GAAP Flash – IAS 12, PCAOB AS 5 and PCAOB Inspection Reports – 03.18.16
gaap-flash-ias-12-pcaob-as-5-and-pcaob-inspection-reports-03-18-16

GAAP Flash – IAS 12, PCAOB AS 5 and PCAOB Inspection Reports – 03.18.16

This edition of the GAAP Flash builds off of last week’s version, highlighting current regulatory and market pressures on U.S. and multinational companies. Corporate income taxes make headlines (and headaches) around the world, with implications for accounting for uncertain tax positions under ASC 740 and IAS 12. Violations of regulatory protocols lead to serious repercussions, such as accounting restatements and material weaknesses defined under PCAOB AS 5. Audit firms also get caught up in the action due to independence findings uncovered in PCAOB inspection reports.

Corporate Inversions Are The Symptoms, Bad Tax Policy Is The Disease (March 8, 2016) – Forbes (@Forbes)

Let me know if this scenario sounds familiar: Company X, a U.S. company, acquires Company Y, a foreign owned company, and subsequently registers the newly combined entity outside the U.S. Why would Company X do this? To avoid U.S. corporate income taxes, of course! These tax inversions, as they are commonly named, have become a common topic of conversation in business and political circles.

Many have criticized the companies that look to “evade” U.S. corporate taxes in this manner. Others, however, point to an uncompetitive tax code that puts U.S companies at a significant disadvantage in the global economy by taxing income multiple times, among other issues. Until the complexities of the current Internal Revenue Code change, U.S. companies will continue to weigh the costs of operating in this corporate tax environment and will need to appropriately evaluate the need for any uncertain tax positions under applicable accounting guidance (such as ASC 740 or IAS 12).

Europe Lawmakers Grill Multinationals on Tax Structures (March 15, 2016) – Wall Street Journal (@wsj)

Meanwhile, on the other side of the Atlantic Ocean, European legislators accused multinational entities, like Google, Apple, and McDonald’s, of skimping on their tax payments. These lawmakers allege that these companies avoid their appropriate share of corporate taxes by using complex intercompany organizations, and transactions keep billions of profits outside the jurisdiction of local taxation authorities. Company representatives assert that these corporate structures follow currently enacted laws that are widely accessible and used by many other companies worldwide.

These arguments arise at a time when European governments hope to alter international tax treaties and laws to levy more taxes on companies in countries where these multinationals serve current customers. With pressure from U.S. and European legislators, multinational companies are stuck in a complicated and highly sensitive regulatory environment, one that again may lead to uncertain tax positions.

SunEdison, TerraForm Again Delay Filing Annual Reports (March 16, 2016) – Wall Street Journal (@wsj)

Two affiliated solar-energy companies shared bad news with their investors this week: don’t expect to see our annual reports any time soon. SunEdison originally delayed its yearly regulatory filing earlier this month, to March 15, but material weaknesses in its internal controls prompted additional procedures to prepare the annual financial information properly. TerraForm relies on SunEdison’s financial reporting process and will delay its filing until the situation at SunEdison is resolved.

So, how did investors for these companies respond? Tumbling share prices for both companies indicate it was a less than positive reaction.

Valeant Slashes Guidance, Warns of Possible Default; Shares Cut in Half (March 15, 2016) – Wall Street Journal (@wsj)

Speaking of falling stock prices, Valeant makes the news again, and unfortunately, it’s still not good information for its stakeholders. After a rough couple of months in the press room (detailed in last week’s GAAP Flash), investors penalized the pharmaceutical company again as shares dropped more 50% when Valeant cut its quarterly and annual earnings estimates and discussed the possibility of default if it does not file its annual report by April 29. Much of this market turbulence originated from improper accounting decisions resulting in an SEC investigation and impending restatement of previously filed financial statements.

PCAOB Sanctions Broker-Dealer Audit Firms (March 15, 2016) – Accounting Today (@AccountingToday)

Reporting entities aren’t the only ones making waves on the wire these days. The PCAOB recently settled disciplinary actions against multiple external audit firms for violating SEC independence rules. The Board found that these five firms prepared financial statements on which they issued an audit opinion, and one audit firm also maintained a client’s accounting records. These violations cast doubt on the validity of the audit firm’s financial statement opinion, especially if an audit firm audits the same information it prepares!

PCAOB Inspection

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