In the interest of global consistency, the International Accounting Standards Board has agreed to adopt U.S. tax rules that overlook the prospective tax liability associated with foreign-invested earnings—at least for now.
The issue involves foreign earnings that are invested outside a parent company’s home tax jurisdiction. International and U.S. rules (International Accounting Standard No. 12, Income Taxes and FASB Statement No. 109, Accounting for Income Taxes) generally agree that the home jurisdiction should not tax earnings from abroad until those earnings become income to the parent operation at home. However, international rules require companies to recognize and carry the prospective tax liability. U.S. GAAP do not require companies to recognize a future tax liability if the earnings are regarded as permanently or indefinitely invested abroad.
In attempting to achieve short-term alignment of standards, the IASB and the Financial Accounting Standards Board have focused on how to resolve the conflict. The IASB agreed at its joint session with FASB last week to drop its liability-carrying requirement to make its standard consistent with GAAP.
At the same time, board members acknowledged that the issue merits further study in a future, comprehensive project because of the complexities involved in recognizing foreign income. Neither board has set a timetable for such a project.
U.S. tax rules regarding foreign income are not without controversy. Critics say the allowance for U.S. companies to hold earnings abroad, free of U.S. tax, discourages investment at home. But a recent act of Congress may encourage U.S. companies to repatriate—or return to their U.S. operations—earnings that are currently invested abroad. The American Jobs Creation Act of 2004, approved Oct. 11 and awaiting the President’s signature, gives companies a significant tax break on repatriated earnings.
Documents related to the FASB/IASB convergence project can be found in the box above, right.
PCAOB Member Offers Reassurance to Calm Compliance Concerns
As the Public Company Accounting and Oversight Board digs deeper into its review of audit firm practices, the board will consult with audit committee chairs to assess the firm/client relationship and the audit process, said PCAOB member Kayla J. Gillan in an address to the National Association of Corporate Directors.
Roger Raber, president and CEO of the NACD, said corporate directors should take comfort in knowing they’ll have a voice in the process. “From the directors’ perspective, we like that there will be some conversation and communication with the committee,” Raber said.
Gillan
Gillan said the PCAOB has broadened its inspection process this year to include the eight largest U.S. audit firms and another 80 to 100 smaller firms, increasing the likelihood of a public company’s selection for a PCAOB inspection. Gillan hopes a PCAOB inspection won’t invoke the same dread as a tax audit or a root canal.
“Understand that it is the auditor that is being inspected, not you,” she said. “If a GAAP error is detected, ask not only how to correct it, but also how to prevent similar errors in the future.”
Gillan acknowledged the costs associated with compliance, but advised “Probe to ensure that controls, including documentation, are maintained. Much of the costs incurred during year one won’t have to recur, so long as sufficient resources are dedicated to ongoing maintenance.”
Raber
Raber said he reserves judgment on Gillan’s one-time characterization of costs. “We know it’s costing us, and we know we have to do it,” he said. “Will the costs really diminish? Time will tell.”
Looking ahead, Gillan said the PCAOB will focus its standard-setting agenda on projects involving fraud detection, auditor independence and audit committee communications.
The complete speech is available from the box above, right.
FASB Extends Option Expensing For Nonpublic Companies
The Financial Accounting Standards Board decided on Oct. 18 to add another extension to its stock option expensing rules, this time focusing on nonpublic companies who adhere to GAAP.
The board decided a week prior to extend the effective date of its still-developing stock option expensing requirements into June 2005 for all companies, but chose this past week to give nonpublic companies an additional six months, until Dec. 15, 2005, to begin expensing options. The extension to December does not apply to smaller public issuers, as had been incorrectly reported in some places.
Todd Patrick, director of the CBIZ Valuation Group for Century Business Services, Inc., characterized the most recent extension as a “friendly” move on FASB’s part, suggesting FASB may be acknowledging that expensing stock options will be more difficult and time-consuming for nonpublic companies.
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