Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. For CPAs in public accounting this means performing higher quality audits. But who has the time to compile a list of relevant and timely accounting news relevant to CPAs? We do! Here are a few articles, blog posts, and publications designed to help increase business acumen in the profession.

Transfer Pricing: Shifting Profits from Hard-to-Value Intangibles (November 17, 2015) – Financial Director (@FDmagazine)

Transfer pricing has been in the news recently with multinational companies repositioning profits, including those derived from their brand and other hard-to-value intangible assets, to more favorable tax jurisdictions. Many companies use comparable transactions to assign a fair value to their intangible assets, but the accuracy and reliability of this method can be questioned by tax authorities.

How It’s Relevant: Multinationals are no different than you and me. They want to minimize their tax liability. However, it should come as no surprise that cash-starved, debt-ridden governments do not take a reduction in tax revenues lightly! As a result, they are questioning these types of transactions. Auditors should keep this in mind during their risk assessment and remember the accounting guidance within ASC Topic 740 regarding uncertain tax positions.

FASB Proposes Clarifying the Definition of a Business (November 23, 2015) – Journal of Accountancy (@AICPA_JofA)

The FASB wants to clarify the definition of a business to help financial statement preparers evaluate whether they should account for transactions as an acquisition of a business or an acquisition of assets. Many preparers were concerned that the current definition of a business was being applied too broadly, requiring them to account for the transaction in accordance with ASC Topic 805. Under the proposal, there is a revised definition of a business and the FASB is proposing a screen to reduce the number of transactions that need to be evaluated as business combinations.

How It’s Relevant: If it is determined that an entity is acquiring assets, the accounting is relatively straightforward with any costs being capitalized along with the purchase price of the assets. However, if the entity is acquiring a business, they need to identify and value all of the assets and liabilities acquired, whether they were previously recorded by the entity being acquired or not. With 2015 being a record year for M&A activity, companies and their auditors need to ensure they are knowledgeable with the accounting for business combinations in accordance with ASC Topic 805.

Pfizer Set for Tax Windfall with Ireland Move (November 23, 2015) – Financial Times (@FT)

Moving Pfizer’s tax base to Ireland after its deal to acquire Allergan is likely to generate a one-off earnings windfall and help the company escape from potentially big U.S. tax bills in the future. At the heart of Pfizer’s decision is the U.S. system of worldwide taxation, which requires companies pay extra tax when they repatriate foreign profits. When U.S. companies earn profits overseas, ASC Topic 740 requires the calculation of deferred taxes using the U.S. tax rate, among the highest in the world, unless these profits are deemed “permanently reinvested.” Pfizer has $128 billion of profits earned overseas, of which $74 billion was deemed “permanently reinvested.” However, Pfizer had already recorded deferred taxes on the remaining $54 billion, The merger with Allergan will allow Pfizer to scrap this deferred tax liability, totaling $21 billion, creating a one-off boost to its earnings.

How It’s Relevant: When companies earn money overseas and claim it is “permanently reinvested” (the so called “APB 23 exception”), they need to be sure they are meeting the criteria within ASC Topic 740. See our previous blog post for further information. Also, companies and their auditors need to be very careful when dealing with tax inversions, which have become quite popular during the past several years. Although there were already rules governing these types of transactions, the U.S. Treasury has recently taken additional actions to rein in corporate tax inversions.

SEC Commissioner Blasts Conflict Minerals, Pay Ratio Rules (November 16, 2015) – CFO Journal (@CFOJournal)

The U.S. corporate disclosure regime “has been hijacked” by social activists with Congress focused more on thwarting social problems than assisting investors, according to SEC Commissioner Michael Piwowar. “Our disclosure regime is supposed to serve investors, not special interests,” Mr. Piwowar said in comments to a Financial Executives International conference. The recent actions on conflict minerals and pay ratio rules have emboldened special interests that want to see corporate disclosures on everything from corporate political spending and climate change, to child labor and human trafficking, he said.

How It’s Relevant: As discussed in a previous edition of GAAP Flash, two-thirds of companies could not determine the source of their conflict minerals. Companies spent millions of dollars and for what? And don’t get us started on the pay ratio rules requiring companies to discuss the ratio of CEO pay to that of the average worker, which is nothing more than corporate shaming to promote the redistribution of wealth. We are not saying these social concerns are not valid, but rather the method the government is using to “solve” them. We side with Mr. Piwowar in believing that the purpose of the SEC is to protect investors and potential investors. Nothing more, nothing less!

Is the Surge in Stock Buybacks Good or Evil? (November 22, 2015) – The Wall Street Journal (@wsj)

Corporate stock buybacks are climbing toward a post-financial-crisis high this year, furthering the debate about the use of hundreds of billions of dollars in company cash to enhance quarterly earnings reports. Stock repurchases boost earnings per share, even if total earnings don’t change, by reducing the number of shares outstanding. With corporate cash levels near records and interest rates low, use of cash or debt to finance buybacks is becoming widespread. However, is it the best use of corporate funds? Should companies go into debt, affecting the company long-term, to better the existing shareholders, which no doubt include current management?

How It’s Relevant: Are companies robbing Peter to pay Paul? Larry Fink, chief executive of BlackRock, Inc. has said some companies invest too much in buybacks and too little in longer-term business growth. Critics have said that buybacks represent an artificial, short-term method of boosting profits. Some companies have made large buybacks in quarters when earnings were soft, leading to suggestions that companies were simply managing earnings. Auditors should carefully scrutinize stock buybacks, ensure that they are accounted for properly in accordance with ASC Subtopic 505-30, and consider these transactions in their audit risk assessment.