Lenovo to take one-time US$400 million hit due to US tax reform, but eyes long-term gains
The new US tax corporate cut expected to cause short-term pain for companies, but likely to be favourable in the longer run
Lenovo Group, one of the world’s largest personal computer makers, said on Wednesday it would book a one-off, US$400 million charge for the nine months ended in December stemming from US President Donald Trump’s tax overhaul, due to a reassessment of its US deferred tax assets.
The write-down is non-cash in nature, and the group “does not expect such an adjustment to have any material effect on its operation or cash flow position”, it said in a filing to the Hong Kong stock exchange.
The company has calculated the charge in respect of its deferred tax assets as a result of the new US tax code, which has reduced the US corporate tax rate to 21 per cent from 35 per cent.
“The board of directors of Lenovo Group believes that such a reduction will positively impact the future earnings of its US operations in the long term,” Lenovo said.
Lenovo is due to announce its third-quarter results on February 1.
Its shares dropped 1.5 per cent to close at HK$4.59 on the Hong Kong stock exchange, underperforming the Hang Seng Index’s 0.2 per cent gain.
Some 61 million shares changed hands for the day, worth a total of HK$282 million.
The US Tax Cuts and Jobs Act was passed by Congress in December and then signed into law by Trump.
While the act is expected to lift future company earnings, the lower corporate tax rate has reduced the value of deferred tax assets already held on company balance sheets and a number of companies have announced one-time writedowns, in particular in the banking sector.
Earlier in December, Citigroup said it expected to write down about US$20 billion due to the reduction in the value of deferred tax assets and changes to rules regarding the repatriation of profits earned in other countries.
Weeks later, Goldman Sachs saw a hit of US$5 billion to profits for the fourth quarter, also because of changes in repatriation taxes and the remeasurement of its US deferred tax assets.
“Firms will be forced to remeasure the value of their deferred tax assets and liabilities at the new 21 per cent statutory federal corporate tax rate,” the investment bank said.
“Companies will record a tax expense (benefit) if deferred tax assets are greater (less) than deferred tax liabilities.”
Goldman expected investors to “look through a noisy (fourth quarter) and focus on the effects of tax reform in 2018”.
Earlier this month, oil company BP and Morgan Stanley separately forecast US$1.5 billion and US$1.25 billion decreases respectively in their fourth-quarter earnings due to the tax changes.