Ask FERF about ... taxes, taxes, taxes.

Several tax-related developments heated up in the summer of 2005--all of which are bound to have a major impact on companies and their auditors.

FASB Uncertain Tax Position Exposure Draft. On July 14, the Financial Accounting Standards Board (FASB) proposed limitations on recognition of, and required certain disclosures relating to, uncertain tax positions. The proposal was issued in the form of an Exposure Draft (ED) of an Interpretation of FASB Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109).

Under the ED, a company can recognize a tax position only if it is probable of being sustained under an IRS audit. The term "probable" is defined in FAS 5, Accounting for Contingencies, as "likely to occur." The ED aims at eliminating a diversity in practice, in which tax positions are sometimes recorded on a "gross" basis as deferred tax assets, with an offsetting valuation allowance for potential disallowance by the IRS. Under the ED, only the net probable amount could be recognized as a deferred tax asset. (Valuation allowances related to sufficiency of future taxable income would still be permitted.)

The comment deadline on the ED was September 12 (the ED and comment letters are available at www.fasb.org). FEI's Committee on Corporate Reporting (CCR) and Committee on Taxation (COT) have filed a joint comment letter, which is available on the CCR, COT and FASB-related information pages on FEI's Web site, www.fei.org.

FASB is holding a public roundtable on the ED on October 10, and plans to issue a final Interpretation in the fourth quarter of 2005. All eyes will be watching the FASB to see what the ultimate effective date of the final Interpretation will be.

FASB/IASB Short-Term Convergence Project. Accounting for income taxes is also being addressed as part of the joint FASB/International Accounting Standards Board (IASB) short-term convergence project. One of the closely watched convergence issues is the treatment of unremitted foreign earnings. At its June meeting, FASB decided to require tabular disclosure of this item, and currently anticipates issuing a short-term convergence ED on taxes in the third quarter of 2005. A joint comment letter sent by FEI's CCR and COT to FASB on April 20, 2005 is available (under "comment letters" on the CCR and COT Web pages) on www.fei.org.

Tax Issues Under FAS123(R), Accounting for Share-Based Payment. Various tax-related issues arising under FAS 123(R), Accounting for Share-Based Payment, have been discussed by the FAS123(R) Resource Group (a group of experts from companies, audit firms and benefits specialists that meets periodically with FASB staff). Summaries of issues discussed by the Resource Group are available on FEI's Web site under FASB-related news.

PCAOB Rule Limits Tax Services by Auditors. On July 26, the Public Company Accounting Oversight Board (PCAOB) approved rules limiting tax services that auditors could provide to their audit clients. At the time this article went to press, the rule, entitled "Ethics and Independence Rules Concerning Independence, Tax Services and Contingent Fees," was awaiting formal approval by the Securities and Exchange Commission (SEC). For current developments, check www.sec.gov.

As described in a PCAOB press release issued August 29 (the day a settlement was announced by audit firm KPMG as part of a deferred prosecution agreement with the Department of Justice), some of the tax services which KPMG was allegedly involved in are among those prohibited in the PCAOB final rule.

FERF-Baruch College Program to Discuss Tax Issues, Section 404 On Nov. 4, 2005, the Zicklin School of Business at Baruch College, Financial Executives Research Foundation (FERF) and the American Accounting Association (AAA) will host the third annual conference, "Academe Meets Practice." During the event, practitioners and academics will discuss a winning paper that was chosen from among top research papers for its practical value. This year's winner, "Taxable Income, Future Earnings and Equity Values," was authored by Baruch Lev of New York University and Doron Nissim of Columbia University.

A separate program will follow in the afternoon, featuring a panel of users of financial statements, preparers and academics, who will address the problems and benefits experienced by executives responsible for compliance with Section 404 of the Sarbanes-Oxley Act.

In honor of FERF's 60th anniversary, FEI members can attend this program at no charge. For more information, visit FERF's Web page (under "research foundation") on www.fei.org or contact Bill Sinnett, FERF manager of research, at [e-mail].

Edith Orenstein ([e-mail]) is Manager of Research at Financial Executives Research Foundation (FERF).

contributed by FERF