Financial Execs Object to Proposed Changes in Accounting for Income Taxes

Financial Executives International has sent a letter to the Financial Accounting Standards Board taking issue with FASB’s recent proposed changes in the accounting standards for income taxes.

FASB recently issued an exposure draft of two proposed accounting standards updates that would affect the accounting for income taxes for businesses, pertaining to intra-entity asset transfers and balance sheet classification of deferred taxes as part of its simplification initiative for reducing complexity in accounting standards (see FASB Proposes Changes in Accounting for Income Taxes).

FASB tentatively decided at a meeting last October to require recognition of the current and deferred income tax consequences of an intra-entity transfer when the transfer occurs. FEI pointed out that this supersedes the current rule that defers the recognition of income tax consequences until assets have been sold to an outside party. As a result, sales between affiliates would generate a tax effect in earnings while the pre-tax profit will continue to be eliminated.

However, two of FEI’s committees foresee problems with the proposals. Last week, FEI's Committee on Corporate Reporting and Committee on Taxation filed a comment letter with FASB, arguing that the proposed rule fails to achieve the objectives of the simplification initiative. They say it would result in potential confusion for financial statement users and undermine the credibility of financial reporting.

“The proposal will require transition to a different set of requirements that will be as complex to implement as the original principles were,” wrote FEI committee chairmen Stephen Cosgrove and Keith Butler. “Companies will need to modify their existing processes to accommodate the income tax accounting for intra-entity asset transfers without the benefit of improved financial reporting to justify the change. Given that it is difficult to argue that either the current approach or the proposed rule is demonstrably simpler, as both require routines and controls to produce the desired application, we believe, that the approach that already has existing processes in place, should be the preferred approach. Since the guidance will require a tax provision on a transaction that does not otherwise produce pre-tax gains or losses at the consolidated entity level, it is likely to create more confusion and increase the possibility of errors.”

They are asking FASB to reconsider the tentative decisions it made on the proposed changes.