IDCC may be subject to a year end earnings hit due to tax law changes.
Because of the reduction in the corporate tax rate, corporations are required to make a one time accounting adjustment to their deferred tax asset accounts. As explained in the following article:
“Billion-Dollar Writedowns Pile Up as Companies Analyze Tax Bill
Eye-popping numbers are related to required accounting changes A third of companies to take one-time hit: Bloomberg analysis
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.
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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.”
As of 30 September IDCC’s recorded Deferred Tax Assets totaling $157.4 million.
IDCC is aware of the potential for write downs . In regard to income tax accounting the 10-K annual report states:
“Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. ]The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statement of Income in the period in which the change was enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if management has determined that it is more likely than not that such assets will not be realized.”
The latest available deferred tax asset balance was $157.4 million. In addition to Federal taxes, the account also covers state and foreign taxes. Based on data in the 10-K report, I would estimate that the Federal tax portion represents approximately 75% of the total, or $118 million. Assuming the adjustment would be calculated based on the 14% difference between the former 35% and the new 21% statutory corporate tax rates, the maximum adjustment would be approximately $16.5 million ($118 x.14%). (Note: the actual tax reevaluation computation is dependent on the composition of the deferred taxes)
Some more comments on the effect of the adjustment on banks:
“Citigroup is estimated to take a $16 billion to $17 billion hit, but even for regional banks, the charges could be sizable. Capital One Financial, for example, may record a charge of about $976 million, according to an estimate by FIG Partners. Among large banks, only Citi has indicated the size of its charge. However, FIG Partners estimated that U.S. Bancorp’s charge could total $514 million; the $19 billion-asset First National Bank of Omaha may record a $50 million charge; the $30 billion-asset Associated Banc-Corp may take a $36 million charge; and the $27 billion-asset Hancock Holding in Gulfport, Miss., could record a $29 million charge.”
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