This week’s GAAP Flash presents a series of articles addressing the accounting for income taxes (ASC 740, APB 23 and taxes related to share-based payments) and a movement to highlight (and potentially fix) the problems with corporate governance, non-GAAP financial measures and existing accounting and reporting requirements under U.S. generally accepted accounting principles (U.S. GAAP). In the case of the latter issues, the articles offer an alternative view than what might be considered the conventional way of thinking!

Tax-Disclosure Plan Would Reveal Reinvested Foreign Earnings (August 2, 2016) – Bloomberg BNA (@BloombergBNA)

On July 26, the FASB issued a proposed Accounting Standards Update (ASU) that would bolster the current disclosure requirements for income taxes. The requirements set out in ASC 740 have not been significantly amended for several years and, therefore, have not been subject to the recent trend in many recent accounting pronouncements to improve financial statement disclosures. While the proposed ASU includes a number of new disclosures surrounding income taxes, one of them is aimed at providing more transparent information about indefinitely reinvested foreign earnings.

How It’s Relevant: The accounting for indefinitely reinvested foreign earnings has been a spotlight issue in recent years, as many multinational corporations have been scrutinized for keeping “would be” U.S. tax revenues overseas. Under ASC 740 (also referred to as the APB 23 exception) these permanently reinvested foreign earnings are exempt from deferred tax recognition if certain conditions are met, often resulting in a smaller income tax expense in the statement of profit and loss. Although the FASB proposal does not change the accounting principles surrounding this exception, these disclosure requirements would provide readers with further insight into the profits companies hold offshore.

Facebook Tax Bill Over Ireland Move Could Cost $5 Billion (July 29, 2016) – Accounting Today (@AccountingToday)

As a result of lower corporate tax rates in other countries, many corporations have increased their business activities in foreign, tax-friendly, countries in recent years, including Facebook, who recently moved its headquarters to Ireland. This article highlights the complex issues surrounding “transfer pricing” and how entities must allocate its earnings and intercompany transactions between its own taxable entities and tax jurisdictions. In this case, the IRS is challenging Facebook’s allocations, which could result in a substantial additional tax penalty.

How It’s Relevant: In addition to the issues discussed above related to the APB 23 exception, this article highlights potential accounting issues surrounding uncertain tax positions under ASC 740 (previously FIN 48). Under these principles, management must consider any additional tax charges as a result of the tax positions that they have taken that either might not be accepted by taxing authorities or not for the same amount of the deduction using a “more-likely-than-not” criterion, irrespective of detection risk. Transfer pricing allocation is a classic example of an uncertain tax position that must be considered under ASC 740.

A Profit Bump for Companies, and Tax Transparency for Investors (July 23, 2016) – New York Times (@nytimes)

In keeping up with the theme of income taxes, this article highlights a different tax related issue surrounding stock compensation. The FASB issued ASU 2016-09 in March of 2016 as part of its Simplification Initiative. Although many of the previous ASUs under this initiative had relatively minor impacts on financial accounting and reporting, this ASU potentially has significant impacts for companies, particularly as it relates to income taxes.

How It’s Relevant: Accounting for income taxes related to certain share-based payment awards required a rather complex accounting model, involving the accumulation of excess tax benefits in something called the “APIC pool” (included within shareholders’ equity), with additional income tax expense recorded directly through earnings. These amounts were derived from differences between the fair value of the award at the date of grant and its intrinsic value on the date the award was actually settled, resulting in a taxable event for the recipient (and a tax deduction for the company). Under the amended guidance, all differences would be captured in earnings as income tax benefit or expense for the entity. While this treatment certain qualifies as a “simplification”, the result will most likely result in a further decrease in the effective tax rate as companies recognize the tax benefits directly in their P&L, rather than the “APIC pool” in equity.

C.E.O.s Meet in Secret Over the Sorry State of Public Companies(July 21, 2016) – The New York Times (@nytimes)

About a dozen executives from the country’s largest investment firms, including Jamie Dimon and Warren Buffet, met to discuss an issue an open letter and detailed report titled, Commonsense Corporate Governance Principles. The principles provide a framework for sound, and long-term governance for public corporations, boards of directors, and shareholders.

How It’s Relevant: While many of the ideas and proposals in this report are of interest to accountants, as they would undoubtedly have impacts on financial reporting, the report specifically mentions non-GAAP financial measures and how companies present them. Non-GAAP financial measures continues to be a focus area for the SEC. This report suggests that the SEC focus is warranted explaining that current practices are potentially misleading to investors. For example, some companies disclose non-GAAP financial measures that exclude stock compensation expenses from earnings! What’s next, excluding wages!

GAAP Failing to Decode Real Financial Data (July 27, 2016) – Accounting Today

This article provides an interesting take on the state of GAAP, arguing that it is failing to meet the needs of those investors trying to make capital market decisions. It cites a recent book that criticizes the current state of our accounting principles that are too “balance sheet-focused” and cites examples where the financial statement picture does not translate to the true value of the issuing entity.

How It’s Relevant: U.S. GAAP and IFRS are continuously evolving and there are some that question whether the existing principles provide investors and users with useful information to enable them to make decisions about how to allocate their resources. While there are a variety of views on this matter, consideration of everyone’s views might help in ultimately improving the way we report financial statements in the future.