The Financial Accounting Standards Board said recently it would issue staff positions to offer guidance on how companies should account for certain tax benefits recently extended to U.S. manufacturers in the latest tax law.
The American Jobs Creation Act of 2004 provides domestic manufacturers a tax deduction of up to 9 percent on certain portions of income as defined in the law. FASB says companies should account for this deduction as a special deduction, not a reduction in the statutory tax rate.
FASB favored the special deduction because any benefit from the deduction would be reported in the year it is earned. If companies reported the tax benefit by reducing the tax rate, it would require an immediate adjustment of deferred tax balances at a different rate, which would create a one-time benefit or loss for earnings.
The new tax law also gives manufacturers a one-time deduction to repatriate, or return to their U.S. books, qualified earnings held in foreign operations. The Act provides a 14-month window of time for the repatriation.
FASB says the Act is ambiguous and establishes the time frame in a way that makes it difficult for companies to exercise good financial judgment about how to repatriate foreign income and invest it in domestic operations. It is issuing a staff position for comment that allows additional time.
The provision of additional time will not set a specific cut-off date, but will define that a company must claim whatever deduction it plans to claim in the same period it determines its repatriation plans, to avoid indefinite deferrals of tax liability.
EITF And Intangibles
In other business, FASB has decided it will add a project to its agenda to provide guidance on determining the useful life of renewable intangible assets. FASB’s Emerging Issues Task Force asked the Board to take up the issue to eliminate conflicting guidance among different standards, which requires Board-authorized amendments to achieve. The U.S. Securities & Exchange Commission recently advised FASB in a staff announcement that public companies needed to adopt more precise methods of valuing intangible assets in the context of mergers and acquisitions.
The EITF is scheduled to convene for a two-day session, Nov. 17-18, to explore long-lived assets, mining costs, investments in limited partnership, variable interest entities and other issues.
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PCAOB's McDonough: Expect Restatements
McDonough
Expect restatements as the Public Company Accounting Oversight Board digs deeper into audit inspections this year and next, said Board Chairman William McDonough in an address to the Financial Executives International's annual Current Financial Reporting Issues conference.
“Our discussions with accounting firms about deficiencies may start a process that results in a company restating its financial statements,” McDonough says in his prepared remarks. He acknowledged that some issuers are publicly linking restatements to PCAOB inspections. “That may continue to happen as we proceed with our 2004 inspections.”
Assuaging concerns that errors will erode investor confidence, McDonough emphasized disclosure is critical. “Don't admit failure,” he said, “but say, 'Here's the problem, here's what we're doing about it, and here's how long it will take to fix it.’ ”
Nicolaisen
SEC Chief Accountant Donald Nicolaisen told conference attendees that companies are undergoing “a real push to get the numbers right,” but that failures are still common and investors remain skeptical of reporting in general. He said Sarbanes-Oxley and its internal controls reporting requirements provide potential for “truly lasting impact on financial reporting.”
Areas for continued improvement, Nicolaisen said, include communication in language investors can understand and off-balance-sheet reporting, which the SEC currently is studying for recommendations.
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