The International Accounting Standards Board made another attempt to bring order to the global uncertainty around fair value.  This serves as one more step to closing the distance between GAAP and IFRS, and according to this article from Accounting Today the guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date,” or the exit price.

I noted in March that Mary Schapiro may be looking to slow the convergence process; even so, agreement on fair value continues to be a dominant point of discussion.

Interesting red flag thrown up by CFO magazine in its recent article on the new administration’s multinational tax plan.  Quoting from the story, “President Obama is pushing Congress to rework tax rules affecting U.S. multinational corporations so that more revenue will flow back into the United States - about $210 billion over the next 10 years, according to the Treasury Department.”

This will be accomplished in large part through the expense-deferral rule, which will restrict deferring tax payments on cross-border profits.

The outlook sheds new light on the international tax story, which we checked in on in this MFA Business Insights post from last month.  We like to keep an eye on these global tax themes, as the opportunities to strengthen business by conducting operations overseas continue to have great appeal.

An interesting look ahead, flagged for us by our peers at TaxProf Blog: Mihir A. Desai (Harvard Business School) has posted a new paper on evolving tax policy for companies operating overseas. Check out Securing Jobs or the New Protectionism?: Taxing the Overseas Activities of Multinational Firms; the abstract reads:

Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy. This paper address these questions by analyzing the available evidence on two related claims - i) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and ii) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.

No surprise to see that the saga around IFRS (International Financial Reporting Standards) lives on.  New SEC Chair Mary Schapiro implied that recent discussions may be wiped from the chalkboard (or at least significantly reconsidered), saying that she “will not necessarily feel bound by the existing roadmap that’s out for comment.”

As noted in the AICPA’s blog on IFRS, any delay is welcome when it comes to preparing for such a major change in standards.  As I discussed in my post on September 3 or last year, I had my own take on the situation and predicted that the existing timetable would not persist.   A shift of such enormous scope will take a great deal of patience and learning on the front end,  and it will not be easily accepted in the financial matrix of the United States.

Even so, we stand by our take in last year’s Perspectives article (Three Steps Financial Executives Should Take Towards IFRS) that getting that learning process underway can only help matters in the long run.  In that Perspetivce, we point to three key steps financial departments can take even this far away from implementation:  keep your radar on, get educated, and prepare to mobilize.  When the tide does eventually rise on IFRS, it will come with a litany of obstacles - but with all this back and forth, getting caught off guard shouldn’t be one of them.

A recent article in Accounting Today investigates a study on reporting practices by multinational companies, and seems to question the intentions of these filers.  Specifically, the report (conducted by the Government Accountability Office) concludes that current rules “influence company decision about how many workers to employ and how much to invest in particular activities and locations.”

One noteworthy comment from the article comes from GAO Chairman Max Baucus (D-Mont.):

I’ve said before that we will tackle tax reform in 2009 and this report underscores the need to review business taxes as part of our tax reform efforts in the next Congress. Simply put, I do not intend to allow U.S. multinationals to sidestep their fair share of taxes by moving income offshore.

This viewpoint may be grounded in sound information from the report, but reform is not necessarily the answer — the best recourse may simply be to clarify and better enforce the rules that exist.

Currently, the US has one of the highest corporate tax rates of any developed country in the world.  As a result, corporations looking to cut costs often determine where to set up business operations by looking to income tax rates as well as payroll and other costs associated with various jurisdictions.

But taking that measure does not exploit a loophole.  The Internal Revenue Code currently has significant rules that are specifically enacted to reduce the possibility of US taxpayers shifting income to foreign jurisdictions.  These include, but are not limited to, Subpart F rules, Transfer Pricing Rules and IRC Section 367, which governs transfers of property from the US to other countries.  Despite Senator Baucus’s quote, these rules make it very difficult for corporations to merely “sidestep their fair share of taxes by moving income offshore.”

That said, the rules are so complex that they are most likely applied differently by different corporations, depending upon how they interpret the rules relevant to their own particular fact pattern.

Back to the solution, then.  One thing the IRS could do is to provide better guidance as to how the rules should be applied.  A second thing would be to step up enforcement of reporting requirements currently in effect.  Proper reporting would provide the IRS with better information as to whether the rules were being applied properly.

Within the past month, the IRS has indicated they will start penalizing corporations for failure to file the necessary information returns.  Penalties have been applicable for many years, but have rarely been assessed.  Better enforcement could be the best way to help prevent any tax avoidance and clear up misunderstandings as to whether taxpayers are shifting income offshore to avoid taxes.

Well, it looks like we may be on our way.  After years of false starts and conjecture about U.S. adoption of - or complete convergence with - International Financial Reporting Standards (IFRS), the SEC issued a press release on August 27th entitled “SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily“.  Despite this press release, a final decision as to whether the adoption of IFRS is in the best interest of the public is not expected until 2011, and U.S. issuers would not begin using IFRS before 2014.

While this development is significant in that it is the first time the SEC has publicly announced a roadmap for the use of IFRS, it doesn’t change my position on what should be done now. I’ve been reading a lot from the press and other news sources about the impending effect of IFRS on U.S. GAAP, and I’m not convinced that IFRS will be a reality any time soon in the U.S.  Call me a cynic, but the SEC gives itself a lot of wiggle room to delay (indefinitely, if it wishes to), and Chairman Cox doesn’t help the cause by using words like “cautious and careful plan”.

