FASB proposed guidance on the AJCA.

The Financial Accounting Standards Board (FASB) issued proposed guidance, effective immediately, on accounting issues raised by two key provisions of the American Jobs Creation Act of 2004 (AJCA).

The guidance, released as two proposed FASB staff positions (proposed FSPs), details the proper accounting treatment of the new deduction for domestic manufacturing activities (new Sec. 199) and provides transition rules for the 85% temporary dividends-received-deduction (DRD) for some repatriated foreign earnings (new Sec. 965). FSPs are a special form of guidance the FASB developed to respond promptly to questions on the application of FASB guidance likely to have widespread effect.

Manufacturing Deduction

According to proposed FSP Financial Accounting Statement (FAS) 109-a, the manufacturing deduction should be accounted for as a special deduction under the rules of FASB Statement No. 109, Accounting for Income Taxes. When fully phased in, Sec. 199 will provide a 9% deduction for income attributable to domestic production activities.

As to whether the deduction should be accounted for as a special deduction or tax rate reduction, the paper concludes that the former treatment is more appropriate, "because the domestic manufacturing deduction is based on the future performance of specific activities" and, thus, is similar to the special deductions illustrated in FASB Statement No. 109, [paragraph] 231.

Repatriation 

As for the repatriation provision, proposed FSP FAS 109-b concludes that a company "should be allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying Statement 109." The 85% DRD is a one-time-only, temporary benefit that applies solely to funds repatriated under a plan for reinvestment in the U.S.

The timing issue arises in connection with Accounting Principles Board Opinion No. 23, Accounting for Income Taxes-Special Areas, which provides an exception to the rule that o company must accrue income taxes on unremitted foreign investments when it can overcome a presumption that the earnings will be repatriated. FASB Statement No. 109 requires companies to adjust deferred tax liabilities and assets to reflect law changes for the period that includes the enactment date (Oct. 22, 2004).

According to the proposed FSP, companies require additional time to analyze the DRD's effect, because the new provision requires legislative or regulatory clarification. The paper points out, however, that the timing break does not give enterprises a free ride to claim the repatriation exception; any company that did not overcome the presumption of repatriation before the AJCA's enactment must continue to presume repatriation of foreign earnings while it is evaluating the new provision.

The repatriation paper also details the information that a company must disclose during reporting periods in which it is considering the effect of the DRD provision. The required disclosures include "the range of reasonably possible amounts" that may be repatriated, as well as a status update on the company's evaluation of the provision.