questions and Answers 2020-07 (PIC Q&A 2020-07) dated Jan. 29, 2021, some issues found were: The date of the bill’s substantive enactment; whether the subsequent enactment of the CREATE bill will be considered an adjusting event; and the impact on the calendar year (CY) 2020 and CY 2021 financial statements of companies covered by the reduced income tax rates, in case the CREATE bill (with retroactive effect in 2020) will be passed into law after the reporting period of an entity.

While we are still awaiting the law’s passage, a quick review of the facts, which are also spelled out in the PIC Q&A 2020-07, will certainly help. These are the conditions existing as of Dec. 31, 2020:

• Congress as the legislative body and the President representing the executive body of the government are separate and independent from each other;

• The bill is still pending with the Bicameral Conference Committee, and consequently not yet submitted to the President of the Philippines;

• Upon submission to the President of the Philippines, he may either approve it or exercise his veto power to stop the enactment of the subject bill; and

• In case the bill is vetoed by the President, Congress may not be able to garner the required two-thirds vote to overturn the presidential veto.

Given these circumstances, the CREATE bill is not considered substantively enacted as of Dec. 31, 2020.

Moreover, under paragraph 22h of the Philippine Accounting Standards 10, Events after the Reporting Period, if the bill is passed into law after the balance sheet date (i.e., Dec. 31, 2020) but before the issuance of the audited financial statements, it is treated as a non-adjusting event. Disclosure of the nature of changes and impact to the financial statements will also be required if the impact is expected to be significant.

Impact to financial statements

Based on the consensus raised by the PIC, there will be considerable impact on both the CY 2020 and CY 2021 financial statements.

For CY 2020 financial statements, current and deferred taxes will still be measured using the applicable income tax rates as of Dec. 31, 2020 since the CREATE bill was not yet enacted/substantively enacted as of such date. This will result in a difference between the provision for current income tax that is reported in the financial statements and the amount of income tax due in the corresponding 2020 income tax return (ITR).

If the CREATE bill is enacted prior to the CY 2020 audited financial statements issue date and before the actual filing of the CY 2020 ITR, this will be treated as a non-adjusting event but significant effects of changes in tax rates on current and deferred tax assets and liabilities should be disclosed. Since the CREATE bill is already a law at this point, Companies will already compute for the current and deferred taxes based on the adjusted tax rates to determine the amount of taxes due.

If the CREATE bill is enacted after the CY 2020 audited financial statements issue date but before the actual filing of the CY 2020 ITR, this is no longer a subsequent event that will require a disclosure, but companies may consider disclosing the general key features of the proposed bill and the expected impact in its audited financial statements.

On the other hand, CY 2021 financial statements will entail that the components of tax expense (income) may include “any adjustments recognized in the period for current tax of prior periods” and “the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes.” An explanation of changes in the applicable tax rate(s) compared to the previous accounting period is also required to be disclosed.

Hence, the provision for current income tax for CY 2021 will include the difference between the income tax in the CY 2020 financial statements and CY 2020 ITR.

Deferred tax assets and liabilities as of Dec. 31, 2021 will be remeasured using the new tax rates. The impact of remeasurement is recognized in profit or loss (i.e., provision for/benefit from deferred income tax), unless it can be recognized in other comprehensive income or another equity account.

Any movement in deferred taxes arising from the change in tax rates that will form part of the provision for/benefit from deferred taxes will be included as well in the effective tax rate reconciliation.

Hope for the future

The pandemic may have battered and beat down our economy, but the government has offered the recalibrated provisions of the CREATE bill with the intention of having a law that is relevant and responsive to the needs of the business community that is being negatively affected by the pandemic. Hopefully, we will be seeing the Philippine economy and business landscape prosper soon.

Mabel Comedia is a partner of the Audit and Assurance and Head of Technical Standards & Quality Control Divisions of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines with 22 Partners and more than 900 staff members. We’d like to hear from you! Tweet us: @GrantThorntonPH, like us on Facebook: P&A Grant Thornton, and email your comments to mabel.comedia@ph.gt.com or pagrantthornton@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph

As published in The Manila Times, dated 10 February 2021