And remember folks…the SEC’s announcement will likely have an impact on private companies as well.  The chairman of the FASB, Robert Herz, has gone on record a number of times regarding the push to international standards, and the SEC’s actions will simply add fuel to that fire.  But similarly, the FASB is unlikely to allow the adoption of IFRS prior to the SEC, and thus any delays by the SEC will likely be reflected in actions by the FASB too.

Being the cautious and conservative CPA that I am, I continue to strongly advocate advanced education on the topic of IFRS and I still contend that companies do not want to, nor should they be, taken by surprise if/when IFRS becomes a reality here in the United States.  But I remain less convinced that this change will come about in the United States as “quickly” as outlined in the SEC’s proposed roadmap.

Time will tell, but as far as I’m concerned, the sky is not yet falling.

UPDATE 10/7/08:  OK, I’m generally not one to say “I’m right”, but slippage is already occuring.  Here’s a link to a brief article on CFO.com that discusses what’s happening (or NOT happening) as of late. 

A June forum on International Financial Reporting Standards (”IFRS”) held in New York saw some urgency around getting the United States aligned on timing and action steps for making a transition to IFRS.

For those new to the topic, migrating to IFRS will mean US companies will begin using the same reporting and disclosure guidelines that more than 100 financial markets around the world, such as Australia, the European Union, New Zealand and Israel, currently permit or require. While there are a number of similarities, there are also significant differences between IFRS and US GAAP (Generally Accepted Accounting Principles) — more on the finer points in this related audiocast and Perspectives article (click on the image above).

Assuming that the SEC continues its onward push toward convergence with IFRS, US companies may quickly find themselves unprepared unless they and their auditors begin to educate themselves now. Even the uniform CPA examination in the US is considering an exposure draft [PDF] that would incorporate new testing requirements of IFRS in the future.

For some, IFRS is the source of optimism for global growth, according to a study by the International Federation of Accountants (IFAC). The organization found that a move to IFRS is expected to boost business, as “approximately 50 percent of respondents said convergence to a single set of international standards…for [Small to Mid-Sized Enterprises] is important to economic growth in their countries.”

The American Institute of CPAs (AICPA) has been one of the most vocal proponents of raising awareness of IFRS. The AICPA recently launched www.ifrs.com as an information resource on the transition, and in April conducted a poll of CPAs to gauge expectations. While 55 percent of 1,240 respondents said that they expect the move to IFRS to directly impact their work, 59 percent said they have not begun to prepare for adoption. Most felt that three to five years was a reasonable time frame to ramp up. However, even more time might be necessary when one considers that public filers will need to report IFRS-processed numbers for three years of income statements and two years of balance sheets; arguably, one would have to start converting to IFRS now in order to be ready to report IFRS numbers in three to five years.

The SEC is currently reviewing a proposal to allow U.S. companies to file under IFRS voluntarily, with a mandated deadline to be set in the future. With these wheels in motion, CPAs are already preparing for IFRS and companies looking to compete across borders will be better armed for global business by doing the same.

Not everyone is convinced that IFRS will improve financial reporting in the United States. For one, IFRS came into being in the early 1970s and is arguably less developed than US GAAP, which got its start in the 1930s. Further, adoption is expected by many to be more complex than the adoption of the Sarbanes-Oxley Act of 2002, which saw internal and external costs for corporate America rise exponentially, and will require an overhaul of the SOX 404 internal controls to ensure proper alignment of systems with IFRS accounting standards. Given that the US arguably has one of the most dynamic economies and easy access to capital, one must wonder if adoption of IFRS is truly necessary to remain competitive in a global economy.

Despite the potential for controversy and debate, it is becoming more and more apparent that an understanding of IFRS and what it might mean to US companies is imperative. Efforts should be underway now to develop the expertise because it is likely that the ramp up time will be significant. Also, users of a company’s financial statements (e.g., Board members, audit committees, investors, bankers, etc.) should begin developing an understanding of what IFRS could mean to financial reporting. There are many resources available, such as the AICPA’s “IFRS Primer for Audit Committees“, that will provide support. Of course, you should work with auditors that are well versed in IFRS to help support your own educational development.

Business is global – and so are taxes. Companies that are connected by common control and share resources across borders need to ensure they address transfer pricing when goods or services change hands. We wanted to share some expertise in this area through this Q&A, and you can also view an educational webcast on where transfer pricing may come into play and the best methods to use for different scenarios.

Q. What is transfer pricing?

A. Simply put, if income or deductions shift between taxpayers in different tax jurisdictions, transfer pricing comes into play. The goal from the perspective of the IRS and other tax authorities is to prevent companies from shifting income between entities in a way that may evade taxation.

For companies that have operations in different regions – whether as part of the core organization or through subsidiaries – transfer pricing is an important piece of tax law. In basic terms, transfer pricing is the determination of the price or compensation for transactions conducted between separate taxpayers based on similar arm’s length transactions with third parties. They can be directly owned companies, affiliates, brother or sister companies or entities under common control, and they can be in different parts of the U.S. or operating across international borders.

Q. How do I know if transfer pricing applies to me?

A. If you and another company have common ownership or are under common control and are transacting business together, you’ll want to be very aware of transfer pricing. A couple examples are:

A U.S.-based company with an R&D subsidiary in Israel

Here’s a case in which the level of activity abroad is a big factor in determining transfer pricing. The higher the level of risk, assets and functionality, the higher the pricing will be.

A UK company with a sales outlet in India

Again, this is not just a U.S. initiative – tax authorities worldwide consider transfer pricing a hot area. The transfer pricing level is driven by the level of operations within each jurisdiction and between such taxpayers, with slightly different rules amongst different global jurisdictions.

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