If procrastination is an art, the Museum of Fine Arts should set aside a wing for IFRS.  I’ve written before about skepticism around adoption — specifically about whether it will happen and whether it will be in the best interests of U.S. companies.  That was many months and several SEC announcements ago, and all the posturing and planning to date brings us to the same spot in which we stood in 2008: at a crossroads, with a pair of binoculars, a compass calibrated for GAAP, and some beef jerky for the trip.

Almost exactly one year ago, I noted that the SEC’s apparent shrug of the shoulders with regard to previous IFRS discussions was a big indicator that there would be no sprint to the convergence finish line.  On the contrary, we’re looking at a slow crawl at best.  The latest word from the SEC comes in the form of an extension to 2015 from 2014 and the elimination of the option for public companies to move to IFRS this year.  Journal of Accountancy reports that “the SEC is not excluding the possibility that issuers may be permitted to choose between the use of IFRS or U.S. GAAP,” and that it is targeting 2011 to issue a recommendation.

So whatever the spin, the bare bones of it is that the SEC has yet to fully commit to requiring companies to change from GAAP to IFRS. The Accounting Onion does an even deeper, more cynical dive in this recent post, calling out the SEC for a lackadaisical approach to vetting IFRS, among other things.

I think it’s all well and good, per my original sentiment way back when- the more time companies have to adjust, the better.  The key is developing an understanding of international standards over the course of the next few years so as to minimize any fire drills, although there will undoubtedly be plenty of those.

So getting back to the title, are finance execs out there starting to prepare by seeking education for their financial staff?  Or is the entire country locked into “wait and see” mode?

Although there is some evidence that the credit market is loosening, it is clear that the harsh lending environment of the past two years has taken a toll on a wide range of businesses.  There are, however, tools that provide temporary help, including the government’s current policy on “loss carrybacks.”

As part of the original stimulus bill, the loss carryback provision gave qualifying companies that registered a loss on their current income tax return the opportunity to extend that loss into previous, profitable years.  Under the adjusted regulations, the field of qualifiers has been expanded to include most companies, and a loss booked for the 2008 or 2009 calendar year (but not both) can be carried back up to five years through amended returns.

A CNN article on loss carrybacks points out that the provision has resulted in “some giant refunds for big businesses — troubled homebuilder Lennar recently booked a $353 million tax gain from the provision — and a much bigger hit to the nation’s coffers. The Joint Committee on Taxation estimates the carryback change will cost the government $33.2 billion this year, though the 10-year cost of the break is smaller, because companies won’t be carrying 2009 losses forward to reduce their future tax bills. The committee’s estimate of the 10-year cost is $10.4 billion.”

The move isn’t unprecedented.  According to an article in CFO Magazine, the Bush Administration provided a similar opportunity following 9/11, and in 2009 the original amendment was available only to businesses with less than $15 million in revenue.  This time it applies to businesses of all sizes and includes pass-through entities as well as C-corporations.

Anecdotal evidence suggests that companies are finding real benefit - albeit short term - in the carryback provision.  Is it a measure you think will aid small to midsized companies through to a recovery?

I would like to highlight an interesting perspective for those who hold within their IRA accounts unregistered securities or investments in limited partnerships such as private equity, venture capital and mezzanine: using an arbitrage strategy.

Let’s begin with a little background:

Investing IRA money in qualified unregistered investments has been within the bounds of IRS rules since 1974 and a common practice among most venture capital and private equity investors. Fast forward to 2010, sprinkle in a little bit of federal government stimulus, and qualified investors can now participate in a once in a lifetime opportunity to create their own personal tax-exempt entities (Roth IRAs) and at the same time arbitrage multiple premises of value.

The Arbitrage:

Let’s say you or someone you know is a high net worth individual who has accumulated unregistered securities within their IRA and these same securities are valued at $3.5 million by the company, its general partner and their outside accountants using United States Generally Accepted Accounting Principle SFAS No. 157 or some other comparable methodology. SFAS No. 157 value, which may not necessarily approximate the IRS’ minority, non-marketable value standards, is only one of many values that a single security can have in the same day. For example, these values may appear as:

-  Control, marketable value $ 6.5 million

-  SFAS No. 157 minority, non-marketable value $ 3.5 million

-  IRS minority, non-marketable value $ 3.0 million

Three distinctive values, same day, same security! This multiple premise of value translates into a permanent taxable income variance of $3.5 million ($6.5 million less $3.0 million) – allowing for a federal and state income tax savings of $1.50 million (assuming an effective 42% tax rate).

The benefit of a Roth IRA, as most people know, is its tax sheltering power over future interest, dividends and capital gains. It is the extra girth of the arbitrage that drastically influences the time value of the tax conversion costs and provides the ultimate wealth accumulating advantage. A time elapse example: under a three year premise that the underlying securities appreciate at a 15.0% CAGR, the arbitrage increases from $3.5 million to $5.3 million. Roth IRAs are a dynastic tax sheltering wealth strategy that will last for untold generations, and what better way to form it but with a little bit of arbitrage.

For those who like hedging arbitrage strategies, here is one for you! Under the new Roth IRA conversion rules there is a special tax incentive for 2010 conversions (ability to equally spread the taxable income on conversion over the following two tax years); and, most importantly, should it appear as if the investment will not succeed, a “fail-safe hedge” provision allows the investor to completely unravel the conversion, at any time, before the tax filing deadline. Under this provision, the earlier transaction can be either abandoned outright or it can be abandoned, reinstituted and re-priced 30 days later at a lower valuation and, therefore, a lower tax conversion costs. This wealth accumulation tactic, which can be further enhanced with a Roth Segregation Strategy, lasts no longer than the IRA/Roth IRA conversion period is open. Only as a result of the Great Recession and only in the United States of America!

While a formal valuation by an independent party is not specifically required within the new provisions, the valuation rulings within the IRS Code and the possible inconsistency between GAAP/IRS valuation methodologies cannot be ignored and, therefore, I recommend that the Roth conversion be made with a tax based securities’ valuation in mind. A well thought out valuation performed by a properly qualified and independent valuator who specializes in complying with IRS security valuations is a conversion cost worth its foundational bearings.